Pest free

IPO REVIEW

Insecticides India has a diversified product basket which holds potential for growth.

Monsanto, Rallis and Bayer Crop are believed to be the key beneficiaries of the increased focus on agriculture in the country. But most companies engaged in agro-chemicals and pesticides have failed to cheer investors with their stock returns lagging the Sensex.

Undeterred by this, Insecticides India, a manufacturer of pesticides is entering the market with an initial public offer of Rs 36.91 crore. The company is optimistic about the agricultural growth in the country and intends to invest in new products and facilities. 
 

VALUATIONS
Company	P/E	EPS	RONW (%)	P/BV	1 Year return (%)
Bayer Crop	18.33	13.18	13.66	3.33	34.36
Rallis India	82.60	4.20	34.53	4.51	2.45
Monsanto India	22.40	67.81	20.52	4.95	-11.14
Bharat Rasayan	31.14	1.76	5.57	0.63	17.72
Syngenta India	31.42	22.50	15.23	2.33	92.29

Considering its consistency in earnings, synergies from backward integration, strong reach across the country and an improved outlook for agriculture, the issue seems promising. However, investors needs to be cautious as the company's earnings are dependent on monsoon and revenues tend to be seasonal.

"We see a huge opportunity in India because the use of pesticides in the country is just about 570 grams per hectare compared to 5 kg in US and 5.3 kg in Europe," says Rajesh Aggarwal, managing director, Insecticides India.

Insecticides India manufactures plant protection chemicals and house-hold pesticides. The company has 3000 distributors and 40,000 dealers spread across the country. It has over 80 products in its portfolio including the largest selling brands Lethal, Victor and Thimet.

The company has a technical collaboration with American Vanguard, USA, for manufacturing and marketing Thimet in India and Nepal.

According to the agreement, the company pays a royalty of about five per cent on the value or $175,000 (Rs 72.62 lakh @ INR/$ 41.5) per year. The US brand, which was collaborated in FY06, has contributed Rs 28 crore to FY07 revenue, accounting for almost 15 per cent of total revenue. This is one of the high margin products providing gross margins of around 20 per cent.

Further, with the help of advertising and brand building, this brand is expected to gain market share and contribute more to the revenue kitty. Apart from the agrochemical business, the company has also entered into the house hold pesticides market. It intends to market such products under the Lethal brand name.

Currently, the Lethal brand constitutes about 10-15 per cent of total income, which will go up further with the increased emphasis. However, within this segment the company will also sell the technicals (the ingredients used to make the drug formulations) to third party. Technicals are developed from intermediates through a reasearch process.

Until recently, the company was importing these technicals. But now it is investing about Rs 4.5 crore in a new R&D facility which will reduce its dependence on import of technicals and save cost significantly.

Currently, the company has registered nine technicals, which will help in the introduction of new brands. Besides, to manufacture new products, the company is setting up a new formulation plant at a cost over Rs 10 crore.

Financially, the company has grown from a turnover of Rs 41 crore in FY03 to Rs 165.05 crore in the nine month ended December 2006.

Further, the company is aiming a sales turnover of Rs 500 crore over the next three years. At the offer price of Rs 97-115 the stock commands a price-earning multiple of 5.85-7 times its estimated FY07 earnings. Compared to listed players in the industry the valuations look attractive.

Issue opens: May 7, 2007
Issue closes: May 11, 2007