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Heranba Industries

Heranba Industries Ltd, incorporated on March 17, 1992, is a crop protection chemical manufacturer, exporter & marketer based in Vapi, Gujarat. It manufactures intermediates, technicals and formulations. Its one of the leading domestic producers of synthetic pyrethroids such as cypermethrin, alphacypermethrin, deltamethrin, permitherin, lambda cyhalothrin, etc.

IPO in Mar 21 was oversubscribed more than 80 times. It has three manufacturing facilities in and around Vapi with a capacity of 14,024 MTPA.

Indian Agrochemical market

India is the fourth largest pesticide manufacturer after China, the US and Japan.

Highly regulated industry - Crop protection product needs to be approved by Central Insecticides Board & Registration Committee (CIB&RC), and then further approved by state governments of each state where the product is to be distributed or sold.

Pricing Impact Due to Chinese Factors
China is the largest exporter of agrochemicals to India, accounting for a share of around 55% of the total agrochemical imports in India. The key Indian agrochemical companies import a significant part of their technical requirements from China as it sources most of the raw materials required to manufacture agrochemicals.

What are pyrethroids?

Pyrethroids are synthetic chemical compounds that are procured from chrysanthemum cinerariaefolium flowers. They are volatile, soluble in water and have low mobility in soil… They are used to control pests and insects in farms, homes, offices, etc. The name pyrethroid means “pyrethrum-like” and refers to the origin of this class of pesticides. Pyrethroids are cost-effective alternatives for conventionally used insecticides.

Most pyrethroid insecticides exhibit characteristics like:

  • Require very low doses to kill insects (high arthropod toxicity);
  • Low in toxicity to mammals and birds
  • Fast-acting
  • Especially effective against chewing insects, though many pyrethroid insecticides can be absorbed by the insect pest when it merely walks over the dry residue;
  • Bind tightly to soil and organic matter (therefore not as effective in penetrating soil to kill underground pests);
  • High in toxicity to fish if applied directly to water

Overview of Indian pyrethroid market: CAGR of 7.4% during 2014 – 2019.

Key players in Indian pyrethroids market

Coming back to the company -

Business verticals include

  • Technicals – 68% of FY 20 sales
    • Domestic bulk sales (32%)
    • Exports (36%)
  • Formulations – 25%
    • Branded formulations in domestic (13%)
    • Exports (13%) – (company sells its products under the brand name of its foreign partner)
  • Insect control chemicals (7%) - participating in public health tenders issued by governmental authorities and selling products to pest management companies.

Manufacturing Units

3 independent manufacturing units of which, 2 are situated in industrial belt of Vapi & 1 in Sarigam.

  • 2 units in Vapi - production of various technical and intermediates
  • 3rd Unit in Sarigam - purely a formulation and packaging facility (Size of Sarigam unit is 55,000 square meters of which 22,300 square meter is operational with formulation and packaging facilities and the rest of the space is earmarked for future expansion into technical manufacturing)

Separate R&D facility at Vapi and Sarigam for product development and process intensification.

The facility fulfils the requirements for organic synthesis as well as formulation development.

Further it has recently received consent from Gujarat Pollution Control Board to establish manufacturing of products at Saykha, it is a 34,600 square meter land parcel which is to be used for further expansion.

Company is fully backward integrated in pyrethroids. Which allows them to be cost competitive in markets like China. – more on this in the following sections…

Major Products

1.Technicals : These comprise pyrethroids as well as other chemicals – manufactured & sold in bulk to Indian agrochem companies and in exports

  • Insecticide: Cypermethrin, Deltamethrin, Alpha Cypermethrin, permitherin, lambda cyhalothrin, etc. etc
  • Fungicide: Tricyclazole and Hexaconazole
  • Herbicide: Glyphosate, Metribuzin & Clodinofop.

2.Intermediates - An intermediate is a molecule that is formed from two or more reactants and then reacts further to give products. Intermediates manufactured by company: Cypermethric Acid Chloride (CMAC), High CIS CMA, High CIS CMAC, High Trans CMA, High Trans CMAC, Bromobenzenes and Metaphenoxy Benzaldehyde (MPBD).

