Aries Agro IPO Avoid

Investors can stay away from the initial public offer of Aries Agro, a manufacturer and marketer of plant micronutrients.

Though micronutrients have good demand prospects in the Indian context and are not subject to the regulatory constraints that fertilisers face, the business is characterised by high competition.

The offer price also appears high in relation to the multiples enjoyed by companies in the fertiliser and agricultural inputs business.

At the price band of Rs 120-130, the offer price values the company at between 18 and 20 times its FY-07 earnings per share, on a fully diluted equity base.

Much larger players in the agri-inputs space such as Rallis India (11 times), which have a presence in this segment, trade at cheaper multiples.

The offer proceeds are to fund working capital, towards the acquisition of an overseas material supplier, purchase of mobile vans for marketing products as well as capacity expansion.

The substantial scaling up of capacities over the next year could provide justification for the offer price over the medium term.

However, the intense competition in this business poses significant execution risks to the scaling up of operations.
Micronutrients business

Aries Agro derives the bulk of its turnover from the marketing of micronutrients under the names — Agromin and Chelamin, which are its leading brands.

Aries also has a small presence in the crop protection and veterinary products business. Micronutrients, which are required in relatively smaller dosages to supplement macro-nutrients (nitrogen, phosphate and potassium — usually delivered through mainstream fertilisers), help improve the yield and output of agricultural and horticultural crops.

The company focusses on chelated micronutrients (combinations of metallic nutrients such as zinc, iron and copper with certain chemicals) that have higher efficacy and allow better absorption by the plant.

The micronutrients business has considerable potential in the Indian context. Factors such as low yields of major foodgrains and horticultural crops, high soil alkalinity and intensive cultivation are the key demand drivers for micronutrients.
Wide network

Aries has built an extensive distribution network which reaches 375 districts across 20 states, through a network of 4700 distributors. This is backed by a portfolio of 37 products consisting of micronutrients, chelated nutrients and insecticides.

From being a small player, Aries has substantially ramped up its manufacturing capacities in FY-07, with capacities rising from 12,000 tonnes to 21,600 tonnes in FY-07.

Net sales have climbed from Rs 26 crore to Rs 73 crore between FY-04 and FY-07 while net profits have risen from a minuscule Rs 0.09 crore to Rs 8.69 crore over the same period.

Both numbers have been helped by a substantial trading component to sales.

The company has now lined up an ambitious expansion, with 79,200 tonnes of additional micronutrients capacity proposed to be added to the existing facilities across locations.
Limited pricing power

The market for micronutrients such as zinc, iron and copper in India, is expected to double over the next two decades. This suggests sustained single-digit growth in demand over the next few years.

Unlike fertilisers, micronutrients are not subject to any price controls by the government and, thus, allow greater operational freedom to producers.

However, players such as Aries Agro would still be constrained by limited pricing power, due to competition from imports as well as the host of local/regional brands, as the product offers limited differentiation possibilities.

The business has low entry barriers, involves small capital investments to put up capacities, limiting the company’s ability to withstand pricing pressures and scale up sales.

The relatively high pricing of the offer also may not leave room for disappointments on this score.