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

Astec Lifesciences IPO Analysis

Astec Lifesciences (Astec) has been promoted by Ashok Hiremath and Dr P L Tiwari. Ashok Hiremath has dissociated from his brother Jai Hiremath, who is a promoter of listed company Hikal. Astec is predominantly an agrochemicals player and operates in an extensively competitive agrochemicals and pharmaceutical industry, with major focus on the manufacture and sale of intermediates, active ingredients and formulations in the off-patent–proprietary category. Active ingredients are sold to crop protection formulators, whereas intermediates are supplied to technical grade product manufacturers and formulations are sold in bulk quantities to companies engaged in retail marketing. Astec's three manufacturing facilities, located at Dombivli (one unit) and Mahad (two units) in Maharashtra, have a total installed capacity of 2,800 tonnes. These facilities have been granted ISO 9001:2000 certificate of assessment by International Standards Certification Pty Limited, Australia, for "Design, Development, Manufacture and Supply of Organic Chemicals and Intermediates for Pharmaceutical and Agrochemical Industry".

Hexaconazole, Tebuconazole, Metalaxyl and Propiconazole are some of the key products of Astec in the agrochemical segment. These are generally used in crop protection. Dicap, one of the company's key pharmaceutical intermediate products, which is used in manufacture of antifungal agents. Triazole fungicides, which includes Hexaconazole, Tebuconazole, and Propiconazole is one of the company's major product in the agrochemical segment, and has contributed 65.81% of the total sales, whereas Dicap, a key product in pharmaceutical segment, contributed 14.14% in 2008-09. Besides enjoying a good pie of the domestic market, the company has been able to successfully venture into the international market as well, exporting its produce to countries like South Africa, Europe, USA, West Asia, East Asia, Japan and South America. The company plans to enter into long-term supply contracts with the buyers in these countries in order to scale up exports.

Astec's concerted effort to identify contract manufacturing as one of the options to maintain growth and profitability and also to undertake contract research and manufacturing (CRAMS) business will enable a predictable pattern of demand going ahead.

To further diversify and widen the product range besides increasing the existing capacity, Astec plans to expand its existing manufacturing facilities at Mahad at an estimated cost of Rs 32.56 crore. The company plans to add nearly 1,150 tonnes of agrochemicals and pharma intermediates to its existing capacity of 2800 metric tonnes. It further plans to expand its research & development centre at Dombivli at an estimated cost of Rs 2.55 crore by expanding its bench scale capabilities, improve analytical capabilities and expand its pilot plant. The proposed expansion will enable the company to carry out research on more complex molecules and to undertake contract research activities. In addition to this, Astec also plans to incur Rs 3.76 crore for both domestic and international product registration. All the capital expenditure would be financed from the proceeds of the initial public offering (IPO) and internal cash accruals.

Strengths-

* Has six diverse products comprising a mix of high volume-medium margin and low volume-high margin category, comprising different kinds of active ingredients, intermediates and formulations catering to the needs of a wide range of customers like agrochemicals manufacturers, pharmaceutical applications and also in manufacturing shampoos and disinfectants.
* Has a research & development (R&D) facility at Dombivli recognised by the Department of Science and Industrial Research, which has been able to develop processes for various new products like Tebuconazole, Propiconozole and Metalaxyl.
* Has existing 43 registrations in 20 countries where local firms/parties have obtained the registration on the basis of being the approved source of supply and three registrations in its own name, two in Australia and one in Vietnam. In addition to overseas registrations, has 69 CIB registrations for various products in the Indian market.
* Has a good mix of domestic and international sales mix with the exports and deemed exports together comprising 29.52% of the total revenue in the previous fiscal.
* Has managed to consistency achieve a higher capacity utilization level. The average capacity utilization was 85% in the past three years.

.Weaknesses-

* Operation dependent on agricultural production and monsoon. Disappointing and erratic monsoon in the current year is likely to have a negative impact on the demand for agrochemicals and other crop inputs.
* Does not have long-term supply agreements for supply of raw materials. Most of the raw materials required are imported. Hence, is vulnerable to volatility in international prices of the raw material and also currency rate fluctuations.
* Also does not have any long-term sales agreement, which is a trade practice in the chemicals intermediates and technical chemical business.
* The industry is a highly fragmented with competition from both the domestic as well as international manufacturers.

Valuation

The price band of Rs 77 to Rs 82 per equity share, translates into a PE of 12.2x at the lower price band and 13x at the higher price band based on FY 2009 EPS of Rs 6.3 on post-IPO equity. Near comparable companies Sabero Organics and Meghmani Organics are trading at a trailing 12- month PE of 4.4 and 6.1, respectively. Composite average TTM P/E for small/medium agrochemical companies is around 6.

Grey Market Premium - Den Networks, Indiabulls Power, Astec Life Sciences

Company Name	Offer Price (Rs.)	Premium (Rs.)
Indiabulls Power	45	+/- 2 to 3
DEN Network Ltd.	195 to 205	5 to 6
Astec Life Science	77 to 82	4 to 4.50