Paradeep Phosphates coming up with IPO to raise around Rs 1579 crore

Paradeep Phosphates

• Paradeep Phosphates is coming out with a 100% book building; initial public offering (IPO) of 37,59,43,390 shares of Rs 10 each in a price band Rs 39-42 per equity share.
  
• Not more than 50% 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 35% for the retail investors.
  
• The issue will open for subscription on May 17, 2022 and will close on May 19, 2022.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 10 and is priced 3.90 times of its face value on the lower side and 4.20 times on the higher side.
  
• Book running lead managers to the issue are Axis Capital, ICICI Securities, JM Financial and SBI Capital Markets.
  
• Compliance Officer for the issue is Sachin Patil.
  

Profile of the company

The company is the second largest private sector manufacturer of non-urea fertilizers in India and the second largest private sector manufacturer in terms of Di-Ammonium Phosphate (DAP) volume sales for the nine months ended December 31, 2021. It 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. Its fertilizers are marketed under some of the key brand names in the market ‘Jai Kisaan – Navratna’ and ‘Navratna’.

The company’s manufacturing facility is located in Paradeep, Odisha and includes a DAP and NPK production facility, a Sulphuric acid production plant and a Phosphoric acid production plant. It utilize Sulphuric and Phosphoric acids for manufacturing DAP and NPK. Its integrated business model has been critical to its success and a differentiating factor from its competitors. The company has established an extensive sales and distribution network, with a strong presence in the eastern part of India. As of March 31, 2022, it distributed its products across 14 states in India through its network of 11 regional marketing offices and 468 stock points. Its network includes 4,761 dealers and over 67,150 retailers, catering to over five million farmers in India, each as of March 31, 2022. The company’s primary raw materials include Phosphate Rock, Phosphoric acid, Sulphur, Ammonia and MOP. It source its raw materials locally as well as from various other countries such as Morocco, Jordan, Qatar and Saudi Arabia. For several of its raw materials, such as Phosphate Rock, Ammonia and Sulphur, it benefit from long-term supply agreements.

Proceed is being used for:

• Part-financing the acquisition of the Goa facility.
  
• Repayment/prepayment of certain of borrowings.
  
• General corporate purposes.
  

Industry overview

While India is one of the largest fertiliser consumer in the world, it is also one of the major importers around the globe, on account of lower capacities compared to consumption. While the demand for urea has remained around 30 million tonnes over the past few years, its capacities have remained more or less stagnant at around 22-24 million tonnes. Moreover, India does not have any manufacturing capacities for MOP. As a result, the country is highly dependent on import of fertilizers. Indian fertiliser industry is not only dependent on imported fertilizers, but for imports of raw materials as well. However, requirement of imported raw materials varies from company to company, depending upon the product mix. On account of this, Indian fertiliser industry is highly vulnerable to the fluctuations in the international prices of key raw materials such as rock phosphate, phosphoric acid, ammonia, Sulphur, sulfuric acid etc. While for urea players, the entire rise in costs is pass-through by government in the form of subsidy, complex players are more vulnerable as the subsidy provided to them is nutrient-based (fixed). Although the retail prices of complex fertilizers are market driven w.e.f. April 1, 2010, offsetting the rise in raw material cost by hiking price at similar levels is not possible, as this would result in subdued demand.

The fertiliser industry, especially the nitrogenous fertiliser segment, is energy intensive. Energy sources are used not only as feedstock, but also to meet the power and fuel requirements of the industry. As feedstock, these are used to produce ammonia, which is then converted into nitrogenous fertilizers. The material cost, and the power and fuel expenses of the nitrogenous fertiliser segment constitutes more than 70-75% of the total production cost. Most plants are set up near feedstock sources to maximize locational advantages. The most distinct characteristic of the fertiliser industry is its high dependence on monsoons for growth in demand. Typically, the demand for fertilizers picks up during seasons of good rainfall, which helps the companies improve their financial performance through volume growth. On the other hand, drought conditions lead to high inventory levels and a consequent decline in profits.