  • Example - MPBD is a pesticide intermediate used in manufacture of synthetic pyrethroid insecticides.
  • Backward integrated in MPBD; which allows them to be cost competitive in markets like China.

3.Formulations - A pesticide formulation is a mixture of chemicals which effectively control a pest. Formulating a pesticide involves processing it to improve its storage, safety, application, or effectiveness.

  • Within this, they manufacture formulation under own brand through own distribution in India. Brand of formulations is a forward integration of their technical business
    i. Brands: Insecticide (Alpha Shakti , Jayam Plus, Progress Plus, cypraplus, etc). Herbicide (Glory, Chakde, etc)
    This is where backward integration comes into picture – key pyrethroid ingredient used in Alpha Shakti in Alpha cypermethrin. Key pyrethroid used in Jayam Plus – is Lambda Cyhalothrin and so on.
  • Export them in bulk outside India and with customer specified packaging. (Not as their brand)

4.Insect control chemicals

Niche Space

They have been manufacturing Technicals like, cypermethrin, alphacypermethrin, deltamethrin since 20 years. CMAC is the main raw material used in these. These involve multi stage chemistry with by-products at each stage being recycled or used for sale.

For Example: Deltamethrin is a 11 stage process, Lamdacyhalothrin Technical is a 8 stage process.

Pyrethroids account for 68% of FY20 revenues; 19.5% domestic market share in 2019.

Being present in the entire value chain of synthetic pyrethroids that provides flexibility to shift between products depending on the demand-supply and pricing dynamics.

  • Has 375 molecules registered in both international & domestic
  • Has a strong pending product pipeline in pyrethroids including formulations filed by partners in domestic & export markets.

Product segment wise revenue

Technicals is the main growth engine

FY 20 FY 19 FY 18 FY 20 growth FY 19 growth
Domestic sale of technicals 3010 3315 1964 -9% 69%
Technicals exports 3471 3966 3008 -12% 32%
Branded formulations 1206 1458 1671 -17% -13%
Formulations exports 1221 952 667 28% 43%
Public health 606 354 141 71% 151%

Capex plan

With the planned expansion in Saykha & Sarigam – capacity likely to increase from 14k MTPA to 30–31k MTPA. Expected to incur capex of Rs 200-250 crore over next 2-3 years. Of which capex for FY 22 is around 100 cr.

  • Sarigam expansion in existing plant (technicals)
  • Saykha expansion – 10680 TPA capacity

Diversified and stable customer base

Heranba manufactures and supplies Technicals to leading agrochemical companies operating in and outside India.

Companies like Sumitomo Chemical India, Sulphur Mills, Biostadt India, Crystal Crop Protection, NACL , Sharda Cropchem, Meghmani Organics, PI Industries, Krishi Rasayan Group, Agro Life Science Corporation and Shanghai Agricare Chemical Company, China

Only ~19% of total revenues comes from top 10 customers in H1FY21

Experienced promoters : Have more than 30 years of individual experience in the agrochemicals sector

Other key Points from the call

  • Focusing on entering the regulated markets of US and Europe.
    • Got 2 products registered in Europe in 2020 and is awaiting approval for 1 in the US.
  • Capex of 200 to 250 cr over the next 3 years - largely from internal accruals
  • Revenue to grow by around 18-20% CAGR over the next 2-3 years
  • Within technical sales, 65% revenue comes from pyrethroids.
    • And 70% of it is from insecticides. Rest from fungicide & herbicide
  • Within technical sales, 65% revenue comes from pyrethroids.
  • 18% Operating margin. Likely to be maintained – to be in similar range
  • Open to contract manufacturing opportunities if there are good opportunities
  • Shutdown of agrochem plants in China
  • Selling pyrethroids to China also. – ‘One of the few companies in the agro chemical space who are selling these pyrethroids in China.’

