Dharmaj Crop Guard

An agrochemical company

The company engaged in the business of manufacturing, distributing, and marketing of a wide range of agro chemical formulations

Incorporated in 2015 and promoted by Rameshbhai Ravajibhai Talavia, Jamankumar Hansarajbhai Talavia, Jagdishbhai Ravjibhai Savaliya and Vishal Domadia, Dharmaj crop guard is an agrochemical company engaged in the business of manufacturing, distributing, and marketing of a wide range of agro chemical formulations such as insecticides, fungicides, herbicides, plant growth regulator, micro fertilizers and antibiotic to the B2C and B2B customers.

The company classify its agrochemicals business into brands business, domestic institutional business and exports institutional business. Its agrochemical formulations are sold as branded products to farmers through its distribution network. Formulations are active ingredients that are mixed with other materials to produce pesticides in a form that can be used by farmers. It sell bulk products and pack-to-pack products to its institutional customers. Bulk products are formulated products that are sold in bulk quantities that are repacked and marketed by other formulators. It also export agrochemical products internationally.

The company also engage in the marketing and distribution of agrochemical products under brands in-licensed by it, owned by them and through generic brands, to Indian farmers through its distribution network. It provides crop protection solutions to the farmer to assist them to maximize productivity and profitability. It exports products to more than 25 countries in Latin America, East African Countries, Middle East and Far East Asia. It sells agrochemical products in granules, powder and liquid forms to customers. Additionally, it manufactures and sells general insect and pest control chemicals for public health and animal health protection.

The company manufacturing facility is located at Ahmedabad, Gujarat, India. As of November 30, 2021, aggregate installed capacity of manufacturing facility for agro-chemical formulations was 25,500 tonne. It manufactured 7,577.21 tonne of agrochemical formulations in fiscal 2021. It has installed a soil bio reactor at its manufacturing facility which is used to treat waste/ sewage water and to remove pollutants. It has also installed solar power panels at its manufacturing facility to generate green power in order to optimally use the electricity which is sourced from third party during the manufacturing process. The aggregate capacity of installed solar power panels is 85,320 KW per annum which caters to electricity requirements at its manufacturing facility and helps to reduce dependency on third party electricity requirements.

The company has a research and development (R&D) centres at manufacturing facility. It also has a quality control laboratory at manufacturing facility, which primarily monitors the quality of raw materials and finished goods. Further, quality control laboratory has received certificate of accreditation from National Accreditation Board for Testing and Calibration Laboratories (NABL) which has assessed and accredited in accordance with the standard ISO/IEC 17025:2017.

The company has an established an extensive, pan-India distribution network for its domestic branded products business. Branded products are sold in 17 states through network comprising over 4,362 dealers having access to 16 stock depots in India supporting the distribution of branded products, as of September 30, 2022. It also carries out institutional sales of agro chemical products across India and international markets.

The key raw materials used in the manufacturing of major products include mancozeb technical, chloropyriphos technical, lambda cyhalothrin tech, thiamethoxam tech, cypermethrin technical. It usually do not enter into long-term supply contracts with any of raw material suppliers and typically source raw materials from third-party suppliers or open market.

Capacity utilization of the company was 65.62% in FY2020, 66.47% in FY2021, 34.857% in FY2022 and 37.95% for April-August 2022.

The Offer and the Objects 

The offer comprises fresh issue of 9113924 equity shares at upper price band of Rs 237 and 10000000 equity shares at lower price band of Rs 216 aggregating up to Rs 216 crore by the company and an offer for sale by promoter group selling shareholders of up to 1483000 equity shares aggregating to Rs 35 crore at the upper price band of Rs 237 and Rs 32 crore at lower price band of Rs 216. The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders, net of its proportion of offer related expenses and the relevant taxes thereon.

Promoter group selling shareholder Manjulaben Rameshbhai Talavia post-issue shareholding shall decrease to 5.8% from 10.8% pre issue shareholding, Muktaben Jamankumar Talavia post-issue shareholding shall decrease to 5.6% from 10.3% pre issue shareholding, Domadia Artiben post-issue shareholding shall decrease to 0.2% from 0.6% pre issue shareholding and Ilaben Jagdishbhai Savaliya post-issue shareholding shall decrease to 0% from 0.12% pre issue shareholding

The company proposes to utilize the net proceeds of the fresh issue towards funding capital expenditure towards setting up of a manufacturing facility at Saykha, Bharuch, Gujarat amounting Rs 104.97 crore, funding incremental working capital requirements of the company amounting Rs 45 crore, repayment and/or pre-payment, in full and/or part, of certain borrowings of the company amounting Rs 10 crore and balance towards general corporate purposes

As on September 30, 2022, the aggregate outstanding borrowing of the company is Rs 55.536 crore.

