Heranba Ind an interesting business but valued high
The company compares itself with the likes of Rallis India, Sumitomo Chemical, Bharat Rasayan and Punjab Chemicals
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HERANBA Industries Limited is looking to tap the markets with its fresh issue for Rs 60 cr and an offer for sale of 90.15 lac shares. The price band is Rs 626-627, with the issue opening on Tuesday the 23rd of February and closing on Thursday the 25th of February. The company is based out of Gujarat and has units in Vapi and Sarigam.
Heranba had revenues of Rs 968 cr in the year ended March 2020 with a net profit of Rs 97.75 cr. In the six months ended September 2020, the revenues have increased to Rs 619.21 cr with net profit of Rs 66.31 cr. The EPS for the year ended March 2020 was Rs 25.03, which makes the PE ratio 25.01 to 25.05 times. The company which is more than 25 years old is into manufacture of pesticides, herbicides and fungicides. It makes technical grade formulations in all three categories and sells in the domestic and export markets as well.
During the previous year the company had completed a major expansion by setting up a formulation plant in Sarigam, Gujarat. This unit is currently utilising capacity of about 60 per cent, which would allow the company to ramp up sales in the medium term. It has ample land at this unit and it is proposed to set up a new technical facility as well. While the business is good, the products lack pricing power being a highly competitive industry.
The company compares itself with the likes of Rallis India, Sumitomo Chemical, Bharat Rasayan and Punjab Chemicals. Rallis India had revenues of Rs 2,250 cr for the year ended March 20 and is more than double the size of Heranba. Similarly, Sumitomo Chemicals had revenues of Rs 2,423 cr in the year ended March 20 and becomes 2.5 times the size of Heranba.
Bharat Rasayan had revenues of Rs 1,215 cr which would be comparable on turnover, but is present only in the pesticides business. Punjab chemicals had a revenue of Rs 547 cr and are half the size of Heranba. Further it is only in the space of performance chemicals. In short, the peer group is strictly not comparable and the price earnings multiple leave little comfort going forward.
Heranba has perfected the art of manufacturing Pyrethroids, which are synthetic chemical compounds that are procured from chrysanthemum cineraria folium flowers. They are used to control pests in farms, homes, communities, restaurants, schools and hospitals. Most importantly, they are an alternative to hazardous chemicals and are cost-effective as well. They are also used in pharmaceuticals to control mosquitoes through lice in the hair and mosquito nets.
The current mood in the market would ensure that everything on offer through a primary issue is lapped up and oversubscribed. The same is bound to happen with Heranba as well.
What needs to be seen is what does an investor with a medium-term outlook have in store. The company would take 3-4 quarters to ramp up the capacity available in the formulation facility. Secondly, it is at least three to four quarters before the new capacity to be set up to manufacture technical come up. This facility is vital to use the full capability of the formulations plant. I would estimate that the top line of Heranba could come in the range of Rs 1,800 cr to 2,000 cr in the next 4-5 years comfortably based on the present prospects of the industry and growth plans. The valuations are rich, offering little upside in the short term. If investing for listing gains, caution is advised. If investing for the medium term, one could wait for some time before doing so.
(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)
