Dharmaj Crop Guard
Dharmaj Crop Guard is coming out with a 100% book building; initial public offering (IPO) of 1,14,28,000 shares of Rs 10 each in a price band Rs 216-237 per equity share.
Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
The issue will open for subscription on November 28, 2022 and will close on November 30, 2022.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 21.60 times of its face value on the lower side and 23.70 times on the higher side.
Book running lead managers to the issue are Monarch Networth Capital and Elara Capital (India).
Compliance Officer for the issue is Malvika Bhadreshbhai Kapasi.
Profile of the company
The company is an agrochemical company engaged in the business of manufacturing, distributing, and marketing of a wide range of agro chemical formulations such as insecticides, fungicides, herbicides, plant growth regulator, micro fertilizers and antibiotic to the B2C and B2B customers. It also engages in the marketing and distribution of agrochemical products under brands in-licensed by it, owned by it and through generic brands, to Indian farmers through its distribution network. It provides crop protection solutions to the farmer to assist them to maximize productivity and profitability. It exports its products to more than 25 countries in Latin America, East African Countries, Middle East and Far East Asia. It sells its agrochemical products in granules, powder and liquid forms its customers. Additionally, it manufactures and sells general insect and pest control chemicals for Public Health and Animal Health protection.
With an aim to offer a wide product portfolio across the agri-value chain, the company continues to expand its product portfolio by introducing new products. It manufactures and sells various formulations of insecticides, fungicide and herbicides, plant growth regulators, micro fertilizers and antibiotics. It has obtained 464 registrations for agrochemical formulations from the CIB&RC, out of which 269 agrochemical formulations are for sale in India as well as for export and 195 agrochemical formulations are exclusively for exports. Additionally, it has have also applied for registrations of 18 agrochemical formulations and 17 agrochemical technicals from the CIB&RC, which are pending at various stages. The company’s manufacturing facility is located at Plot No. 408 to 411, Kerala GIDC Estate, Off NH-8, Kerala, Taluka Bavla, Ahmedabad, Gujarat, India. As of November 30, 2021, its aggregate installed capacity of its manufacturing facility for agro-chemical formulations was 25,500 MT. The company manufactured 7,577.21 MT of agrochemical formulations in Fiscal 2021. Its manufacturing facility are equipped with modern plant and machinery capable of producing quality agrochemical products and have received quality control certifications such as ISO 9001:2015, ISO 14001:2015 and ISO 45001:2018 for development and manufacturing of agrochemical formulations such as insecticides, herbicides, fungicides, micro fertilizers and plant growth regulators.
Proceed is being used for:
Funding capital expenditure towards setting up of a manufacturing facility at Saykha, Bharuch, Gujarat.
Funding incremental working capital requirements of the company.
Repayment and/or pre-payment, in full and/or part, of certain borrowings of the company.
General corporate purposes.
Industry overview
The evolution of pesticides in India was led by Green Revolution. In 1943, India saw one of the worst food disasters during the Bengal famine. Food shortages had resulted in death of around 40 lakh people in the eastern part of India. The problem of food shortage in India continued even after independence at different time period and the frequent food scarcity issue led to the beginning of Green Revolution in India. Around 1960s, the Green Revolution was launched by the government of India with the support of M.S. Swaminathan, a geneticist, who is now referred as the father of the Green Revolution in India. The revolution started in 1967 and continued till 1978. The Green Revolution in India resulted in growth in agricultural production, primarily in the states of Haryana, Punjab, and Uttar Pradesh. The main achievement in this revolution was the development of high-yielding variety of seeds of wheat and rust-resistant strains of wheat. The value chain of pesticide industry involves five stages as shown in the chart below. The chain starts with feedstock moves to technical grades, formulations, distributors and concludes at end users.
In the global agrochemicals market, India is the 4th largest producer led by USA, Japan and China. Also, India is a net exporter of agrochemicals and has emerged as the 13th largest exporter of pesticides globally. The output of pesticides in India (which includes 42 technical grades) increased at a CAGR of 8.7% from 213 thousand tonnes in 2017-18 to 295 thousand tonnes in 2021-22. During the year 2021-22, the production of pesticides grew by 16.4% y-o-y to 295 thousand tonnes. The demand for pesticides from agriculture (which was not much affected by Covid-19 in 2020-21) and low-base effect are believed to have supported the output of pesticides in 2021-22. It can be seen from the above chart that in terms of volume, insecticides accounted for the largest share of around 41% on an average during the period 2017-18 to 2021-22 followed by herbicides, fungicides and others that held a share of about 37%, 19% and 3%, respectively. In the five-year period, insecticides (the largest segment) grew at a CAGR of 4.7% while fungicides increased at a faster CAGR of 13.2% on account of a 58% and 20% jump in its output during 2020-21 and 2021-22, respectively. Herbicides rose at a CAGR of 6.4% in 2017-18 to 2021-22 and others increased at a CAGR of 15.6% during these five years.