Competition Overview on key pyrethroids in product portfolio

Name lambda cyhalothrin deltamethrin alpha cypermethrin
Heranba Industries Yes Yes Yes
UPL - - Yes
Bharat Rasayan Yes - -
Dhanuka Agritech Next FY plan - -
Tagros Chemicals (unlisted) Yes Yes Yes

Among listed players, only Heranba has a presence across the spectrum of various pyrethroids.
Will look to dig deeper into these in the coming days…

Other metrics

  • 5 year sales CAGR: 19%
  • Promoter holding: 74%
  • Debt / equity: 0.1

Peer valuations & return metrics

S.No. Name M Cap P/E M.Cap/ Sales ROCE % ROE %
1 UPL 62600 21 1.6 14 15
2 Sumitomo Chemicals 21608 64 8.2 32 25
3 Bharat Rasayan 5732 34 5.2 31 26
4 Dhanuka Agritech 4672 22 3.3 37 28
5 Heranba Inds 3293 21 2.6 45 36

Key risks & concerns

  • Strict regulation of environmental matters
    • Industry is subject to strict regulations
    • In the past, the company has received temporary closure notices from GPCB for its manufacturing units on inspection by GPCB officials. But was revoked post correcting the lapses.
  • Dependency on China – Any restrictions on exports/import may affect business
    • More than half of the global demand for Pyrethroids comes from China
    • In H1FY21, the company reported 14.7% of revenues from China. It imported 13% of raw materials from China during same period.
  • No long term contracts
    • Company has not entered into any long-term agreements with customers, as yet. There’s a likelihood that customers may terminate their relationship in case of change in preference. However, in a way – also gives them leeway of passing on raw material price fluctuation to customers.
  • Sensitive to seasonal fluctuations and climatic variations
    • Adverse weather conditions in India, or an inability to plan for adverse weather conditions, could affect farmers’ decisions about the types of crops to plant, may lead to an adverse effect on the sales of the company’s products
  • Outstanding litigations against promoters: mainly related to alleged violations of insecticides act.

Disc: Invested with a tracking position

Links:

Q4 Earnings call

https://www.dsij.in/DSIJArticleDetail/ArtMID/10163/ArticleID/17988/Heranba-Industries-receives-consent-to-establish-manufacturing-plant

https://www.google.com/amp/s/m.economictimes.com/markets/stocks/news/heranba-industries-eyes-rs-1200-cr-revenue-in-fy21-to-enter-capital-markets-to-raise-rs-700-cr/amp_articleshow/79445531.cms

http://www.marketsguruji.com/heranba-industries-ltd/

Pyrethroid

18 Likes

Hi, could you please highlight the commodity elements in their product. It seems like technical grade is a commodity. In that case their major sale is in cyclical.

Hi, could you high light management quality and governance quality?

Hi, Do you think the increasing Account receivables maybe a point of concern?

This is a question which has never occurred to me before. Seniors please help.

Is it normal for company and its promoters to have criminal cases against them?

Most criminal cases against the company are relating to non-conformity with standard specs in their pesticides.

Criminal cases against promoters relate to non-payment of taxes and another promoter group company called Shakti Bio Science

@ankit_tripathi please check

Possible. Need to monitor closely in coming quarters.

Likely to be a concern in case of recent listings. Other recent listings like Sona BLW, Clean Science, etc also have outstanding litigations. Regarding the loan - the company has clarified in the recent call that the group company (Shakti bio) loan has been fully repaid.

Q1 Results were good.
Heranba Q1 FY 22 result.pdf (2.2 MB)

30% increase in sales YoY; 51% increase in Operating profit,
Management commentary indicated a strong Q2

Disc: Invested

1 Like

Hi, its an industry norm. Nothing wrong particularly with the company. All technical agchem companies are doing this so its more of an industry thing.

Disc - invested

Source: IPO review SP Tulsian

2 Likes

So, this wilfaul defaulter for Rs 49 crore has been Paid by the management and it is closed now.
Secondary, regarding the closure - this has happened with many companies like IPL who has just listed and management will improve it as they would not want their Plants to be shut for a long time and this also has been okay now.
There is a 75 crore guarantee and even if fails in the worst case scenario, the company generated net Profit of 150 cr and this will not be very big though very unlikely to happen.