Pros and strengths

Second largest manufacturer of Phosphatic fertilizers in India: Among private sector entities with a focus on the non-urea segment, the company is the second largest in terms of phosphatic fertilizer (DAP and NPK complexes) capacity, as of March 31, 2022. As of March 31, 2022, (i) the company’s total annual granulation capacity of DAP and NPK production plant was approximately 1.50 million MT; (ii) its total annual installed capacity of Sulphuric acid production plant was approximately 1.30 million MT; and (iii) its total annual installed capacity of Phosphoric acid production plant was 0.30 million MT, in addition, the plant has three operational concentrators to concentrate weak Phosphoric acid into strong Phosphoric acid. For the Financial Year 2022, it was the second largest backward integrated manufacturer in the private sector with Phosphoric acid capacity in India. In general, operations in the fertilizer industry are capital intensive due to high costs of land acquisition, construction of manufacturing facilities and high costs of equipment and machinery. Fertilizers manufacturing plants with proximity to transportation facilities typically have logistical benefits. In view of the said, the scale of the company’s facility, its proximity to Paradeep port, access to a network of railways, waterways and highways provides it with a competitive advantage and an integrated business model.

Driving raw material efficiency through backward integration of facilities and effective sourcing: The company is committed to the integration of the industrial value chain from securing a stable supply of raw materials and owning integrated facilities to maintaining a wide distribution network for its products and ensuring good customer service. Its primary raw materials include Phosphate Rock, Phosphoric acid, Ammonia, Sulphur and MOP. It produce some of its Phosphoric acid and Sulphuric acid requirements, with the other raw materials being sourced from suppliers. It source its raw materials from a number of suppliers based locally and in countries such as Morocco, Jordan, Qatar and Saudi Arabia, among others.  In order to ensure a stable supply of company’s most important raw material by value, Phosphate Rock, on January 1, 2021, it entered into a long term supply agreement with OCP for the procurement of Phosphate Rock for term three years, expiring December 31, 2023 and which may be automatically renewed for successive periods of two years. In addition, it has entered into two long-term supply agreements, one with a Qatar state owned chemical and petrochemical marketing and distribution company, and the other with a large Indian fertilizer company that trades, sells, markets and supplies critical raw materials to India for the procurement of Ammonia.

Strategic location of manufacturing facility and sizeable material storage, handling and port facilities: The company’s manufacturing facility is strategically located near the Paradeep port, where the company own a captive berth with 14 meters draft with facilities to unload solid and liquid cargo. As a result, it is generally able to meet loading and unloading schedules of the carriers and save on demurrage charges. It propose to replace its ship unloader by procuring a new one by December 2022 to enhance reliability and efficiency of its port operations. It also has a closed conveyor belt which is 3.4 km long connecting the Paradeep port to its facility. This enables it to transport its raw materials in solid form directly to its facility. In addition, cross-country pipeline which is 3.1 km long. This enables it to transport raw material in liquid form directly to its facility. It also own a railway siding.

Established brand name backed by extensive sales and distribution network: Strong and recognizable brands are a key attribute in company’s industry. Such brands increase customer confidence and influences a purchase decision. The brands ‘Jai Kisaan – Navratna’ and ‘Navratna’ are well-known to the farmers in the Eastern parts of India. It caters to nearly all types of crops. It is able to generate demand for its brand through its marketing activities, which are directed towards distributors and farmers. They consist of a broad range of advertising and promotional tools, such as meeting with farmers, promotions at point-of-sale locations, field demonstrations, organizing bazaar days, rural upliftment programmes in selected districts where fertilizer consumption is low, crop seminars, trainings programmes for farmers, programmes for promoting soil health awareness, distribution of crop and product literature, publicity van campaigns, retailers’ meets, hoardings and direct marketing activities. Further, it periodically organize meetings with its dealers and retailers to build its brand, introduce new products and train its dealers and retailers about the suitability of its products for specific crops.

Risks and concerns

Business is subject to climatic conditions: The company’s business is sensitive to weather conditions such as drought, floods, cyclones and natural disasters, as well as events such as pest infestations. Its results of operations are significantly affected by weather conditions in the agricultural regions in which its products are used. Adverse conditions early in the season, especially drought conditions, can result in significantly lower than normal plantings of crops and therefore lower demand for crop protection products. This can result in its sales in a particular region varying substantially from year to year. Weather conditions can also result in earlier or later plantings and affect the levels of pest infestations, which may affect both the timing and volume of company’s sales or the product mix. In addition, sales of fertilizers in India are typically seasonal due to the monsoon. Farmers tend to apply fertilizers during two short application periods, the two major crop seasons in India, namely rabi and kharif.