Pros and strengths
Diversified portfolio of products and consistent focus on quality and innovation: The company has developed a niche portfolio of agro-chemical products. It has diversified its product portfolio since incorporation and has grown into a multi-product manufacturer of agrochemical products such as insecticides, fungicides, herbicides, plant growth regulator, micro fertilizers and antibiotic. This diversification across products and categories has allowed it to de-risk its business operations. Additionally, it manufactures and sells general insect and pest control chemicals for Public Health and Animal Health protection. It provides crop protection solutions to the farmer to maximize productivity and profitability. It has obtained registrations from the CIB&RC to manufacture 464 agrochemical formulations out of which 269 agrochemical formulations are for sale in India as well as for exports and 195 agrochemical formulations are exclusively for exports. It has also obtained registration of from the CIB&RC for 6 agrochemical technicals for manufacturing and sales in India as well as for export. It has 157 trademark registrations including its brand products. Its agrochemical formulations are sold as branded products to framers through its distribution network. As of September 30, 2022, it had over 118 branded formulations that are sold to farmers.
Strong R&D capabilities with focus on innovation and sustainability: The company has a research and development (R&D) centre at its manufacturing facility. It also has a quality control laboratory at its manufacturing facility, which primarily monitors the quality of its raw materials and finished goods. Further, its quality control laboratory has received certificate of accreditation from National Accreditation Board for Testing and Calibration Laboratories (NABL) which has assessed and accredited in accordance with the standard ISO/IEC 17025:2017. It has been able to diversify its products range mainly due to its technological capabilities. It relies on its R&D team, which helps it to manufacture products more efficiently and to cater the demand of the overseas customers across agro industry. As at September 30, 2022, it employed 9 researchers including personnel who had obtained masters degree in chemistry and specialize in process research and complex chemistries.
Established distribution network with strong branded products: The company’s ability to deliver sufficient quantities of agro chemical products to farmers with short lead-time is critical, particularly given the seasonal nature of cropping. It has a pan-India sales and dealer presence in 17 states with a dedicated sales force that provides customer service and undertakes product promotion. As of September 30, 2022, its network comprised over 4,362 dealers having access to 16 stock depots supporting the distribution of its branded products in 17 states of India. As of September 30, 2022, it exported its products to approximately 66 customers across 25 countries. As of September 30, 2022, it had a sales team of 195 employees, who are responsible for managing institutional sales and branded sales, the distribution channel and product promotion at the farmer level. Strong and recognizable brands are a key attribute in its industry, which increase customer confidence and influences a purchase decision. Since incorporation, it has built several strong brands by leveraging the strength of its marketing and distribution network.
Experienced Promoters and management team: The company’s Promoters and its management team have significant experience in the agrochemical industry. Its management team is backed by a core technical team that has vast experience in manufacturing and also has the required technical know-how to manufacture the products. Its experienced Promoters supported by its management team position it to grow its business, increase its product portfolio, helps it to assess the market, enlarge its distribution footprint and improve its operating margins. It is led by a dedicated senior management team with several years of industry experience. Its senior management team has played a key role in developing its business and it benefits from their significant experience in the agro chemical industry. Its management team’s industry experience, knowledge and relationships with suppliers and customers have led to its growth.
Risks and concerns
Do not enter into long-term agreements with majority of customers: Though the company has had repeat orders from customers and has developed long-term relationships with certain customers, it typically does not enter into long-term contracts with its customers. In the absence of long-term contracts, there can be no assurance that its existing customers will continue to purchase its products and any loss of its customers will have a material adverse effect on its business, results of operations and financial condition. Customers with whom the company does not have long-term agreements may choose to cease sourcing its products. In the event a customer ceases to use it as its preferred supplier for products that was specifically created for them, it cannot assure that it will be successful in marketing those products to another customer. This could lead to a surplus of those products in its inventory. It is also exposed to risks of lower sales volume or lower price realization on such volumes depending on prevailing market conditions, as a result of such short-term arrangements.