As a part of its expansion plans and in order to achieve backward integration for operations, the company has acquired around 33,489.73 sq. mtrs of land at Saykha Industrial Estate, Bharuch, Gujarat, India on leasehold basis for 99 years from GIDC to set up a manufacturing facility for agrochemical technicals and its intermediates which will be used for internal consumption as well as for sales in domestic and international market. It has already obtained registrations of 6 agrochemical technicals and have applied for registration of 17 agrochemical technicals from the CIB&RC (Central Insecticides Board and Registration Committee), which will be manufactured in this new manufacturing facility. It has also obtained certain regulatory approvals such as environment clearance for new manufacturing facility.

The total estimated funds required for funding capital expenditure towards setting up of the proposed Facility is approximately Rs 172.8 crore for which Rs 104.97 crore will be met from the net proceeds and the balancing amount will be funded through new loan facility to be availed from the banks

Strengths 

The company manufactures a wide variety of pesticides, weedicides, fungicides, herbicides, and has an active portfolio of around 100 products. A diverse product portfolio has enabled the company to establish a wide customer base including bulk consumers, retailers and export customers. Also this diversification across products and categories has allowed it to de-risk business operations.

The company manufacturing facility are equipped with modern plant and machinery capable of producing quality agrochemical products and has received quality control certifications such as ISO 9001:2015, ISO 14001:2015 and ISO 45001:2018 for development and manufacturing of agrochemical formulations such as insecticides, herbicides, fungicides, micro fertilizers and plant growth regulators.

The company manufacture and sell various formulations of insecticides, fungicide and herbicides, plant growth regulators, micro fertilizers and antibiotics. It has obtained 464 registrations for agrochemical formulations from the CIB&RC, out of which 269 agrochemical formulations are for sale in India as well as for export and 195 agrochemical formulations are exclusively for exports. Additionally, it has also applied for registrations of 18 agrochemical formulations and 17 agrochemical technicals from the CIB&RC, which are pending at various stages.

The company has 157 trademark registrations including its branded products. Its formulations are sold as branded products to customers. As of September 30, 2022, it had over 118 branded formulations that are sold to farmers. It sells bulk products to institutional customers domestically and in the international markets. Further, as of September 30, 2022, it had more than 154 institutional products that it sold to more than 600 customers based in India and in the international markets. As of September 30, 2022, it exported products to more than 66 customers across 25 countries.

The overall Indian pesticides and other agrochemicals market grew at a CAGR (compounded annual growth rate) of 4.5% from Rs 368 billion in 2013-14 to Rs 439 billion in 2017-18. The overall Indian pesticides and other agrochemicals industry is estimated to increase at a CAGR of 7.5%-8.5% by 2026-27 on account of an upward growth expected in the international market and a likely increase in domestic usage of pesticides in India.

The company has increased its market share in India for agrochemical products in recent years through increasing product portfolio organically and intend to continue to evaluate opportunities to capitalize on industry consolidation and acquire other products and brands to grow its portfolio.

Any pesticide that goes off-patent provides an opportunity to the Indian industry to develop generic molecules. Such an event thus opens up opportunity for Indian manufacturers to increase their exports. As per industry sources, an opportunity amounting around USD 5 billion is estimated to go off-patent by FY27. This is likely to support pesticide exports from India going forward.

The global pyrethroids market increased at a CAGR of 4% from USD 2,678 million in 2016 to USD 3,309 million in 2021. This increase in the market is backed by agricultural requirements as the use of pyrethroids help improves crop yield. They are also safer compared to organophosphate pesticides. In addition to this, the global pyrethroids market is also supported by public health and animal health needs. These factors are expected to aid the global pyrethroids market and the industry is expected to increase by CAGR of around 5% to touch the size of approximately USD 4,300 million by 2026. The other end users in pyrethroids markets include public health and animal health with an approximate share of 20% and 5%, respectively.

