HP Adhesives coming with an IPO to raise upto Rs 125.96 crore

HP Adhesives

• HP Adhesives is coming out with a 100% book building; initial public offering (IPO) of 45,97,200 shares in a price band Rs 262-274 per equity share.
• Not more than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on December 15, 2021 and will close on December 17, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 26.20 times of its face value on the lower side and 27.40 times on the higher side.
• Book running lead managers to the issue is Unistone Capital.
• Compliance Officer for the issue is Jyoti Nikunj Chawda.

Profile of the company

HP Adhesives was originally formed as a partnership firm under the name and style of M/s. H.P. International pursuant to a deed of partnership dated January 01, 1987. M/s. HP International was thereafter converted into a private limited company HP Adhesives Private Limited on May 07, 2019, pursuant to the provisions of Chapter XXI of the Companies Act. Subsequently, the company has been converted into a public limited company and the name of the company changed to “HP Adhesives Limited” pursuant to a special resolution passed at the Extra-Ordinary General Meeting of the company held on June 23, 2021 and a fresh Certificate of Incorporation dated July 01, 2021 issued by the RoC.

The company is a fast-growing multi-product, multi-category consumer adhesives and sealants company. For its largest product category - PVC solvent cement, it is amongst the leading manufacturing companies in India in the consumer/ bazaar segment of the adhesive industry. 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 network of distributors and direct customers. It also manufactures these products for select large PVC pipe manufacturing companies under co-branding or private label on 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 its distribution network.

The company 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 its distribution network across India. With strict focus on product quality and long-standing track record in the distributor network, it has an established brand image which helps it in penetrating new product categories. The company constantly engages with its distributor network through marketing and promotional activities and also conduct a range of activities such as distributor meets, retailer meets and plumber and carpenter meets which leads to promotion of its product brands.

Proceed is being used for:

• Funding the working capital requirements of the company.
• Funding capital expenditure for expansion of production capacity at the existing manufacturing facility at Village Narangi, Raigad, Maharashtra and at the additional unit having a proposed construction area admeasuring about 4,532.57 sq. mtrs. (built-up) area on the adjacent plot (Proposed Expansion): 1) to expand its existing installed capacities for the existing product lines; and 2) to enable it to also add new products to its existing product portfolio.
• General corporate purposes.

Industry Overview

The Rs 134-136 billion (fiscal 2021) domestic adhesives and sealants market is broadly categorized into 1) industrial and 2) consumer and bazaar adhesives. The industrial segment caters to B2B industries such as packaging, footwear, paints, automotive, etc. The retail segment caters to industries such as furniture/woodwork, building construction, arts and craft, electrical fittings, etc. The adhesives and sealants market clocked 8-9% CAGR between fiscals 2015 and 2020, driven by growth in major end-user industries such as packaging, construction, electronics and woodworking. Construction investments logged 4-5% CAGR during the period, driven by an increase in spending on roads, railways and urban infrastructure. Moreover, the industry reflected healthy growth (7-8% CAGR) in the packaging segment. However, the adhesives market stagnated in fiscal 2021 because of the pandemic, de-growing at 1-2% CAGR to Rs 134-136 billion. Fortunately, the decline was restricted thanks to growth in food packaging and e-commerce industries, which catered to people forced to stay at home and ordered online. Moreover, redecorating spend increased, leading to higher usage of consumer and bazaar adhesives in the furniture market.

The Rs 53-55 billion (fiscal 2021) consumer adhesives industry clocked 8-10% CAGR between fiscals 2015 and 2020, driven by the rapidly growing furniture industry with booming real estate and rising income levels leading to an increased demand for interiors. Increased investment in building construction investment also contributed to its growth. The woodwork segment is the largest end-user for consumer adhesives, constituting 55% of fiscal 2021 revenue. The market de-grew 1-2% in fiscal 2021, due to the pandemic-led reduced construction activity. However, the decline was restricted due to increased demand from the furniture segment due to work from home, which led to higher demand for home furniture. However, the economy recovered in the second half of fiscal 2021, leading to a rise in demand from end-user industries. The consumer adhesives market is expected to recover in fiscal 2022, following an expected GDP growth of 9.5% on-year and consequent recovery in infrastructure and construction activity.