Remember, the company is debt free and generates surplus cash. Most capex in future are from internal accruals.

corporate governance does remain a risk but was similar with bharat rasayan who is in the same line in regards to their related Party transactions but the company has generated huge wealth for it’s shareholders due to consistenly rising revenues and Profits.

Disc - invested, views could be biased

Hi @tanishq
Does paying default money make the promoter clean?

Obviously they had to do IPO and get more money than the small amount 49 crore…

What’s the guarantee history won’t repeat? Grey areas on promoter background will remain as is bro… Whatever justification they give…

I am sorry if it finds you against your views …bt it’s just Frank view from my side

disclosure:not holding

3 Likes

Hey sir,

Your opinion is right too, these are anti-thesis Pointers. I could be wrong but what i feel is in investing it is a triangle of corporate misgovernance , earnings growth in future and the Price you’re getting for the business. There is a reason that such a company with Past 4 years of 40 Percent Plus ROCE continuously growing and an industry with major tailwinds is trading at such valuations is because of this. The market might be discounting what you are saying. But i am willing to take the risk of corp misgovernance for getting such a high growing business at these valuations.

I exited from Garware Hi-tech films for the same reasons, i could have stayed but the company was valued very well for it’s future Profits and i could not stay. I can be wrong here sir, i am learning myself and thus not making it a big Position.

All investing is learning and any anti-thesis Pointers are a must to not fall in love with any stock :slight_smile:

1 Like

A liquidity test on the markets can say , among both of you, which one is right. Till then, I will go with paresh. Again agrochem there are other well established players. Prudence is what I will advocate. Ultimately, it is our money.

Notes from the Q1 Call

Segment wise update
• 44% growth in technical revenue; 10% growth in formulations
• Exports - Exports growth was marginal due to container issue. Focused on domestic market in the qtr (constituted 62% of revenue). Have registrations across the globe. Demand is not lost in export market. Over longer term- looking at 60% export & 40% domestic.
• While there was cost pressure in freight side, were able to pass on freight & logistics related expenses. Not much of impact.

Gross margin - 34 to 34.5% this qtr.
o Higher margin YoY, owing to better product mix, new product launches
o Confident of maintaining 35 to 36% gross margin.

• There has been a gradual increase in annual OP margins over 3 years (12-14% range earlier). Reasons:
o Received many registrations in export market & India
o Had low base in branded business – which has grown now
o Operational efficiency
o Better product mix

• Production facility is fungible. Better product mix led to better gross margin
• Capacity utilization - Around 90% in technicals. Formulations utilization - 55% .

• New product launch: Had 2 product launches in this qtr. Planning to launch 4 to 5 products next year (2 herbicide, 1 fungicide and 1 insecticide) and in FY 24

Registrations
• Have 375 registrations currently. Received 1 registration in US this year. Received 4 registrations in Europe. All are mainly from pyrethroids side.
o Have lot of registrations in pipeline. That will also drive domestic market growth in the next 1-2 years.
o Product profile & opportunity size in new molecules to be launched will be much bigger

Shift from organo phosphorous product to pyrethroids
o Lot of Organo phosphorous products are banned in US & Europe markets. Share will go directly to pyrethroids segment.
o Pyrethroid are environmentally safe. Safe for humans too. So opens up a lot of opportunities as any switch from organophosphorous would be to pyrethroid segment.
o Dosage is less in pyrethroid. Instead of 350 ml - have to put only 50 ml. Less chemical applied across the field – gives almost similar results. That’s why the pricing comes out to be cheaper

• Cross -sell opportunities: Pyrethroid as a group has 10 to 14 products. Company is active in 5 products. Would like to strengthen their position in the space. If they are selling 1 pyrethroid to a customer– look to cross sell other pyrethroids too.
• Working capital days: Around 90 days – likely to be in the same range going forward.

