Astec Lifesciences IPO Analysis

Astec Lifesciences (Astec) has been promoted by Ashok Hiremath and Dr P L Tiwari. Ashok Hiremath has dissociated from his brother Jai Hiremath, who is a promoter of listed company Hikal. Astec is predominantly an agrochemicals player and operates in an extensively competitive agrochemicals and pharmaceutical industry, with major focus on the manufacture and sale of intermediates, active ingredients and formulations in the off-patent–proprietary category. Active ingredients are sold to crop protection formulators, whereas intermediates are supplied to technical grade product manufacturers and formulations are sold in bulk quantities to companies engaged in retail marketing. Astec's three manufacturing facilities, located at Dombivli (one unit) and Mahad (two units) in Maharashtra, have a total installed capacity of 2,800 tonnes. These facilities have been granted ISO 9001:2000 certificate of assessment by International Standards Certification Pty Limited, Australia, for "Design, Development, Manufacture and Supply of Organic Chemicals and Intermediates for Pharmaceutical and Agrochemical Industry".
Hexaconazole, Tebuconazole, Metalaxyl and Propiconazole are some of the key products of Astec in the agrochemical segment. These are generally used in crop protection. Dicap, one of the company's key pharmaceutical intermediate products, which is used in manufacture of antifungal agents. Triazole fungicides, which includes Hexaconazole, Tebuconazole, and Propiconazole is one of the company's major product in the agrochemical segment, and has contributed 65.81% of the total sales, whereas Dicap, a key product in pharmaceutical segment, contributed 14.14% in 2008-09. Besides enjoying a good pie of the domestic market, the company has been able to successfully venture into the international market as well, exporting its produce to countries like South Africa, Europe, USA, West Asia, East Asia, Japan and South America. The company plans to enter into long-term supply contracts with the buyers in these countries in order to scale up exports.
Astec's concerted effort to identify contract manufacturing as one of the options to maintain growth and profitability and also to undertake contract research and manufacturing (CRAMS) business will enable a predictable pattern of demand going ahead.
To further diversify and widen the product range besides increasing the existing capacity, Astec plans to expand its existing manufacturing facilities at Mahad at an estimated cost of Rs 32.56 crore. The company plans to add nearly 1,150 tonnes of agrochemicals and pharma intermediates to its existing capacity of 2800 metric tonnes. It further plans to expand its research & development centre at Dombivli at an estimated cost of Rs 2.55 crore by expanding its bench scale capabilities, improve analytical capabilities and expand its pilot plant. The proposed expansion will enable the company to carry out research on more complex molecules and to undertake contract research activities. In addition to this, Astec also plans to incur Rs 3.76 crore for both domestic and international product registration. All the capital expenditure would be financed from the proceeds of the initial public offering (IPO) and internal cash accruals.
Strengths-
* Has six diverse products comprising a mix of high volume-medium margin and low volume-high margin category, comprising different kinds of active ingredients, intermediates and formulations catering to the needs of a wide range of customers like agrochemicals manufacturers, pharmaceutical applications and also in manufacturing shampoos and disinfectants.
* Has a research & development (R&D) facility at Dombivli recognised by the Department of Science and Industrial Research, which has been able to develop processes for various new products like Tebuconazole, Propiconozole and Metalaxyl.
* Has existing 43 registrations in 20 countries where local firms/parties have obtained the registration on the basis of being the approved source of supply and three registrations in its own name, two in Australia and one in Vietnam. In addition to overseas registrations, has 69 CIB registrations for various products in the Indian market.
* Has a good mix of domestic and international sales mix with the exports and deemed exports together comprising 29.52% of the total revenue in the previous fiscal.
* Has managed to consistency achieve a higher capacity utilization level. The average capacity utilization was 85% in the past three years.
.Weaknesses-
* Operation dependent on agricultural production and monsoon. Disappointing and erratic monsoon in the current year is likely to have a negative impact on the demand for agrochemicals and other crop inputs.
* Does not have long-term supply agreements for supply of raw materials. Most of the raw materials required are imported. Hence, is vulnerable to volatility in international prices of the raw material and also currency rate fluctuations.
* Also does not have any long-term sales agreement, which is a trade practice in the chemicals intermediates and technical chemical business.
* The industry is a highly fragmented with competition from both the domestic as well as international manufacturers.
Valuation
The price band of Rs 77 to Rs 82 per equity share, translates into a PE of 12.2x at the lower price band and 13x at the higher price band based on FY 2009 EPS of Rs 6.3 on post-IPO equity. Near comparable companies Sabero Organics and Meghmani Organics are trading at a trailing 12- month PE of 4.4 and 6.1, respectively. Composite average TTM P/E for small/medium agrochemical companies is around 6.