Aries Agro IPO Analysis

Aries Agro (AAL), promoted by Dr T B Mirchandani and his two sons, is a major manufacturer of micronutrient and other nutritional products for plants and animals. Its range of products comprise five categories: multi-micro nutrient fertilisers, chelated micro nutrient fertilisers, specialty soluble fertilisers, anti-bacterial products for agricultural use, and nutritional products for animals.

A pioneer in introducing chelated micronutrients and chelated zinc in the country, under the brands Agromin and Chelamin, respectively, AAL has developed in house bactericides for agriculture.

Besides primary macronutrients, secondary micronutrients are required for high yield of the agriculture crop. Though essential for growth, micronutrients are required in small quantities. AAL is a leader in the production of micronutrients, with hardly any competitors in the organised sector in the country.

With four manufacturing facilities in Bangalore, Mumbai, Hyderabad and Kolkata, AAL's total production capacity is 21,600 tonnes per annum. It has 41 products under its umbrella. Strong trademarks protect these brands. These products are sold across 375 fertilizer-consuming districts in the country. The company has 25 branches with a distribution network comprising about 4,700 distributors and 65,000 dealers across the country.

New manufacturing units at Ahmedabad, Lucknow, Medak (Andhra Pradesh), and an additional one in Maharashtra will bring on stream 79,200 tonnes per annum of new capacity by October 2008.

With an aim to expand its global footprint, specially the Middle East, AAL is investing Rs 7.37 crore in one of its group companies Golden Harvest Middle East (FZC), incorporated in the UAE, to convert it into a subsidiary. Golden Harvest is setting up a facility in Sharjah to manufacture chelated micronutrients with a capacity of 10,800 tonnes per annum. It is also investing Rs 2.46 crore in another company, MAPCO Fertilizer Industries Free Trade Zone Company (MAPCO). MAPCO's distribution reach in the Middle East will be used to sell the company's micronutrients in those markets.

To distribute its products to the far-flung corners of the country, where it does not have a distribution network, AAL is planning to buy around 100 mobile vans at a cost of Rs 5.79 crore.

Strengths

• Has been in the business of manufacturing and marketing plant nutrients since over three decades. During this period, acquired strong domain expertise, which is difficult for a new entrant to replicate.
• Is a dominant player in the plant-nutrient space with minimal competition from the organised players.
• Has an in-house R&D facility, equipped with infrastructure required to develop new products targeted at specific crop requirement.
• Has an established distribution network spanning 375 fertilizer-consuming districts of the country. Has 4,700 distributors and more than 65,000 dealers.
• Products are not subject to price control as other fertilisers.
• Indian farmlands have one of the lowest yield rates in the world. Hence, there is good scope for improvement in yields by using micronutrients. Spread of organised retail and development of farm-to-consumer supply chain will encourage better yields through use of micronutrients.

Weaknesses

• Being a feedstock industry for the agricultural sector, the business depends on the monsoons. Abnormal rainfall could have an adverse effect on the performance.
• Increase in imported raw material cost could squeeze margin, as it would not be able to pass on the increase in prices to the final consumer.
• Due to high working capital requirement, there was negative cash flow from operations in four of the last five years. Of the total debtors of Rs 26.71 crore, 46% were due for more than six months end March 207.
• Defaulted in payment of dues to IFCI in the past and entered into a one-time settlement.

Valuation

AAL has set a price band of Rs. 120 to Rs 130 per equity share of Rs 10 each, translating into a PE of 17.9x at the lower price band and 19.4x at the higher price band on the year ending March 2007 (FY 2007) EPS of Rs 6.7 on post-IPO equity. There is no comparable listed company. Overall, the fertiliser-nitro sector enjoys P/E of 16 times, fertiliser-SSP (single super phosphate) sector trades at P/E of 13, and pesticides-medium/small industry trades at P/E of 7. Being the only listed focused player on the high growth segment of micronutrients, with massive capacity expansion plans, the scrip will get above