Dharmaj Crop Guard IPO opens for subscription, GMP rises; should you apply for the issue? | The Financial Express

Dharmaj Crop Guard IPO opens for subscription, GMP rises; should you apply for the issue?

Dharmaj Crop Guard IPO comprises a fresh issue of shares worth Rs 216 crore and a sale of 14.83 lakh shares by promoters.

Dharmaj Crop Guard IPO opens for subscription, GMP rises; should you apply for the issue?
Dharmaj Crop Guard shares were commanding a grey market premium (GMP) of Rs 55 on Monday

Dharmaj Crop Guard IPO opened for subscription on Monday, 28 November, and will close on 30 November. The price band for the IPO has been fixed Rs 216–237 per share. Dharmaj Crop Guard IPO comprises a fresh issue of shares worth Rs 216 crore and a sale of 14.83 lakh shares by promoters. The company aims to raise Rs 251.15 crore through the offer at the upper price band Dharmaj Crop Guard shares were commanding a grey market premium (GMP) of Rs 55 on Monday, according to people dealing with unlisted securities. The shares of the company are expected to list on the stock exchanges BSE and NSE on Thursday, 8 December.

Dharmaj Crop Guard is an agrochemical company engaged in the business of manufacturing, distributing, and marketing a wide range of agrochemical formulations. Promoters Manjulaben Rameshbhai Talavia will offload 7.09 lakh shares, Muktaben Jamankumar Talavia 6.56 lakh shares, Domadia Artiben 87,500 shares and Ilaben Jagdishbhai Savaliya 30,000 shares. Ahead of the IPO, the company on Friday mobilised Rs 74.95 crore via anchor book. It finalised allocation of 31.62 lakh equity shares to anchor investors, at Rs 237 per share. Three investors – Elara India Opportunities Fund, Rajasthan Global Securities, and Resonance Opportunities Fund – invested in the company via anchor book.

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Should you apply for Dharmaj Crop Guard IPO?

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“The company is available at the upper end of the IPO price band, it is offered at 27.9x its FY22 earnings and 9.4x to P/BV with a market cap of Rs. 8,010 million. The valuation of the IPO appears to be reasonable when we compare with listed peers. The company has established a distribution network, strong branded products, and stable relationships with their institutional customers. In addition to this, the government’s aim to reduce dependency on China and improve self-sufficiency is expected to support industry’s backward integration and thus its growth. Pursuant to the setup of this manufacturing facility, profit margins on products would resultantly increase due to backward integration. Considering the future prospect for the
company we assign “Subscribe” rating to this IPO.”

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“The upward momentum in pesticide industry output is expected to continue going forward, backed by a growth in food consumption in the domestic market amid an expected increase in population, government support for agriculture, demand from export markets, and the horticulture and floriculture markets, among others. The penetration of pesticides and agrochemicals in India is low, and this poses an opportunity for growth for agrochemical producers. In addition to this, the government’s aim to reduce dependency on China and improve self-sufficiency is expected to support industry’s backward integration and thus its growth. The issue is priced at 20 PE of FY22 earnings, which is lower than most of its listed peers, and the company has posted steady growth in both revenue and profit. Profit margins are also rising continuously in a tough environment, so we assign a “Subscribe” rating to this IPO.”

Choice Broking: Subscribe with Caution

“At higher price band, Dharmaj Crop Guard Ltd is demanding a P/E multiple of 27.9x (to its FY22 EPS of Rs. 8.5), which seems to be in-line to the peer average. Thus the issue seems to be fully priced. However considering the growth outlook and its ability to expand the profitability margin post the commissioning of the agrochemical technical facility (around H2 FY24), we are assigning a “Subscribe with Caution” rating for the issue.

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“The set-up of the new factory will enhance the manufacturing capabilities of the business and lead to better profit margins due to backward integration. However, a low level of capacity utilization of around 35% in FY2022 remains a key concern for the business. On the upper end of the price band, the issue is valued at a P/E of 20.4x based on FY2022 earnings which we feel is fairly priced. Hence, we recommend a “SUBSCRIBE” rating for the benefit of listing gains.”

Reliance Securities: Expensive valuation

“Based on FY22 earnings, the company is valued at 27.9x P/E, 18.9x EV/EBITDA and 2.1x EV/ Sales. The track record of decent financials, diverse agrochemicals portfolio, enough domestic and global footprint, better quality assurance process and in-house R&D capabilities, are key positives. However, the Agro Chemical business is very competitive, with several large players dominating the market. It also needs strict technical expertise, quality requirements, regular inspections and audits by clients.”

“The manufacturing of agrochemical formulations is complex any failure to follow specific protocols and procedures can impact the business. All these are key challenges for this business. The IPO is aggressively priced with expensive valuation compared to other listed players and hardly leaves anything meaningful on the table for investors.”

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The fresh issue proceeds will be used for setting up a manufacturing facility at Saykha in Gujarat (nearly Rs 105 crore) and to meet working capital requirements (Rs 45 crore) and for general corporate purposes. The company will also pay its debts through fresh issue proceeds (Rs 10 crore), while the offer for sale money will go to promoters. As of July 2022, the company’s borrowings stood at Rs 51.56 crore.

(The recommendations in this story are by the respective research analysts and brokerage firms. FinancialExpress.com does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)

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First published on: 28-11-2022 at 10:39 IST