India’s consumer adhesives industry is expected to clock 9-10% CAGR between fiscals 2021 and 2026 driven by economic recovery and growth in end-user industries. In particular, demand is expected to recover in fiscal 2022, growing at 14-15% on-year, on a low base of fiscal 2021, as the Indian economy recovers from the impact of the pandemic. Overall, growth of the consumer adhesives industry is expected to moderate and log a CAGR of 8% between fiscals 2022 and 2026.

Pros and strengths

Established brand presence: The company has grown from a single product to a multi- product adhesives company with sales across India (through pan-India distribution network) and also in international markets. Its revenue from operations has grown from Rs 355.96 lakh in Fiscal 2010 to Rs 11,816.16 lakh in Fiscal 2021, registering a CAGR of 37.5% in last 11 years. Over the years, the company’s brands “HP” and “Strong Weld” in PVC adhesives product category have gained increasing acceptance on account of high product quality and efficient pricing. Despite Fiscal 2021 being impacted by COVID-19, its revenue from operations have grown by 23.75% between Fiscal 2020 to Fiscal 2021. This brand image has enabled it to introduce newer product categories through the existing distribution network initially and then to a larger customer base with an established goodwill. Increasing acceptance in newer product categories due to high quality and efficient pricing has further established Company’s brand reputation.

Wide product portfolio: When the company started its business activities, it only had one product category i.e. PVC, cPVC and uPVC solvent cement. Over last few years, it has expanded its product portfolio to multiple product categories including silicone sealants, synthetic rubber adhesives, PVA adhesives and other sealants. Having a wide portfolio of product categories enables it to cross-sell to a large customer base (which, in its case, are majorly distributors) who in-turn reach out to large number of retail counters for serving the appliers and eventual end-customer. Having a wide product portfolio also enables the company to efficiently compete with larger adhesive players in the market who also have a wide product offering. Its constant efforts are focused towards continuously identifying market demands and introducing relevant products with high quality.

Focusing on multiple end-user industries: It has over the last few years introduced new product categories which have diverse end-use applications. Initially when it started with PVC adhesives, it was primarily dependent on the PVC and cPVC pipes industry (irrigation, plumbing and water transport) for its growth. Subsequently, it has now established a good presence in silicone sealants, which has helped it to diversify into more end-user industries such as automobiles, electronic devices and appliances, glass and glazing, external weather sealing, general interior sealing, bathroom and sanitary, uPVC door and window industry, ACP panel industry, wood working (in case of PVA adhesives) and furniture, footwear, handicrafts, automotive, PVC flooring, AC ducting, upholstery, foam- mattresses, non-woven and thermal insulation leather, (in case of synthetic rubber adhesives). This expansion has facilitated a diversified product portfolio and has helped it to create demand for its adhesives and sealants across various end user industries.

Extensive distribution network: The company has established its distribution network strategically over the last several years to meet its goals. The company’s distributors cater to retailers who, in turn, make the product available for end-users (typically plumbers, carpenters, masons, glazing contractors, etc). Its sales team services the retail network through the distributors by making regular visits. For the financial year ended on March 31, 2021 and six months period ended on September 30, 2021, out of its total revenue from operations, its sales to distributors was about Rs 8,573.79 lakh and Rs 5,293.21 lakh respectively which represents 71.52% and 74.06% respectively of its total sales. It has more than 750 distributors and no distributor constitutes more than 5% of its total sales in Fiscal 2021 and six months period ended September 30, 2021. Top 10 distributors contributed not more than 20% of total sales in Fiscal 2021 and six months period ended September 30, 2021. Its distributors are also spread across the country having presence in 23 states and 4 union territories.

Risks and concerns 

Significant portion of domestic sales comes from western zone: The company has historically derived a significant portion of its revenue from sales in the western zone. In Fiscal 2021 and six months period ended September 30, 2021 the revenue generated from sales in western zone represented 47.03% and 53.65% respectively of its revenue from domestic sales. Accordingly, any materially adverse social, political or economic development, natural calamities, civil disruptions, regulatory developments or changes in the policies of the state or local government in this region could adversely affect its manufacturing and distribution activities, result in modification of its business strategy or require it to incur significant capital expenditure, which will in turn have a material adverse effect on its business, financial condition, results of operations, and cash flows. Further, the company’s sales from this region may decline as a result of increased competition, regulatory action, pricing pressures, fluctuations in the demand for or supply of its products or services, or the outbreak of an infectious disease such as COVID- 19. Its failure to effectively react to these situations or to successfully introduce new products or services in these markets could adversely affect its business, prospects, results of operations, financial condition, and cash flows.

