Sharda Cropchem
By Geetanjali Kedia
Sharda Cropchem is entering the primary market on Friday, 5th September 2014, through an offer for sale of 2.26 crore equity shares of Rs.10 each, priced in the band of Rs. 145 to Rs. 156 per share. The issue represents 25% of the post issue paid-up capital and will raise Rs. 327 crore and Rs. 352 crore, at the lower and upper price band, respectively. To be listed on NSE and BSE, the issue closes on Tuesday 9th September.
Sharda Cropchem, a crop protection company, markets formulations and generic active ingredients in fungicide, herbicide and insecticide segments. It also undertakes order-based supply of conveyor belts, chemicals, dyes intermediates, which accounts for a very small percentage of topline. Having 180 Good Laboratory Practices certified dossiers, company owns 1,040 registrations for formulations and 155 registrations for generic active ingredients. It has own sales force of 100 personnel and 440 third party distributors, in 60 countries across Europe, North and Latin America and Rest of the World.
Sharda Crop clocked total income of Rs. 815 crore in FY14, flat YoY, while net profit was at Rs. 107 crore, leading to an EPS of Rs. 11.85 on equity of Rs.90.22 crore. High equity base of over Rs. 90 crore is seen unexciting. Significant portion of profits accrue from trading activity, as traded goods accounted for 62% of total sales, which was at 71% in FY13. This does not augur well for any company. Other agro chemical companies like UPL, PI Industries, Dhanuka Agri have less than 10% of income from traded goods.
Sharda Crop does not have any manufacturing facilities of its own and sources products from third party vendors or manufacturers. In addition to this, it does not have any definitive long term contracts with vendors, and operates on a case-to-case basis. A peek at the balance sheet (consolidated) reveals that fixed assets of Rs. 198 crore, comprised of intangibles of Rs. 196 crore! i.e. company does not have a single plant or machinery or building of its own. Complete reliance on third party manufacturers does not bode well, besides being extremely challenging with respect to control and operations, given the vast geographic span. No other agro chemical company outsources 100% of its manufacturing function.
Besides negligible tangible assets, it has humongous amount of money locked in outstanding debtors - Rs. 400 crore as of 31st March 2014, which represents 177 sale days or nearly 6 months sales are outstanding as debtors. Historically too, this number has been very high at 175 days for FY13 and 192 days for FY12. Company states that it extends 30 to 180 credit days, based on local market practice. But the financials paint a picture quite contrary to this. This also puts a big question mark on the integrity of the sales numbers. Also, Rs 8 crore worth of debtors outstanding on 31st March 2014, are due for over 6 months and have not been provided for, is a case of bad accounting practice.
In comparison, none of the listed peers have outstanding debtors for more than 3 months of sales. Hence, this is seen a negative for the company, due to unusual shift from trade practices. Company’s current ratio too is very high at 2:1, and has remained so since FY10. Thus, fundamentals and working capital position of the company is extremely precarious and weak.
Since the IPO is an offer for sale, no funds will flow to the company. Infact, the company does not need any money, as it has surplus cash of Rs. 150 crore (debt of Rs 40 crore and cash and equivalents of Rs. 191 crore), as of 31st March 2014. Thus, IPO is only to facilitate exit to PE investor HEP Mauritius’ 15.87% stake, which entered the company in 2008, at an average bonus-adjusted price of Rs 69.83 per share. Promoters, Bubna family will also trim their holding from 84.13% currently to 75% post IPO, to comply with SEBI’s public shareholding norms. On net worth of Rs. 556 crore, its book value per share is at Rs. 62, as of 31st March 2014.
Estimating 10% growth for the company in FY15, it will post net profit of close to Rs. 118 crore , resulting in an EPS of close to Rs. 13. At the lower and upper band of Rs. 145 and Rs. 156, shares are being issued at PE multiple of 11 times and 12 times, based on expected current year earnings, respectively.
UPL (formerly United Phosphorous), among the largest agro chemical firms globally, with 23 manufacturing facilities across Europe, Asia, Latin America and FII holding of 48.59%, has sales of Rs. 11,000 crore and net profit of Rs. 950 crore and is trading at PE multiple of 12 times, of FY15E earnings. Excel Crop Care, another key player in the pesticide industry with FY14 sales and net profit of Rs. 966 crore and Rs. 67 crore respectively, rules at PE multiple of close to 8 times, based on yesterday’s closing price of Rs 995.
Sharda Cropchem lacks financial strength, while fundamentals do not warrant a subscription. Not being swayed by sentiments and market operations, we advise to avoid the issue! Avoid looking at the attractive grey market premium, coupled with frenzy created by the vested interest for the IPO.