Company Background

Punjab Chemicals & Crop Protection's (PCPL) was incorporated in 1975 as a joint venture between Excel Industries and Punjab State Industrial Development Corporation. The company began by producing oxalic acid and diethyl oxalate. It regularly expanded capacities and soon became a leading producer of both products. The company got a major boost in the mid-1990s when it launched a high-value export-oriented herbicide. It soon became a major producer of this product worldwide. It further diversified into pharmaceuticals when it acquired DSMs stake in Alpha Drugs India (ADIL).

The company proposes to fund these acquisitions through a mix of debt and equity. It has already convened an EGM and received shareholders approval for raising Rs 400 crore through various instruments like GDRs, FCCBs, private equity and structured debt. It has also allotted 8.33 lakh preferential convertible warrants to the promoters at Rs 231 per share aggregating to Rs 19.24 crore.

Consolidation of group companies
The company has merged its group companies STS Chemicals and Alpha Drugs with itself in order to broad base its product portfolio and also to benefit from the synergies of a consolidated entity. It has established itself as a reliable supplier and has contract manufacturing arrangements with leading MNCs. Its clients include reputed multinationals like Bayer, Dow, Ranbaxy Labs, Nufarm, etc. With a well-diversified portfolio, the company is now less sensitive to a downturn in any single product category. The company has developed a couple of new products for the export market and is expected to launch them in the third quarter of the current year.

Foray into local agro-chemical formulations market
The company has recently acquired IA & IC Chem, which has a state-of-the-art agro-chemical formulation facility, giving it a footprint in the domestic agro-chemical formulations market. It has ambitious plans for the local market and will be introducing new generation herbicides and fungicides. This acquisition will also help reduce transportation costs as well as ensure faster delivery to its distributors since the plant is located in Maharashtra.

Risks & Concerns

The companys plans are very ambitious compared to its current size and their success will depend on the managements ability to execute and integrate the acquisitions. Further, most of the funds for the acquisitions are yet to be tied up.

Sugar is a major raw material and sugar prices are currently on an upswing. Inability to pass price increases on to the customer would lead to EBIDTA margins shrinking.

Financials:

For FY06, PCPL reported a turnover of Rs 267 crore and net profit of Rs 16.7 crore, which works out to an EPS of Rs 25.34. It has healthy EBIDTA margin of 10.38% and net margins of 6.26%. The equity capital has gone up to Rs 6.59 crore subsequent to the three-way merger. We expect FY08 revenues to grow to Rs 480 crore with an increase in net earnings to Rs 22.5 crore, resulting in EPS of Rs 30.31 on expanded equity capital of Rs 7.42 crore post-conversion of warrants issued to the promoters. These estimates are standalone and the consolidated figures post international acquisitions could be higher.

Valuations

The agro-chemical sector should continue to show strong growth since prices of agro commodities are in the midst of an ongoing global commodity boom. The benefits of the consolidation exercise will be visible from the current year and along with the international foray should lead to a re-rating of the stock. PCPL is available at 6.51x FY06 earnings and 5.44x FY08E earnings, which we feel is extremely attractive. The company has a consistent track record of dividend payment. For FY06, it has announced 40% dividend and the scrip is trading cum-dividend. At the current price, the dividend yield is 2.40%. We rate the stock an Outperformer with a price target of Rs 242 (8x FY08E EPS).