Astec Lifesciences IPO Review

Investors can refrain from subscribing to the Initial Public Offering (IPO) from Astec Lifesciences, being made to fund expansion projects for the manufacture of agrochemical and pharma ingredients.

The company has managed consistent profit growth with high margins in the past. However, it has limited presence in the overseas markets which is deemed lucrative for ingredient suppliers.

A small scale of operations and an expansion project that is in its very initial stages also make an investment in the stock unattractive at this stage. In the price band of Rs 77-82, the offer price discounts the company’s 2008-09 earnings by about seven times based on the pre-offer equity base and 12 times, on the expanded one.

Though that appears to be an undemanding valuation, much larger listed peers in the space — Hikal, Meghmani Organics and Sabero Organics — command multiples of only 5-6 times.

Astec Lifesciences is a supplier of fairly long-standing active ingredients such as Hexaconazole, Propiconazole, Metalaxyl, Tebuconazole and Dicap to manufacturers of fungicides and anti-fungal drugs. Over two-thirds of the company’s sales go to domestic clients such as Syngenta India, Indofil Chemicals and Atul, with exports making up the rest of revenues.

Historic growth rates in the company’s sales and net profits have been impressive, with sales growing at an annualised rate of nearly 50 per cent over the past three years (Rs 89 crore in 2008-09), while net profits (Rs 10.7 crore) have grown at 47 per cent. This growth has been managed through a scaling up of the company’s sales volumes with manufacturing capacities expanded from 500 tonnes to 2,800 tonnes over the past five years.
Capacity expansion

The present IPO is to fund a further expansion of capacity to over 3,950 tonnes by 2010-11, working capital and expenses on product registration and research. One point in the company’s favour is that it has managed to almost fully utilise its present capacity.

However, this expansion project, originally scheduled to be commissioned in October 2009, has already faced a sizeable delay and is now expected to come up only by October 2010.

The project is also in a preliminary stage with orders for equipment yet to be placed. The company is relying entirely on the IPO proceeds to fund this project.

Fungicides, with a market size of about Rs 750 crore, make up less than a fifth of the domestic crop protection market, in which insecticides are the dominant segment. The domestic demand for crop protection chemicals is expected to register high single-digit growth over the next five years, helped by healthy farm product prices and the pressure to improve crop yields. However, sale volumes do tend to be cyclical and susceptible to the vagaries of the monsoon.

A fragmented industry structure, with a large number of small players and a fairly high rate of product obsolescence also imposes constant pricing pressure on agrochem suppliers.

Astec has so far managed to keep its operating profit margins (23 per cent) well above industry levels (10-12 per cent) over the past three years. However, it is currently a small player and ramping up sales volumes may entail a sacrifice on margins.
Minimal global presence

Even after doubling its exports over the past three years, Astec remains a marginal player in overseas markets with exports of Rs 26 crore in 2008-09.

Exports offer scope for strong growth and higher margins for ingredient suppliers, given that India is a low-cost manufacturing base for agrochemical and pharma ingredients. However, establishing a significant overseas presence in agrochemicals is a long-drawn process, dependent on an extensive distribution network, a wide range of products and the need to register each new product in individual markets.

With a small export turnover and just three product registrations in its own name (43 held by clients), Astec is well behind leading agrochem marketers such as United Phosphorus or even Meghmani Organics in global market presence.

The company also faces unresolved litigation, which could pose risks to its operations. Nath Biogene, a former customer, has alleged supply of spurious products by the company; which Astec has disputed.

An appeal on this matter is now pending before the Supreme Court. The offer document also mentions a complaint filed by the Government of Maharashtra alleging “illegal manufacture and distribution of pesticides without an appropriate licence” at one of its units.

via BL