Disc: Invested

1 Like

Didn’t see rating upgrade news shared earlier in thread, good to see them in good books of rating agencies backed by performance.

https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/HeranbaIndustriesLimited_April%2027,%202021_RR_268313.html

Serious money is made when operating performance and rerating( mkt perception on future outlook)both goes hand in hand. While performance with high teen sales CAGR and operating margin expansion is visible, mkt participation may follow soon.

Valuation are lower compared to peers group esp in light of high return ratios, low downside risk here, and mkt generally takes its own time to reward new listings.( Experience being invested in another chemical company Jubilant ingrevia is that there was lot of selling after demerger by fund houses as well as concerns around environmental damages etc - at the end mkt rewarded it well) - Narrative changes with price :slight_smile:

Q1 concall issue was raised on payment default in past - Mr Shetty did explain circumstances and closure status - good enough for now, can keep a watch on any patterns

  • Again As an Investor our effort is well spent on Heranba performance and Corp governance and here are some positive as we can see
  • Promoter skin in game - 74% holdings post IPO
  • Ratings upgrade by Crisil
  • Quality of quarterly performance reporting and con calls
  • Future Capex through internal accruals
  • Efficient capital allocation as of now - guided for 250 Cr Capex with 3.5 type asset turnover in Q1 22 concall
  • Additional capacities to come online in next few quarters for Brownfield in technicals
  • Promoter remuneration is quite conservative - details below

Annual report is a good read to get a better sense about company performance and outlook

Some highlights from AR

Steady and consistent performance - esp margin profile trajectory

Reputable customer base

**Industry tail winds as their future is linked with Agchem and pyrethoroids - they are dominant player with 20% mkt share in India for pyrethoroids- mgmt discussions has good details on outlook and growth - esp realization call out which will improve going forward volume vs value **

  • Above seems to be corroborated with recent quarterly performance where inspite of higher domestic share in mix, margins have done well and go higher as export normalization

Promoter remuneration seems quite conservative and well in line with performance for MD

Valuations

  • FY22 they are likely to close at 1500 cr + revenue, 200 cr+ profit and 19% margins - this is not considering new brownfield capacities coming online in Q4 type. Current market cap is 3100 cr.
  • Once new Capex of 250 cr ( all from internal accruals) comes online we are looking at 2500 cr rev, 20% margins( new products at higher margins and increasing export mix), it can do profits around 325-350 crs - looking at its peers trading at 3.5X TO 8X sales and 25 to 50 PE ( Sumitomo, Bharat rasayan, Dhanuka etc).
    There is sizable rerating potential even at lower band of segment valuations it can have market cap in range of 8000 cr+ over next 2 years from current 3100 cr., RoCE and RoIC for Hernaba is segment leading

*Technically on charts, likely to be stronger once it takes out listing price in 900+ region

Disc : Invested after Q4 results

4 Likes

I can name you all agrochem Players as i have studied them myself. If someone talks about corporate governance, then nobody would have invested in Bharat Rasayan with the number of Related Party transactions.

This industry is all about scale, no Player can get 40 Percent ROCE like this company has because of the scale at which they operate. They export even to china even after duties showing the Prices they are offering that still china buys from them.

All players in this industry are generic Players, not a single indian Player makes their own Patented technicals except maybe UPL, the game is about scale and backward integration. Heranba is backward integrated from the intermediates to the APIs to the formulations in Pyrethroids.

2 Likes

India Pesticides too has high return ratios.

Yes, i failed to mention it but that company has very big issues. Before the IPO, it issues itself its shares at a massive discount

read the thread, i have some trust issues with this company for the same reason.

Both are having corporate governance issues…
In case of IPL there was a article before IPO

1 Like

Agreed on your part. But the actions of IPL are showing that the company is willing to squeeze the minority shareholder for their Personal gains. The Process of issuing the shares to themselves at a huge discount just before the IPO shows the ethics of the management. I was excited about the Prospects of both the companies but chose to invest in Heranba for the above reason.