Choice Broking assigned a “subscribe with caution” rating for Heranba Industries issue, saying the demand valuation is stretched.
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The public issue of Heranba Industries, a crop protection chemicals manufacturer, has got a good response considering its high return ratios, dominance in the pyrethroids segment and a strong balance sheet with negligible long-term debt.
The offer had been subscribed 83.29 times by afternoon on February 25, the final day of bidding, as it received bids for 58.15 crore equity shares against an offer size of 69.81 lakh equity shares, the subscription data available on the exchanges shows.
The non-institutional investors were at the forefront, with their reserved portion subscribed 271.15 times and that of qualified institutional buyers 67.45 times. Retail investors had bid 11.84 times more against the portion set aside for them.
The Gujarat-based Heranba Industries aims to raise Rs 625.2 crore through the public issue, which comprises a fresh issue of Rs 60 crore and an offer for sale of Rs 565.2 crore by promoters. The company will use fresh issue proceeds for its working capital requirements, while the offer for sale money will go to promoters.
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The shareholding of promoters, after the public issue, will be reduced to 74 percent from 98.8 percent.
The company manufactures intermediates, technicals and formulations and is one of the leading domestic producers of synthetic pyrethroids like cypermethrin, alphacypermethrin, deltamethrin, permitherin, lambda cyhalothrin etc, with a 19.5 percent market share. Its range includes insecticides, herbicides, fungicides and public health products for pest control.
“Heranba brought the issue at P/E multiple of approximately 25x at the higher end of the price band of Rs 626-627 per share on FY20 PAT basis.
The company, being one of the leading domestic producers of synthetic pyrethroids, has shown strong financial performance,” Hem Securities said.
Heranba Industries IPO: Should you subscribe?
The company was in the process of developing two fungicides, two herbicides and an insecticide for exclusive sale to the European markets, the brokerage said. “Therefore looking after all above, we find that company with its current strong fundamentals has bright future prospects. Hence, we recommend investors to subscribe to the issue for the short and long term,” it added.
Heranba had a positive operating cash flow over FY18-20, which increased by 2.2 percent CAGR to Rs 54.21 crore in FY20. The average operating cash flow during the period was around Rs 64.62 crore. Average RoIC and RoE stood at 35.6 percent and 31.1 percent, respectively, over FY18-20. The company paid a dividend in the last three years, with an average dividend payout of around 6.7 percent over FY18-20.
For H1 FY21, the company has reported a 23.3 percent YoY higher topline to Rs 618.34 crore. EBITDA and PAT margin stood at 16.1 percent and 10.7 percent, respectively.
“We feel that the improvement in the profitability is not sustainable and is mainly linked to COVID-19 pandemic induced low-cost structure. We forecast an 18.7 percent CAGR rise in topline over FY20-23 to Rs 1,591.5 crore in FY23E. EBITDA and PAT margin are expected to contract by 60bps and 55bps, respectively, to 13 percent and 9.7 percent in FY23 as compared to a level of 13.6 percent and 10.3 percent in FY20,” said Choice Broking. It assigned a “subscribe with a caution” rating for the issue as it feels the demand valuation is too stretched.