Business is subject to climatic conditions and cyclical in nature: As an agrochemical company, the company’s business is sensitive to weather conditions such as rains, drought, floods, cyclones and natural disasters, as well as events such as pest infestations. There is growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Its results of operations are significantly affected by weather conditions in the agricultural regions in which its products are used. The most important determinant of its sales is the volume of crops planted. Adverse conditions early in the season, especially drought conditions, can result in significantly lower than normal plantings of crops and therefore lower demand for crop protection products. This can result in its sales in a particular region varying substantially from year to year. Weather conditions can also result in earlier or later sowings and affect the levels of pest infestations, which may affect both the timing and volume of its sales or the product mix.
Face competition: The company faces competition from both domestic and multinational corporations. Its failure to obtain new customers or to retain or increase its existing market share or effectively compete could adversely affect its business, financial condition and results of operations. Competition in its business is based on pricing, relationships with customers, product quality and customization. It is exposed to the risk of losing market share to cheaper imports from other countries, which could adversely affect its business, financial condition and results of operations. It also faces pricing pressures from multinational companies that are able to produce chemicals at competitive costs and consequently, supply their products at cheaper prices. It is unable to assure that it shall be able to meet the pricing pressures imposed by such multinational competitors which would adversely affect its profitability.
Manufacturing facility concentrated in a single region: The company’s manufacturing facility is located at Kerala GIDC Estate, Ahmedabad, Gujarat, India. Consequently, any materially adverse social, political or economic development, natural calamities, civil disruptions, or changes in the policies of the state government or local governments in this region could adversely affect, amongst others, manufacturing operations and transport operations, and require a modification of its business strategy, or require it to incur significant capital expenditure or suspend its operations. Any such adverse development affecting continuing operations at its manufacturing facility could result in significant loss due to an inability to meet customer contracts and production schedules, which could materially affect its business reputation within the industry. The occurrence of, or its inability to effectively respond to, any such events or effectively manage the competition in the region, could have an adverse effect on its business, results of operations, financial condition, cash flows and future business prospects.
Outlook
Incorporated in 2015, Dharmaj Crop Guard is an agrochemical company. The company is engaged in the business of manufacturing, distributing, and marketing a wide range of agrochemical formulations such as insecticides, fungicides, herbicides, plant growth regulators, micro fertilizers and antibiotics to the B2C and B2B customers. The company also provides crop protection solutions to the farmer to assist them to maximize productivity and profitability. It exports products to more than 20 countries in Latin America, East African Countries, the Middle East and Far East Asia. As of November 30, 2021, the company had more than 196 institutional products that they sold to more than 600 customers based in India and the international markets. Its manufacturing facility is located at Kerala GIDC Estate, Off NH-8, Kerala, Taluka Bavla, Ahmedabad, Gujarat, India. It has a research and development (R&D) centre at its manufacturing facility. It has also a quality control laboratory at manufacturing facility, which primarily monitors the quality of its raw materials and finished goods. As of November 30, 2021, the company exported its products to more than 60 customers across 20 countries. On the concern side, the company’s business requires significant amount of working capital primarily as a considerable amount of time passes between purchase raw materials and sale of its finished products and the subsequent collection process viz. its customers. Besides, regulations and policies implemented by the Government of India as well as the countries to which it export its products can affect the demand for, expenses related to and availability of its products.
The issue has been offered in a price band of Rs 216-237 per equity share. The aggregate size of the offer is around Rs 246.84 crore to Rs 270.84 crore based on lower and upper price band respectively. On the performance front, the company’s total income for Fiscal 2022 was Rs 396.28 crore as compared to Rs 303.56 crore for Fiscal 2021, representing an increase of 30.54%. Profit for the Fiscal 2022 was Rs 28.69 crore as compared to Rs 20.96 crore for the Fiscal 2021. Its profit margin increased from 6.93% in Fiscal 2021 to 7.28% in Fiscal 2022. Meanwhile, with a view to further diversify its customer base and increase its market share, the company intends to augment its sales in the markets where it sell its products as well as expand into new markets. Towards this objective, it seeks to continue to leverage its relationships with its existing customers through cross-selling of its products. It also intends to strengthen its existing brand building activities including dealer training programs, field demonstrations, field shows, farmers training programs, jeep campaigns and participation in various national and international exhibitions for marketing its products.