The company intend to increase manufacturing and sales in the public health and animal health products segment. On the public health and animal health side, products include general insect control, termiticide, larvicide, indoor residual spray, rodenticide and cockroach gels which are formulations of synthetic pyrethroids which are currently procured from third parties. It intend to supply public health and animal health products on retail basis for purposes like controlling the spread of malaria, filaria, dengue, chikungunya and such other parasitic diseases. These products are also supplied to pest control companies which spray them at residential and commercial premises. It supply these products under its own brands like Dhoofon, Dharmexo Gel and Podcast 25WP, amongst others and intend to further increase market share by increasing product portfolio in public health segment. Further, the technicals that will be produced in the proposed new manufacturing facility will also be used in public health and animal health segment.

Pursuant to the setup of agrochemical technicals manufacturing facility, profit margins on products would resultantly increase due to backward integration.

Weaknesses 

The domestic agro-chemicals industry remains vulnerable to ban on products by the government and erratic monsoons.

The presence of spurious pesticides and insecticides could endanger the brand equity of players and damage crop production.

Intense price and product competition among local players and multinational corporations (MNCs) limits the bargaining power with customers.

The company requires certain approvals and licenses in the ordinary course of business, including certain registrations from CIB&RC for its agrochemicals and any failure to successfully obtain such registrations or maintain statutory and regulatory permits and approvals required to operate business and manufacturing facility would adversely affect operations.

The business is subject to climatic conditions and is cyclical in nature. Seasonal variations and unfavorable local and global weather patterns may have an adverse effect on business, results of operations and financial condition.

The company operations are subject to environmental and workers health and safety laws and regulations. It may have to incur material costs to comply with these regulations or suffer material liabilities or damages in the event of an incidence or non-compliance of environment and other similar laws and regulations which may have a material adverse effect on reputation, business, financial condition and results of operations

The company is subject to significant risks and hazards when operating and maintaining manufacturing facility, including the manufacture, usage and storage of various flammable, corrosive or hazardous substances, for which its insurance coverage might not be adequate.

Resistance from farmers to crop protection chemicals and the inappropriate application of products from farmers may adversely affect business, financial condition and results of operations.

The company is exposed to foreign currency exchange risks as its portion of its revenues are denominated in foreign currencies which may adversely impact results of operations

The business requires significant amount of working capital primarily as a considerable amount of time passes between purchase raw materials and sale of finished products and the subsequent collection process. As a result, the company is required to maintain sufficient stock at all times in order to meet manufacturing requirements, thus increasing storage and working capital requirements

The company has reported negative net cash from operating activities of Rs 2.325 crore in Apeil- August 2022.

Valuation 

For FY 2022, consolidated sales were up by 30% to Rs 394.21 crore. This was primarily due to increase in sales of branded products, institutional sales and addition of more dealers and customers. OPM rose 90 bps to 11.2% which led to 43% increase in operating profit to Rs 44.34 crore. Other income increased 80% to Rs 2.08 crore while interest cost rose 84% to Rs 2.62 crore and depreciation increased 103% to Rs 5.27 crore. PBT increased 37% to Rs 38.53 crore. Tax expenses were 36% higher at Rs 9.84 crore. Net profit increased 37% to Rs 28.69 crore.

For four months April- July 2022, consolidated sales were Rs 220.94 crore. OPM was 12.2% which led to operating profit of Rs 26.87 crore. Other income was Rs 23 lakh crore while interest cost was Rs 93 lakh and depreciation Rs 1.6 crore. PBT stood at Rs 24.57 crore. Tax expenses were Rs 6.21 crore. Net profit stood at Rs 18.36 crore.

The EPS on post-issue equity works out to Rs 8.5. At the upper price band of Rs 237, PE works out to 27.9.

As of 24 November 2022, its listed peers such as Rallis India trades at PE of 28.6 times of their consolidated FY2022 EPS, India pesticides at 18.1 times, Punjab Chemical & Crop Protection at 17.2 times, Bharat Rasayan at 23.9 times, Astec Lifesciences at 46.8 times and Heranba Industries at 11 times. 

For FY22, Rallis India OPM and ROE stood at 10.5% and 9.7% respectively, compared to 29.9% and 24.8% for India pesticides, 15.0% and 37.0% for Punjab Chemical & Crop Protection, 19.6% and 22.9% for Bharat Rasayan, 22.8% and 22.7% for Astec Lifesciences and 17.9% and 26.5% for Heranba Industries respectively.