Profile of the company
The company is a crop protection chemical manufacturer, exporter and marketing company based out of Vapi, Gujarat. It manufactures intermediates, technicals and formulations. It is one of the leading domestic producers of synthetic pyrethroids like cypermethrin, alphacypermethrin, deltamethrin, permitherin, lambda cyhalothrin etc. Its Pesticides range includes insecticides, herbicides, fungicides and public health products for pest control. Its business verticals include (a) Domestic Institutional sales of Technicals: manufacturing and selling of Technicals in bulk to domestic companies; (b) Technicals Exports: Exports of Technicals in bulk to customers outside India; (c) Branded Formulations: Manufacturing and selling of Formulations under its own brands through its own distribution network in India; (d) Formulations Exports: Export of Formulations in bulk and customer specified packaging outside India; and (e) Public Health: Manufacturing and selling of general insect control chemicals by participating in public health tenders issued by governmental authorities and selling to pest management companies.
The company’s manufacturing process mainly includes chemical reactions of ammonolysis, esterification, hydrolysis, condensation, favorski reaction, isomerisation, cyanation, friedel crafts, methoxylation, cyclisation and halogenation. It has its inhouse R&D team for product development and improvisation which is well supported by its product registration team. Its R&D facilities at Unit I and II are recognized by the Department of Scientific and Industrial Research, Ministry of Science & Technology, Government of India (DSIR). Its new R&D facility at Unit III, Sarigam has become operational from October, 2020. The company exported its products to more than sixty (60) countries in Latin America, CIS, Middle East, Africa, Asia and South East Asia in Fiscal 2020.
Proceed is being used for:
Growing at a CAGR of nearly 7.4% during 2014-2019, the India Pyrethroids market is currently experiencing a positive growth. In 2019, the market reached a sales value of $110 million. Pyrethroids are cost-effective alternatives for conventionally used insecticides. They exhibit biodegradable properties and are widely used as liquid powders, granules, concentrate emulsifiers, and ultra-low-volume (ULV) sprays. Additionally, they are relatively less poisonous for mammals or birds, owing to which they are used for killing bugs and flying insects in small quantities. Consequently, they are also replacing organophosphates, which were conventionally used on vegetables, such as carrots and lettuce. Despite the presence of several driving forces, the Indian pyrethroids market faces some challenges as well. For instance, the rapid photodegradation and high susceptibility to moisture and heat are limiting the effectiveness of pyrethroids in agriculture and other open space applications. Moreover, although pyrethroids offer lower toxicity to human applicators and nontarget mammals and birds, they are highly toxic to invertebrates and fish. Furthermore, the behavioral and genetic changes in insects that result in resistance to pyrethroid treatment act as another major restraint to the market growth.
The agrochemicals market in India reached a value of $2,760 million in 2019, growing at a CAGR of 6.5% during 2014-2019. In India, the agrochemicals market is rising due to growing demand for food driven by an increasing population. Moreover, India's agrochemical market is expected to grow in the forecast period due to rising export opportunities for Indian suppliers owing to the shutdown of agrochemical plants in China due to green movements. The agrochemical industry has an extensive consumption of raw materials that are derived from crude-oil, chlorine, yellow phosphorus and bromine. As these materials are essential for the manufacturing of technical grades, any fluctuation in the pricing of these raw materials, directly impacts the overall production costs of agrochemicals.
Pros and strengths
Presence in wide range of products across entire value chain of synthetic pyrethroids: The company manufactures Intermediates, Technicals and Formulations which form part of the entire value chain of synthetic pyrethroids and other active ingredients in the agrochemicals business. It is one of the leading domestic producers of synthetic pyrethroids like cypermethrin, alphacypermethrin, deltamethrin, permitherin, lambda cyhalothrin etc. It started manufacturing of Cypermethric Acid Chloride (CMAC) which is a key pre-cursor required to produce pyrethroids in the FY 1995-96 at its facility at Vapi, Gujarat. By the FY 2001-2002, it forwards integrated its operations to manufacture Technicals like Metametron, Cypermethrin, Alphacypermethrin, Permethrin and Deltamethrin. In the FY 2004-05 it further expanded its product line to include Formulations to then move on to launch Formulations under its own brands in the FY 2005-06. This capability of manufacturing Intermediates, Technicals and Formulations and its presence in the entire value chain of synthetic pyrethroids provides it the flexibility to shift between products depending on the demand-supply and pricing dynamics of the domestic and international agrochemicals industry.
