Paradeep Ltd IPO: Right pick for medium-term investment

Paradeep Phosphates Limited is tapping the markets with its fresh issue of Rs 1,004 crores and an offer for sale of 12,00,35,800 shares in a price band of Rs 39-42. The issue opens on Tuesday (May 17) and closes on Thursday (May 19). The issue size is about Rs1,508 crore. The government of India would be exiting its stake entirely in Paradeep Phosphates post this issue. The company has completed its allocation to anchor investors on Friday which consists of 68 per cent to domestic mutual funds (MFs) and the balance to FII's. The main object of the issue is to raise funds to acquire on a slump sale the Goa facility.

The company is a manufacturer and trader of complex fertilisers which are non-urea in nature. Its main products include DAP and NPK. As part of its backward integration, it makes its own phosphoric acid and is adding capacity of the same so that it becomes an even more effective cost producer. The company is located at Paradeep in Orissa and has its own jetty and pipelines for shifting materials whether they are in slurry form or gaseous in nature to the plant located about 3-4 kilometers away. This enables the company to shift large quantities of material quickly and cost effectively and at virtually no cost other than running of pumps connected with the pipelines.

Currently the company would have an effective capacity of 3 million tons of DAP/NPK capacity after the revamping of lines in Paradeep and Goa takeover are completed by September 2022. By October 2022, the phosphoric capacity available inhouse would have been ramped up after retrofit to 5 lakh tons per annum. This would help in reducing the cost of manufacture significantly.

The Goa acquisition would be in a slump sale form and an amount of over Rs 1,000 crores has already been paid. The balance of about Rs 500 crores is part of the objects of this issue and would happen by the end of May. Zuari Agro is a strong brand in the western and Southern part of the country while Paradeep has been strong in Northern and Central parts. With these two plants under one umbrella, they would have a pan-India presence and be able to maximise returns with higher realisation products as well.

Paradeep Phosphates sources key raw materials locally as well as from Qatar, Jordan, Morocco and Saudi Arabia. OCP is not only a key supplier but is also an equal shareholder in the company Paradeep Phosphates. It is this partnership which has taken over the Zuari asset and would be a key raw material supplier as well. The company enjoys benefits of ramping up its capacity as size and scale matters. While raw material prices have moved up significantly over the last couple of years, the margin percentage has not kept pace. However, the net realisation per ton at EBITDA level has been healthy at around Rs 5,463 per ton. This was higher than the Rs 4,433 per ton in the previous year.

Revenues for the combined company which includes present capacities at Paradeep and the acquired facilities in Goa which would be available for half the year FY23 will make this company a sizeable and effective player.

The company reported an EPS of Rs 6.30 for the nine months ended December 2022. At this EPS, the PE multiple of the share is more than attractive with the PE band based on nine months non-annualised being Rs 6.20-6.67. This is very attractive when compared to peer group like Coromandel, Chambal and Deepak fertilisers who trade between 11.57-18.72 times. This issue is more than attractively priced.

Investors looking for gains in the medium term should subscribe to this issue as it is attractively priced and is also in a sector which has no alternatives. There could also be reasonable pop available on listing but that should not be the reason for subscription.