Sharda Crop's fabulous profit margin raises doubt: VS Fernando, Best IPO Analyst (LINK)

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Sharda Cropchem: Agrochem’s current industry P/E may justify price-band though the ‘marketing’ company’s fabulous profit margin raises doubt. The IPO The present IPO is an offer for sale of 2.26 equity shares of Rs 10 each from the company’s existing shareholders: HEP Mauritius Ltd (1.43 crore shares), Sharda Bubna and Ramprakash Bubna (41.17 lakh shares each). The offer is made through book-building route with a price band between Rs 145 and Rs 156. The issue constitutes 25 percent of the capital of the company. Investors should apply for a minimum of 90 shares and multiples of 90 thereafter. Edelweiss Financial Services and IDFC Securities are appointed as book-running lead managers while Edelweiss Securities and Sharekhan are acting as syndicate members. IPO Object The main object of Sharda’s IPO is to derive benefits of listing and to carry out the offer for sale by the selling shareholders. In other words, the entire issue premium of over Rs 304 cr would go to the selling shareholders and not the company. Grading Being an offer for sale, the IPO has not been graded by any rating agency. Company Background Incorporated in March 2004 as Sharda Worldwide Exports Pvt Ltd, the company’s activities were dominated by export-trading till fiscal 2013. The company changed its name to Sharda Cropchem Ltd (SCL) only in September 2013. As regards the people behind SCL, the promoters Sharda Bubna and Ramprakash Bubna claim to have engaged in dealing of dyes and dyes intermediates since late eighties through their proprietary concerns viz. Sharda International (1987) and Bubna Enterprises (1989). The businesses of the proprietary firms were transferred to SCL in April 2004.  Business profile SCL presents itself as a crop protection chemical company engaged in the marketing & distribution of wide range of formulations and generic active ingredients globally. The company is also involved in order-based procurement and supply of belts, general chemicals, dyes & dyes intermediates. The company claims, its core strength lies in identifying generic molecules, preparing dossiers and seeking registrations.   SCL does not have a manufacturing facility of it own even though its net block is valued around Rs 200 cr. According to the company, the ‘net block’ is predominantly of foreign licences for its molecules which are essentially intangible assets. Until fiscal 2013, the company’s revenue was dominated by trading and for the first time in fiscal 2014, manufactured goods-sales overtook trading revenue.  The company claims to get its manufactured goods on job-work basis from third parties.  The company’s entire revenue is derived from exports. Financial Performance SCL’s revenue grew from Rs 203 crore (cr) in fiscal 2010 to Rs 556 cr in fiscal 2013. Trading revenue accounted for 81 percent in 2010 which came down to 60 percent in 2013. In fiscal 2014, the top line witnessed a negative growth to Rs 532 cr as trading turnover dropped from Rs 335 cr or 60 percent to Rs 236 cr or 44 percent. However, export of manufactured goods has steadily increased from Rs 38 cr in 2010 to Rs 296 cr in 2014. The company’s net profit has grown from Rs 13.29 cr in 2010 to Rs 84.50 cr in 2014. An interesting aspect of SCL is, though predominantly a trading company, its operating margin is as attractive as 22.5 percent which is more than double of the best in the industry.  The company’s capital, which was at Rs 1.38 cr in 2004, was enhanced to Rs 15.18 cr in 2007 through a bumper 10:1 bonus issue. Post-bonus, the company made private placements in 2008 thereby enlarging the equity to Rs 18 cr and collected Rs 94 cr premium. In June 2011, it made another bonus issue in the ratio of 4:1 taking the equity to over Rs 90 cr. On the enlarged equity, the EPS worked out to Rs 9.37 for fiscal 2014.  The ten-year old company joined the dividend list in fiscal 2012 (10 percent). For 2013 too, it paid 10 percent which was hiked to 20 percent in fiscal 2014. This worked out to a payout of 21 percent. Prospects Even though SCL does not have any manufacturing base, the company is confident of maintaining its growth on the strength of its core competency in registration of molecules, strong sourcing capabilities and global distribution network. The company’s current dividend base itself gives a yield of 1.3 percent on the offer price.   Valuation & Perception Sharda is asking for a valuation of Rs 1300-1400 cr at a price band of Rs 145-156.  The price band gives 15-16 P/E which compares well with the industry peers. At the offer price, SCL’s book value is discounted 2.5 to 2.7 times.  Perhaps, one factor that may weigh against the valuation is the absence of any tangible asset. The non-promoter shareholder whose average cost is less than Rs 70 is offloading his entire holding through the IPO. If the profit margin is so convincing and also if the prospects are so promising, why should the Mauritius shareholder dispose all his holding? Lead Manager’s Track For managing the offer for sale, SCL has hired two investment bankers viz. Edelweiss Financial and IDFC Securities whose track record is a mixed bag.  Whereas the two issues managed by IDFC in recent years are currently quoting at a premium, most of the IPOs handled by Edelweiss are languishing below the offer price even in the current boom. The only solace is, Wonderla, lead-managed by Edelweiss in 2014, is currently quoting nearly two and a half times its offer price.

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LINK
http://www.moneycontrol.com/mccode/news/article/article_pdf.php?autono=1171471&num=0