Product registrations in domestic, international markets enabling global outreach: The company’s International Distribution Partners, with its product and technical support, have obtained registrations for 371 Technicals and Formulations in 41 countries across Middle East, CIS, Asia, South East Asia and Africa. Further, 172 of its Technicals and Formulations have been filed by its overseas customers which are pending registration before the regulatory authorities of 41 countries in various regions across the world, excluding Europe. Its core strength lies in the R&D of Active Ingredients for creating new Formulations, preparing dossiers for national and international registrations of these new Formulations. Its in-house registration team is led by qualified personnel who facilitate the registration process in India with the CIB&RC and its dealers/customers in overseas jurisdictions, including some highly regulated markets like Europe enabling the manufacture and export of a range of Technicals and Formulations in the international markets.
Strong product portfolio and wide distribution network: The company manufacture and supply Technicals to leading domestic and multinational agrochemical companies operating in and outside India which are used by them for manufacturing their products. It supplies Technicals like cypermethrin, alphacypermethrin, deltamethrin, permitherin and lambda cyhalothrin to other agrochemical companies in India. Its end customers for its Formulations are the farmers who use its products for crop protection and crop care. It has more than 9,400 dealers/distributors supported by its 21 stock depots spread across 16 states and 1 union territory in the country in order to meet the demand of its products from farmers. It participates in various international and domestic agrochemical exhibitions & industry conferences to market its products. Its sales & marketing teams travel extensively to maintain and strengthen existing relationships with customers and to explore new relationships with potential customers. It educates farmers on the care and protection extended by its products over their crops by conducting farmer training camps, participating in village level programmes and district exhibitions to establish a direct relationship with farmer communities all over India.
Diversified and stable customer base: Various domestic and multinational agrochemical companies operating in and outside India are company’s customers for the Technicals manufactured by it. These include companies like Sumitomo Chemical India, Sulphur Mills, Biostadt India, Crystal Crop Protection, NACL (Formerly Nagajuna Agrichem), Sharda Cropchem, Meghmani Organics, PI Industries, Krishi Rasayan Group, Agro Life Science Corporation and Shanghai Agricare Chemical Company, China amongst others who use its products to manufacture their own Formulations and other products. The company also procure certain Technicals and Formulations from other companies depending on demand and supply and pricing dynamics. This diverse and stable base of customers provide the necessary revenue stability to the company as not more than 20.85% and 18.57% of its aggregate sales come from its top 10 customers for FY 2020 and the period ended September 30, 2020, respectively.
Risks and concerns
Reliance on large number of small customers for business: The company’s top ten customers across product categories constituted 22.03% and 20.85% of its revenue from operations for the six months period ended on September 30, 2020 and for Fiscal 2020, respectively. Reliance on large number of small customers for its business may generally involve several risks. These risks may include, but are not limited to, reduction, delay or cancellation of orders, failure to negotiate favourable terms with customer, the loss of these customers, all of which would have a material adverse effect on the business, financial condition, results of operations, cash flows and future prospects of the company. Further, there is no guarantee that it will retain the business of its existing customers or maintain the current level of business with each of these customers. In order to retain some of its existing customers, it may also be required to offer terms to such customers which it may place restraints on its resources. Additionally, its revenues may be adversely affected if there is an adverse change in any of its customers supply chain strategies or a reduction in their outsourcing of products it offers, or if its customers decide to choose its competitors over it or if there is a significant reduction in the volume of its business with such customers.
