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| Expensive formulation | |
| Ram Prasad Sahu / Mumbai November 1, 2009, 20:30 IST | |
While Astec Lifesciences has a stable revenue stream and bright prospects going ahead, it is asking for too steep a price for its shares.
Agro-chemical company, Astec Lifesciences which manufactures intermediates, active ingredients and formulations for the agro-chemicals and pharmaceutical sectors is planning to expand its capacity to increase its exports, product range and contract manufacturing activities. The proposed expansion, which will be funded by IPO proceeds, will increase its capacities by 41 per cent to 3,950 metric tonnes per annum and is being done at a cost of Rs 32.56 crore. The company is also planning to enhance its R&D capability, file for product registrations in export markets and raise resources for working capital needs to the tune of Rs 19 crore.
Supplier of choice
The company currently makes a range of fungicides and pharma intermediates and wants to expand this range going ahead with a focus on products that are off-patent and are difficult to manufacture. The company counts among its clients multinational companies such as Syngenta, Irvita and Nufarm for exports and domestic clients such as Nicholas Piramal and United Phosphorus. It is planning to build dedicated facilities for international agro-chemicals majors with a business model which is similar to the one followed by contract research and manufacturing services (CRAMS) companies.
It is estimated that large multinational and CRAMS clients to form about 40 per cent of its revenues from 2011-12 from under 2 per cent currently. Astec gets over 80 per cent of its business from agro-chemicals and will focus on this segment as it fetches it better margins than its pharma segment. The company wants to focus on the fungicides as it forms only 16 per cent of the Indian agrochemicals market while the world share is 22 per cent for this segment.
Maintaining margins
One of the concerns for the company is the longer working capital cycle with payments coming after 3-4 months putting pressure on cash-flow. The management says that this is a norm for the industry and is working to ensure timely payments. It is focussing on the industrial agro-chemicals market due to the high bad debt situation in the retail (branded) segment. The present expansion and new registration in overseas markets will help the company improve its realisations as the production and sales shifts to more value-added products. For example, while the average sales price per tonne for Propicanozole, a fungicide, was Rs 1,200, the company’s average sales price per tonne in 2008-09 for all products was at Rs 355. Expect this to improve to Rs 548 per tonne in 2010-11 when the expansions are completed.
Valuations
The agro-chemical intermediate business is crowded with a whole host of domestic and international players vying for the Rs 5,000 crore market. The company, however, hopes to score over competition on the back of its value-added product range, stable revenue flows and diversified customer base. While the business model is sound, execution is a major risk. Further, as compared to Hikal, which is a comparable peer, the valuation gap is too close for comfort.
| Issue details |
| Price band (Rs) |
77-82 |
| Size (Rs cr) |
57-61 |
| Opens |
29-Oct |
| Closes |
04-Nov |
| CARE rating |
2/5 |
Hikal, which is nearly five times the size in revenues as compared to Astec and derives 65 per cent sales from pharma segment, trades at 8.5 times and 6.4 times its estimated 2009-10 and 2010-11 earnings, respectively. Astec trades at 8.3 times and 6.5 times, respectively at the lower end of the price band. While growth rates would be higher and margins slightly better for Astec, the valuations already price in these positives, and hence, the offer is expensive even at the lower band.
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