Not entered into long-term arrangements with distributors: The company sells all its products through its distributor network. It presently does not have any long-term or exclusive arrangements with any of its distributor and there is no assurance that it will be able to sell the quantities it has historically supplied to such distributors. In the event its competitors’ products offer better margins to such distributors or otherwise incentivizes them, there can be no assurance that its distributors will continue to promote its products or place orders with it. Most of its transactions with its distributors are typically on a purchase order basis without any commitment for a fixed volume of business. There can also be no assurance that its distributors will renew their arrangements with it on current or similar terms, or at all. Further, its distributors could change their business practices or seek to modify the terms that it has customarily followed with them, including in relation to their payment terms. Any failure to continue its existing arrangements could negatively affect its business and results of operations

Stiff competition: The Indian consumer adhesives market is primarily dominated by Pidilite Industries Ltd. that has an aggregate market share of 60-65%, as the industry presents significant entry barriers. These market entry barriers include the development of an extensive distribution network through long-term relationships with distributors as well as significant marketing costs and the establishment of a distinct brand to gain product acceptance. The company competes on the basis of the strength of its products, distribution network and brand recognition. As a result, to remain competitive in its markets, it must continuously strive to manufacture products, expand its distribution network, enhance its brand and improve its operating efficiencies. Some of its competitors may have larger business operations, may be diversified with operations across India, may have greater financial resources than it does, may have access to a cheaper cost of capital and may be able to produce adhesives more efficiently or invest larger amounts of capital into their businesses in terms of strengthening their brands and expanding their distribution networks. An inability to effectively compete in terms of branding, providing competitive and products or services or expand into new markets, could have a material negative effect on its business, financial condition and growth prospects.

Huge working capital requirement: The company’s business requires significant amount of working capital primarily as a considerable amount of time passes between purchase of raw materials and collection of receivables post sales to customers. As a result, it is required to maintain sufficient stock at all times in order to meet manufacturing requirements as well as extend credit period to customers as per the industry practice, thus increasing its storage and working capital requirements. Consequently, there could be situations where the total funds available may not be sufficient to fulfil its commitments and hence it may need to incur additional indebtedness in the future, or utilize internal accruals to satisfy its working capital needs. There can be no assurance that the company will be able to effectively manage its working capital. Should it fails to effectively implement sufficient internal control procedures and management systems to manage its working capital and other sources of financing, it may have insufficient capital to maintain and grow its business and it may breach the terms of its financing agreements with banks, face claims under cross-default provisions and be unable to obtain new financing, any of which would have a material adverse effect on its business, results of operations, financial condition, and cash flows.

Outlook

HP Adhesives Limited is an adhesives and sealants company. The company 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 lubricants. These 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. On the concern side, the company has not enter into long-term arrangements with its distributors and any failure to continue its existing arrangements could negatively affect its business and results of operations. Moreover, the business is working capital intensive. If it experience insufficient cash flows from its operations or are unable to borrow to meet its working capital requirements, it may materially and adversely affect its business and results of operations.

The issue has been offered in a price band of Rs 262-274 per equity share. The aggregate size of the offer is around Rs 120.45 crore to Rs 125.96 crore based on lower and upper price band respectively. On the performance front, the company’s revenue from operations increased to 23.76% to Rs 11,816.16 lakh for the financial year 2020-21 from Rs 9,547.93 lakh for the financial year 2019-20. Its entire product portfolio has performed well in FY21 including the recently introduced product categories of Silicone Sealants, Rubber adhesives and PVA adhesives. Meanwhile, its profit after tax increased by 315.39% to Rs 1,005.97 lakh for the financial year 2020-21 from loss of Rs 467.06 lakh in the financial year 2019-20. The substantial increase was primarily due to increased revenue and to exceptional items of Rs 743.71 lakh. The company is focused to introduce new product categories to cater to more end-users. This helps in strengthening the relationship with existing distribution network as they have a larger product basket to offer to their customers, at the same time, it onboard new distributors in untapped segments and regions. Moreover, the company has constantly expanded the distribution network across the country and this continues to be one of the core strategies of the company to further expand the distribution network.