Derives majority of sales from major pesticides consuming crop: The company derives majority of sales from major pesticides consuming crop like paddy, cotton, sugarcane, wheat etc. Any significant reduction in the area under cultivation in these crops may significantly reduce the demand for its Formulations Products. Further, the demand for the company’s Formulations products is dependent on the cropping pattern which may vary year on year for these major crops. Any significant changes in the cultivable area and the cropping pattern in India for these crops may impact its sales and profitability. Further, the demand of its Formulations products is also dependent on the monsoon and general weather conditions in India. Lack of monsoon in a particular year may result in the decline in demand for its Formulations products. The unpredictable effects of weather in India, including floods, droughts and subsequent damage to crops significantly affects crop production in India as they can be more severe than those in other countries.
Branded formulations business is sensitive to seasonal fluctuations: As the company’s agrochemicals business is dependent on the agricultural industry, it is highly sensitive to seasonal and weather factors, which make its results of operations unpredictable from period to period. The weather can affect the presence of disease and pest infestations in the short term on a regional basis, and accordingly may adversely affect the demand for crop protection products. Sales of agrochemical products in the domestic Indian retail market are seasonal due to the monsoon. In particular, demand for pesticides is generally higher during the monsoon season and therefore most of its sales of Branded Formulations products take place between June and November, which is also known locally as the Kharif crop season. Demand by domestic customers for its Formulations products is also affected by weather conditions in India such as droughts, excessive rainfall and cyclones or other natural calamities such as fires, floods and earthquakes. The unpredictable effects of monsoonal weather in India, including flooding, droughts and subsequent damage to crops significantly affects crop production in India as they can be more severe than those in other countries.
Business depends on manufacturing facilities which are geographically located in one area: The company has three operational Intermediates, Technicals and Formulations manufacturing facilities, two of them are manufacturing Intermediates and Technicals situated at Vapi, Gujarat and one located at Sarigam, near Vapi, Gujarat is presently manufacturing Formulations. These facilities are subject to the normal risks of industrial production, including natural disasters, directives from government agencies and power interruptions. Any extended power supply interruption will result in reduced production at the affected facility. The company depends on the Dakshin Gujarat Vij Company for the supply of power to its manufacturing facilities and the GIDC for the supply of water to its manufacturing facilities. As the company does not carry business interruption insurance, any disruption that affects its operations will adversely affect its business, financial condition and results of operations.
Incorporated in 1992, Heranba Industries is a Gujarat-based crop protection chemical manufacturer. It is one of the leading domestic producers of synthetic pyrethroids like cypermethrin, deltamethrin, lambda-cyhalothrin, etc. The company manufactures different types of pesticides including insecticides, fungicides, herbicides, and other pest control products. Operates in different verticals including Domestic sales of Technicals to companies; Technicals exports; Domestic sales of Branded formulations under its own brand name; Formulations export; and Manufacturing and selling of insect control chemicals. The company’s promoters have more than 30 years of individual experience in the agrochemicals sector and are adequately qualified to manage the operations of the company from manufacturing, exports and marketing. On the concern side, the installed capacity of the company’s manufacturing facilities located at Vapi, Gujarat have not been fully utilized, over the last three financial years, and there is no assurance that there will be an increase in the capacity utilization in the future. The company relies to a significant extent on the relationships it has with its third-party dealers, as they lay a significant role in enhancing customer awareness of its products and maintaining its brand names.
The issue has been offered in a price band of Rs 626-627 per equity share. The aggregate size of the offer is around Rs 624.33 crore to Rs 625.33 crore based on lower and upper price band respectively. On the performance front, the company’s total revenue decreased by Rs 439.32 million or 4.34% from Rs 10,118.38 million in the Financial Year 2019 to Rs 9,679.06 million in the Financial Year 2020. This was primarily due to government mandated lockdowns in response to COVID-19 which hindered its manufacturing activities, dispatch of goods to the depots situated across PAN India and export sales. Profit for the year increased by Rs 223.48 million or 29.64% from Rs 754.02 million in the Financial Year 2019 to Rs 977.50 million in the Financial Year 2020. The company intends to leverage its existing relationships in the international markets where it is already present for new products and develop new relationships in the markets where the company is not yet present on the strength of the quality and range of its product. As part of the company’s further growth strategy it intends to focus on manufacturing and sales of Formulations under its own brands in India and the manufacturing and marketing of public health products.