Dharmaj Crop IPO review (Apply)

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Review By Dilip Davda on November 23, 2022

•    DCGL is an emerging player in agrochemicals having B2C and B2B customers. 
•    The company has marked steady growth in its top and bottom lines for the reported periods.
•    Based on FY23 earnings, the issue appears reasonably priced. 
•    This segment is poised for bright prospects and gaining fancy. 
•    Investors may consider parking funds for medium to long-term rewards. 

ABOUT COMPANY:
Dharmaj Crop Guard Ltd. (DCGL) is an agrochemical company engaged in the business of manufacturing, distributing, and marketing a wide range of agrochemical formulations such as insecticides, fungicides, herbicides, plant growth regulators, micro fertilizers, and antibiotics to the B2C and B2B customers. It is also engaged in the marketing and distribution of agrochemical products under brands in-licensed and owned by it, and through generic brands, to Indian farmers through the distribution network. 

DCGL provides crop protection solutions to the farmer to assist them to maximize productivity and profitability. The company exports products to more than 25 countries in Latin America, East African Countries, the Middle East and Far East Asia. It sells agrochemical products in granules, powder, and liquid forms to its customers. Additionally, DCGL manufactures and sells general insect and pest control chemicals for Public Health and Animal Health protection.

With an aim to offer a wide product portfolio across the agri-value chain, it continues to expand its product portfolio by introducing new products. The company manufactures and sells various formulations of insecticides, fungicides, herbicides, plant growth regulators, micro fertilizers, and antibiotics. As of the date of this Red Herring Prospectus, 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 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. DCGL 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 were 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. Currently, DCGL has 4200+ dealers/distributors in 17 states with 16 stock depots.

Some of its key customers are Atul Limited, Heranba Industries Limited, Innovative Agritech Private Limited, Meghmani Industries Limited, Bharat Rasayan Limited, Oasis Limited, United Insecticides Private Limited and Sadik Agrochemicals Co. Ltd. As a part of its expansion plans and in order to achieve backward integration for its operations, DCGL has also acquired around 33,489.73 sq. meters of land at Saykha Industrial Estate, Bharuch, Gujarat, India. As of September 30, 2022, it has 314 employees on its payroll and also employs contract workers as and when required.  

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for CAPEX for the new Bharuch plant (Rs. 104.97 cr.), working capital (Rs. 45.00 cr.), repayment/prepayment of certain borrowings (Rs. 10.00 cr.), and general corporate purpose, DCGL is coming out with a maiden combo issue of fresh equity shares worth Rs. 216.00 cr. (approx. 9113940 shares at the upper cap), and an offer for sale (OFS) of 1483000 equity shares (for approx. Rs. 35.15 cr. at the upper cap). It has fixed a price band of Rs. 216 - Rs. 237 per share of Rs. 10 each. Thus it will issue overall 10596940 equity shares for Rs. 251.15 cr. at the upper price band. A minimum application is to be made for 60 shares and in multiples thereon, thereafter. DCGL has reserved 55000 shares for its eligible employees and from the residual position, it has allocated 50% for QIBs, 15% for HNIs, and 35% for Retail investors. The issue opens for subscription on November 28, 2022, and will close on November 30, 2022. Post allotment, shares will be listed in BSE and NSE. The issue constitutes 31.35% of the post-IPO paid-up capital of the company. 

The joint Book Running Lead Managers (BRLMs) to this issue are Elara Capital (India) Pvt. Ltd., and Monarch Networth Capital Ltd., while Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 15 to Rs. 21.95 between April 2017 and December 2019. It has issued bonus shares in the ratio of 3 for 2 in May 2019, 1 for 1 in July 2019, and 1 for 2 in November 2021. The average cost of acquisition of shares by the promoters is Rs. 1.98, Rs. 6.58, Rs. 7.09, Rs. 7.19, Rs. 7.28, Rs. 7.52, and Rs. 9.17 per share. 

Post-IPO, DCGL's current paid-up equity capital of Rs. 24.68 cr. will stand enhanced to Rs. 33.80 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 801 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, DCGL has posted a turnover/net profit of Rs. 199.17 cr. / Rs. 10.76 cr. (FY20), Rs. 303.57 cr. / Rs. 20.96 cr. (FY21), and Rs. 396.29 cr. / Rs. 28.69 cr. (FY22). For the four months of FY23 ended on July 31, 2022, it earned a net profit of Rs. 18.36 cr. on a turnover of Rs. 221.17 cr. Thus it has posted an average CAGR of 41+% in revenue and 63%+ in net profits. The management is confident in maintaining the trends.

For the last three fiscals, DCGL has reported an average EPS of Rs.9.60 and an average RoNW of 34.86%. The issue is priced at a P/BV of 5.78 based on its NAV of Rs. 40.99 as of July 31, 2022, and at a P/BV of 2.53 based on its post-IPO NAV of Rs. 93.84. (at the upper cap).

If we annualize FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 14.55. Based on its financial performance, the issue appears reasonably priced. 

DIVIDEND POLICY:
The company paid a dividend of 1% for FY21 and FY22. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer documents, DCGL has shown Rallis India, India Pesticides, Punjab Chem., Bharat Rasayan, Astec Lifescience, and Heranba Ind. as their listed peers. They are currently trading at a P/E of 28.43, 18.77, 17.55, 23.56, 44.37, and 11.73 (as of November 23, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORDS:
This is the first mandate from the two BRLMs associated with the offer and hence has no track record.

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