Paradeep Phosphates IPO review (Apply)

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Review By Dilip Davda on May 12, 2022

•    PPL is the second-largest non-urea fertilizers manufacturer.
•    The company has posted growth in its bottom lines for the reported periods.
•    The issue is reasonably priced on the given parameters.
•    Investors may consider investment for the medium to long term.

ABOUT COMPANY: 
Paradeep Phosphates Ltd. (PPL) is the second-largest private-sector manufacturer of non-urea fertilizers in India in terms of Di-Ammonium Phosphate ("DAP") volume sales for the nine months ended December 31, 2021 (Source: CRISIL Report). 

PPL is primarily engaged in manufacturing, trading, distribution and sales of a variety of complex fertilizers such as DAP, three grades of Nitrogen-Phosphorus-Potassium ("NPK") (namely NPK-10, NPK-12 and NP-20), Zypmite, Phospho-gypsum and Hydroflorosilicic Acid ("HFSA"). It is also engaged in the trading, distribution and sales of Muriate of Potash ("MOP"), Ammonia, Speciality Plant Nutrients ("SPN") and City compost. PPL's fertilizers are marketed under some of the key brand names in the market 'Jai Kisaan - Navratna' and 'Navratna'. It has an established track record of delivering robust financial performance.

The Company was incorporated in 1981. Zuari Maroc Phosphates Private Limited ("ZMPPL"), a joint venture of Zuari Agro Chemicals Limited ("ZACL") and OCP Group S.A. ("OCP"), currently holds 80.45% of the equity share capital of the Company, with the balance being held by the Government of India.

PPL is a part of the Adventz Group, as well as OCP. The Adventz Group operates in several businesses and has a strong presence in the agribusiness, engineering and infrastructure businesses and emerging lifestyle businesses. OCP, founded in 1920, with revenues of over US$6.3 billion in 2020, is one of the leading producers of Phosphate rock globally and operates largely in the Morocco and Western Sahara region which has approximately70% of the global Phosphate rock reserves, according to CRISIL Research, and is owned 95% by the Moroccan government. 

Phosphate rock is processed to produce phosphorous, which is one of the three main nutrients most commonly used in fertilizers (the other two are nitrogen and potassium). India has negligible Phosphate reserves and is dependent on imports of Phosphate rock (a source raw material) or Phosphoric Acid (an intermediate raw material) or DAP (finished phosphatic fertilizer). As of March 31, 2022, PPL employed 905 permanent personnel. It has also hired six consultants and hires contract labour for operations from time to time.

PPL distributes products across 14 states in India through various private and institutional channels, as of March 31, 2022. As of the same date, it has set up a network of 11 regional marketing offices and 468 stock points in 14 states across India. Its network comprised 4,761 dealers and over 67,150 retailers, catering to five million estimated farmers in India. Further, it has a dedicated team of 70 marketing officers, 9 junior agronomists and 71 field assistants, as of March 31, 2022.

ISSUE DETAILS/CAPITAL HISTORY: 
To part finance its funding needs for part financing acquisition of Goa facility (Rs. 520.00 cr.), repayment/prepayment of certain borrowings (Rs. 300 cr.), and general corporate purposes, PPL is coming out with a maiden combo offer of fresh equity and Offer for sale (OFS) to garner Rs. 1501.73 cr. at the upper cap. The company has fixed a price band of Rs. 39 - Rs. 42 per share of Rs. 10 each. Minimum application is to be made for 350 shares and in multiples thereon, thereafter. The issue opens for subscription on May 17, 2022, and will close on May 19, 2022. Post allotment, shares will be listed on BSE and NSE. PPL will issue approx. 239047550 fresh equity shares worth Rs. 1004.00 cr. at the upper cap. With the OFS of 118507493 shares (approx. Rs. 497.73 cr.) the total issue will be for 357555043 equity shares. The issue constitutes 43.90% of the post issue paid-up capital of the company.

The issue is jointly lead managed by Axis Capital Ltd., ICICI Securities Ltd., J M Financial Ltd. and SBI Capital Markets Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue. 

Having issued most of the equity at par value, it converted loan and preference shares at a consideration other than cash (on the basis of Rs. 10 FV). The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 7.3691 and Rs. 10.00 per share. 

Post-IPO, PPL's current paid-up equity capital of Rs. 575.45 cr. will stand enhanced to Rs. 814.50 cr. At the upper cap of the IPO price, the company is looking for a market cap of Rs. 3420.89 cr.

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, PPL has (on a consolidated basis) posted turnover/net profits of Rs. 4397.21 cr. / Rs. 158.96 cr. (FY19), Rs. 4227.78 cr. / Rs. 193.22 cr. (FY20) and Rs. 5183.94 cr. / Rs. 223.27 cr. (FY21). For the first nine months of FY22 ended on December 31, 2021, it has earned a net profit of Rs. 362.78 cr. on a turnover of Rs. 5973.69 cr. While it marked growth in top lines for the reported periods except for FY20, it continued to mark improvements in its bottom lines.

For the last three fiscals, PPL has posted an average EPS of Rs. 3.52 and an average RoNW of 11.91%. The issue is priced at a P/BV of 1.10 based on its NAV of Rs. 38.04 per share as of December 31, 2021, and at a P/BV of 1.07 based on its post-IPO NAV of Rs. 39.20 per share. 

If we annualise 9M-FY22 results and attribute it to post IPO fully diluted equity capital, then the asking price is at a P/E of around 7.07. 

COMPARISON WITH LISTED PEERS:
As per offer documents, PPL has shown Coromandel Intl., Chambal Fertilizers and Deepak Fertilizers as its listed peers. They are currently trading at a P/E of 18.13, 13.70 and 36.31 (as of May 12, 2022). However, they are not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY:
PPL has paid a dividend of 10% for FY19 and FY20 and thereafter it has not announced any dividend. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORDS:
The four merchant bankers associated with this issue have track records as under:

Axis Capital Ltd.: This is the 37th mandate from Axis Cap in the last three fiscals (including the ongoing one). Out of the last 10 listings, 3 opened at a discount and the rest with premiums ranging from 1.16% to 169.04% on the day of listings. 

ICICI Securities Ltd.: This is the 41st mandate from ICICI Sec in the last three fiscals (including the ongoing one). Out of the last 10 listings, 4 opened at a discount and the rest with premiums ranging from 0.06% to 169.04% on the day of listings.

J M Financial Ltd.: This is the 26th mandate from J M Fin in the last three fiscals (including the ongoing one). Out of the last 10 listings, all opened with premiums ranging from 0.04% to 89.86% on the day of listings.

SBI Capital Markets Ltd.: This is the 18th mandate from SBI Cap in the last three fiscals (including the ongoing one). Out of the last 10 listings, 5 opened at a discount and the rest with premiums ranging from 0.06% to 103.11% on the day of listings.

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