HP Adhesives IPO review (May apply)

• IPO Details
• Stock Price
• Docs
  • RHP
  • DRHP
  • Anchor Investor Link
• Reviews
• Subscription
• Calculator
• News
• GMP
• Allotment
• BoA
• Messages

Review By Dilip Davda on December 12, 2021

•    HPAL to emerge as the second-largest listed player in the adhesives and sealants segment.
•    Based on its financial parameters, the issue appears fully priced. 
•    Strong client list and rising market share augur well for future prospects.
•    Cash surplus investors may consider investment for the medium to long term rewards.

PREFACE:
Consumer adhesives and sealants are widely used products worldwide and there are many small and unorganized players. However, if we take the scenario on the basis of market share, as per industry reports, Pidilite enjoys over 65% (overall) market share while HP Adhesives is having a market share of around 17% (for solvents). Thus it will be the second-largest player in the segment among listed entities. Sonal Adhesives and Nikhil Adhesives are small players. To gain market share, HPAL is taking a small hit on margins. Its expansion will bring more additions to the top and bottom lines once completed. 

ABOUT COMPANY:
HP Adhesives Ltd. (HPAL) is a fast-growing multi-product, multi-category consumer adhesives and sealants company. For its largest product category - PVC solvent cement, HPAL is amongst the leading manufacturing companies in India in the consumer/ bazaar segment of the adhesive industry. (Source: CRISIL Research).

It manufactures a wide range of consumer adhesives and sealants such as PVC, cPVC and uPVC solvent cement, synthetic rubber adhesive, PVA adhesives, silicone sealant, acrylic sealant, gasket shellac, other sealants and PVC pipe lubricant which are sold across India, through an extensive distribution network of distributors, and exported also to several countries, through a network of distributors and direct customers. 

The company also manufactures these products for select large PVC pipe manufacturing companies under co-branding or private label on an order basis. Apart from the above products, it also sells ancillary products like ball valves, thread seal and other tapes and FRP products for drainage and architectural solutions that are distributed along with its products to the end customers through the distribution network. HPAL is selling its products under the brand names STRONG WELD, HP, STRONG SEAL and STRONG FIX. As of September 30, 2021, its sales team had 198 members with an overall tally of 364 on its payroll.

The aforesaid adhesives and sealant products have applications in multiple industries such as plumbing and sanitary, drainage and water distribution, general-purpose building/ construction and interior operations as well as for glazing operations, woodwork, footwear, automotive, foam-furnishing and other varied industries. HPAL has a robust business model aimed at consistently expanding its product portfolio by introducing new product categories as well as SKUs to cater to multiple end-use applications which are sold through distribution networks across India. 

With a strict focus on product quality and a long-standing track record in the distributor network, it has an established brand image that helps in penetrating new product categories. The company constantly engages with the distributor network through marketing and promotional activities and also conduct a range of activities such as distributor meets, retailer meets and plumber and carpenter meet which leads to the promotion of its product brands. As of September 30, 2021, its distribution network is comprised of 4 depots situated in Delhi, Kolkata, Bengaluru and Indore and more than 750 distributors who cater to more than 50,000 dealers in 23 states in India. Currently, it is exporting its products to over 17 countries worldwide.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 54.00 cr.), CAPEX for expansion of existing plant (Rs. 25.51 cr.) and general corporate purpose funds, HPAL is coming out with a maiden combo IPO worth Rs. 125.96 cr. (at the upper cap) for 4140000 fresh equity shares and an offer for sale of 457200 shares having a face value of Rs. 10 each. The company has fixed a price band of Rs. 262 to Rs. 274 per share. Minimum application is to be made for 50 shares and in multiples thereon, thereafter. The issue opens for subscription on December 15, 2021, and will close on December 17, 2021. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.02% of the post issue paid-up capital of the company. 

The sole Book Running Lead Manager (BRLM) to this offer is Unistone Capital Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. HPAL has allocated 75% for QIBs, 15% for HNIs and 10% for the Retail investors. 

Having issued initial equity at par, the company raised further equity at a fixed price of Rs. 174.50 in May/June 2021. The average cost of acquisition of shares by the promoters is Rs. 10.00 and Rs. 22.97 per share.  

Post-IPO, HPAL's current paid-up equity capital of Rs. 14.23 cr. (14234947 shares) will rise to Rs. 18.37 cr. (18374947 shares). Based on the upper cap of IPO, the company is looking for a market cap of Rs. 503.47 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, HPAL has posted turnover/net profits of Rs. 87.98 cr. / Rs. 4.00 cr. (FY19), Rs. 97.91 cr. / Rs. (4.67) cr. (FY20) and Rs. 123.88 cr. / Rs. 10.06 cr. (FY21). For the first half of FY22 ended on September 30, 2021, it has earned a net profit of Rs. 3.10 cr. on a turnover of Rs. 72.73 cr. 

For setbacks in FY20, management clarified that due to exceptional one-time adjustment and other provisions in the balance sheet cleaning exercise, it has provided nearly 11 cr. of expenses. For the lower net in the first half of FY22, spiralling prices of raw materials that could not be passed on to customers attributed. 

For the last three fiscals, the company has posted an average EPS of Rs. 3.19 and an average RoNW of - (18.38) %. The issue is priced at a P/BV of 10.38 based on its NAV of Rs. 26.39 as of September 30, 2021, and at a P/BV of 3.33 based on its post-issue NAV of Rs. 82.18 (at the upper cap).

If we annualize FY22 earnings and attribute it on fully diluted post issue equity, then the asking price is at a P/E of 81.31 and on the basis of FY21 earnings, it stands at 50.

COMPARISON WITH LISTED PEERS:
As per offer documents, HPAL has shown Pidilite Ind. as its listed peer. It is currently trading at a P/E of 89.86 (as of December 10, 2021). However, it is not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY:
The company has paid a dividend for the last three fiscals including the ongoing one. For FY19 it paid 30% for FY20 50% and for FY21 30% till filing of RHP. Thus, the company is confident of maintaining a prudent dividend policy going forward.

MERCHANT BANKER'S TRACK RECORDS:
The Book Running Lead Manager associated with the offer has handled 6 public offers in the past three years, out of which 1 issue closed below the offer price on the listing date.

HP Adhesives IPO FAQs