Competition from organic farming, bio fertilizers and water soluble fertilizers: Organic farming has increased in recent years, which discourages the use of mineral fertilizers. Organic farming has been growing due to: (i) the Government of India, through its National Mission for Sustainable Agriculture, facilitating the adoption of such concepts, issuing related guidelines and providing agricultural subsidies; and (ii) consumer pressure related to pesticides, food scares, health and environment and animal welfare. Organic farming generally utilizes manure or other organic materials in combination to improve soil quality naturally. While limited use of some fertilizers of low solubility is permitted under applicable guidelines, some are prohibited in organic farming. Increased competition from organic farming (as well as bio fertilizers and water soluble fertilizers) may result in the reduction of demand, or lower growth in demand, for company’s fertilizers. In addition, a number of geographies in which the company operate are considering restricting the use and application of 'inorganic fertilizers', due to concerns with respect to the impact of these products on the environment. As a result, the demand for nitrogen and phosphate products, such as NPK fertilizers, may decline over time.

Rely on third party transportation providers: The company typically rely on third party transportation providers and engage carrying and forwarding agents to supply most of its raw materials and to deliver products to its customers. Its operations depend on the timely transport of raw materials to its manufacturing facility and of its products to distributors, retailers and farmers. It use a combination of land and ocean transport for such purposes, which are subject to various bottlenecks and other hazards beyond its control, including customs, weather, strikes or civil disruptions. Further, it cannot guarantee that its insurance will cover loss in such circumstances, as well as where raw materials are delayed or damaged during transit. Continuing increases in transportation costs may also have an adverse effect on its business, results of operation and financial condition.

Dependent on performance of agricultural sector: The company’s business is dependent on the performance of the agricultural sector in which its fertilizers are used. The performance of the agricultural sector and consequently the demand for its fertilizers and other products, is dependent on area under cultivation, soil quality, climatic conditions including rains and adequacy of monsoon, adequacy of water supply, crop prices, and availability of credit to farmers which are beyond its control. Further, the demand for its fertilizers is dependent on the cropping pattern which may vary year on year for the major crops. Any reduction in area under cultivation, adverse cropping pattern, climatic conditions, erratic or inadequate monsoon and consequent scarcity of water or other developments affecting the performance of agricultural sector in which its products are used, may adversely affect its business, results of operations and financial condition.

Outlook

Paradeep Phosphates is a manufacturer of non-urea fertilizers in India. The company is engaged in manufacturing, trading, distribution and sales of a variety of complex fertilizers such as DAP, three grades of Nitrogen-Phosphorus-Potassium (namely NPK-10, NPK-12 and NP-20), Zypmite, Phospho-gypsum and Hydroflorosilicic Acid. It is the second largest private sector manufacturer of non-urea fertilizers and Di-Ammonium Phosphate (DAP) in terms of volume sales for the nine months ended December 31, 2021. The company's fertilisers are marketed under the brand names Jai Kisaan-Navratna and Navratna. The company is committed to the integration of the industrial value chain from securing a stable supply of raw materials and owning integrated facilities to maintaining a wide distribution network for its products and ensuring good customer service. On the concern side, the company is exposed to foreign exchange risks since its business is dependent on imports entailing large foreign exchange transactions, in currencies including the U.S. Dollar and Euro. Besides, the company could be held liable for accidents that occur at its manufacturing facility or otherwise arising out of its operations. In the event of personal injuries, fires or other accidents suffered by its employees or other people, it could face claims alleging that it was negligent, provided inadequate supervision or be otherwise liable for the injuries. 

The issue has been offered in a price band of Rs 39-42 per equity share. The aggregate size of the offer is around Rs 1466.17 crore to Rs 1578.96 crore based on lower and upper price band respectively. On the performance front, total income increased by 22.62% to Rs 5183.94 crore for the financial year 2021 from Rs 4227.77 crore for the financial year 2020, primarily due to an increase in its revenue from operations. Profit for the year increased to Rs 223.26 crore for the financial year 2021 from Rs 193.22 crore for the financial year 2020.  To further strengthen and capitalize on the existing reputation and recognition of each of the three brands, the company intend to undertake marketing efforts in select cities where there is potential for growth. It also intend to bolster its marketing campaigns through mass media such as television, radio, digital and print campaigns. Further, upon acquisition of the Goa Facility, it will gain access to its Ammonia production plant, Urea production plant and combined NPK production plant. It will also gain access to its robust outbound facilities, captive power plants, storage for raw material and finished goods as well as a bagging plant. This is expected to allow it to scale its operations and increase its manufacturing capabilities.