Sharda Cropchem IPO Review by ARM Research (Apply)

Review By ARM Research Pvt. Ltd. on September 5, 2014

Issue opens for subscription on 05.09.14 and will close on 09.09.14. Bids can be made for minimum 90 equity shares and in multiples of 90 shares thereafter.

Utilization of Funds

To give exit rout to strategic investor (HEP Mauritius –15.9% stake) and gain benefit of listing on the bourses, the company is coming out with a maiden IPO of 22500000 equity share of Rs. 10 each via a book building process and has fixed price band of Rs. 145-156 per share. Thus the company intends to raise between Rs. 327 to Rs. 352 Cr on the basis of lower and upper price bands.

Lead Manger & IPO Grading

Issue is lead managed by Edelweiss Financial Services Ltd and IDFC Securities Ltd and Karvy Computershare Pvt Ltd is the registrar to the issue. This issue is grades as IPO 3/5 by CRISIL. Shares will be listed on BSE and NSE post allotments.

Sharda Cropchem Limited, a crop protection chemical company engaged in the marketing and distribution of a wide range of formulations and generic active ingredients globally. It is also involved
in order based procurement and supply of Belts, general chemicals, dyes and dye intermediates. The core strength of the company is to identifying generic molecules, preparing dossiers, seeking
registrations, marketing and distributing formulations or generic active ingredients in fungicide, herbicide and insecticide segments. They have also recently entered into the biocide segment and have acquired several registrations from the existing registration holders, primarily, in Europe.

Investment Rationale:

1. Asset-light business model & Core Competency in Registrations

The company has an asset-light business model whereby it focuses on identifying generic molecules, preparing dossiers, seeking registrations, and marketing and distributing formulations through third-party distributors or its own sales force. As of August 5, 2014, SCL has over180 good laboratory practices ('GLP') certified dossiers and as of July 15, 2014 it owns over 1,040 registrations for formulations and over 155 registrations for generic active ingredients across Europe, North American Free Trade Agreement (NAFTA) nations, Latin America and the Rest of the World. As of August 5, 2014, SCL has filed over 500 applications for registrations globally which are pending at different stages. Till date the company invested near Rs.383 Cr of capex for acquiring registrations. Considering the complexity in registration process, ownership of ~1,200 formulations across Europe, NAFTA, Latin America and Rest of World remains core competency.

2. Strong global distribution network

SCL is undertaking the distribution of formulations and generic active ingredients through thirdparty distributors based in Europe, NAFTA, Latin America and the Rest of the World. With an objective to increase its presence in the agrochemical value chain, the company has set upits own sales force in various countries in Europe as well as in Mexico, Colombia, South Africa and India. As of date it has over 440 third-party distributors and over 100 personnel in its own sales force. SCL is able to increase the penetration of formulations and generic active ingredients in various countries because its third-party distributors and own sales force are present across the globe.

3. Strong Sourcing Capabilities

Availability of multiple manufacturers and formulators in the agrochemical & non agricultural business helps company not being dependent on a single or limited number of manufacturers or formulators. It also procures generic active ingredients for preparation and sale of formulations wherein it outsource the process of preparation of formulations to third party formulators, primarily, in Europe and United States. Procurement of agricultural & non-agrochemical products from manufacturers, primarily, in China or India at competitive prices, based on the orders they
receive from their customers results in operational efficiencies.

4. Well Diversified Portfolio

The company's agrochemical business operations are spreading over 60 countries across Europe, NAFTA, Latin America and the Rest of the World offering a diverse range of formulations and generic active ingredients in fungicide, herbicide, and insecticide and biocide segments. In the non agrochemical business, the product portfolio comprises belts, general chemicals, dyes and dye intermediates which enable it to cater to the varied demands of customers.

5. Strong Financial Performance

The company has a strong balance sheet with healthy return ratios. It has maintained a focus on capital efficiency and has a conservative debt policy (zero debt as per FY2014 balance sheet. The company has a consistent track record of profitability over the last three years and a 25% compounded annual growth in the net income over FY2012-14. It has strong return on capital employed (RoCE) of 25% and return on Equity (RoE) of close to 20%.

Growth Strategy:

1. Concentrate on forward integration through its own sales force in its existing markets
2. Strengthen its distribution presence in the existing and new markets, including highly regulated markets, by leveraging its existing portfolio of formulations and generic active ingredients
3. Continued focus on obtaining registrations across jurisdictions to increase its portfolio of formulations and generic active ingredients
4. Increase the scale of their biocide registration organically and inorganically and focus on their marketing and distribution
5. Pursue opportunities of inorganic growth through strategic acquisitions and partnerships

Risks

1. Operates in highly regulated business: The Company operates in the agrochemical business, which is a highly regulated sector, and has to comply with the regulations prescribed by the authorities of the jurisdictions. So any regulatory hurdle may adversely affect the company's performance.

2. Currency risk: Any volatility in the local currency will affect the earnings of the company

3. Registration failure or delay may adversely affect its performance: The process of seeking registrations is complex, expensive and time consuming. If the company is unable to successfully obtain registrations in a timely manner or at all, it may lose the market opportunities which will adversely affect its operations and profitability.

4. Offer diversified range of formulations and generic active ingredients to protect different kind of crops in the agricultural industry, which is seasonal and cyclical in nature.

5. SCL do not own the SHARDA CROPCHEM LIMITED and SC trademarks and have made applications for registration of the same. Until they receive the registration, SHARDA CROPCHEM LIMITED and trademarks enjoy limited legal protection and its ability to use the trademarks and logo may be impaired.

6. A substantial portion of its business involves third parties, being manufacturers or formulators, and they rely on them for supply of formulations or generic active ingredients in their finished form or for outsourcing the preparation of formulations or packaging, labeling, consultation, storage and distribution.

7. SCL do not own its Registered Office and other premises from which they operate.

Conclusion / Investment Strategy

Sharda Cropchem Ltd (SCL) operates in a niche market of crop protection & the company is in the marketing and distribution of a wide range of formulations and generic active ingredients globally. It is also involved in order based procurement and supply of Belts, general chemicals, dyes and dye intermediates. The company is virtually Debt free Company.

At the upper price band of Rs 156, the company is priced at a P/E ratio of 13x comparatively lower than the average P/E of 25x of the listed peers.

The company with its asset light business model, core competency in seeking registrations, global distribution network, diversified portfolio and strong financial performance is looking attractive investment bet.

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