Shares of Agrochemical company Dharmaj Crop Guard and engineered systems manufacturer Uniparts India IPO traded with a double-digit premium in the grey market ahead of their debut, scheduled to take place soon. The healthy subscription of both IPOs, better financial performance and positive equity market conditions may be key reasons for the strong grey market premiums.
The grey market is an unofficial platform for trading in IPO shares, which is generally tracked by investors to sense the expected listing price of any public issue.
Dharmaj Crop Guard
The initial public offering of agrochemical formulations manufacturer Dharmaj Crop attracted huge demand last week. It was oversubscribed 35.49 times between November 28 and 30, with support from all segments of investors. Qualified institutional buyers and high networth individuals provided the maximum support amongst them, buying shares 48.2 times and 52.3 times the allotted quota.
Retail investors also looked aggressive, subscribing 21.5 times the portion set aside for them, while employees bought 7.48 times the reserved portion.
Currently, Dharmaj Crop shares traded with more than a 20 percent premium in the grey market, over and above its expected final issue price of Rs 237 per share, analysts said.
The expected growth in the pesticide industry amid expectations of growth in food consumption, low penetration in India, government's support to the industry, and reasonable valuations are other key reasons for the healthy premium, analysts believe.
"The upward momentum in pesticide industry output is expected to continue going forward, backed by growth in food consumption in the domestic market amid an expected increase in population, government support for agriculture, demand from export markets, and the horticulture and floriculture markets, among others. The penetration of pesticides and agrochemicals in India is low, and this poses an opportunity for growth for agrochemical producers," Santosh Meena, Head of Research at Swastika Investmart, said.
In addition, he said the government’s aim to reduce dependency on China and improve self-sufficiency is expected to support the industry’s backward integration and thus its growth.
Incorporated in 2015, Dharmaj Crop Guard primarily manufactures a wide range of agrochemical formulations such as insecticides, fungicides, herbicides, plant growth regulators, micro fertilisers and antibiotics. It also handles distribution and marketing of these products to B2C and B2B customers.
"The company has been able to develop strong distribution channels and a stable, diversified product portfolio. The issue is priced at 20 PE of FY22 earnings, which is lower than most of its listed peers, and the company has posted steady growth in both revenue and profit. Profit margins are also rising continuously in a tough environment," Meena said.
Dharmaj, which has a diversified product set with a presence across domestic as well as international markets, has recorded nearly 37 percent growth in profit after tax at Rs 28.7 crore for the year ended March FY22 and revenue during the same period increased by 30 percent to Rs 394.2 crore.
In the four months period ended July FY23, it clocked a profit after tax of Rs 18.4 crore on revenue of Rs 220.9 crore.
"The operations look relatively small compared to its peers. However, revenues, EBITDA and margins are on the rise. Given the growth and small issue size, huge demand is anticipated for the issue," Manan Doshi of UnlistedArena.com said.
The company successfully raised its targeted IPO amount of Rs 251 crore that comprised a fresh issue of Rs 216 crore, and an offer for sale of Rs 35 crore by promoters. The price band for the offer was Rs 216-237 per share.
Uniparts India
Uniparts, an Indian global manufacturer of engineered systems and solutions, launched its maiden public issue last week with the aim of raising Rs 835.6 crore. The IPO received a healthy response from all categories of investors. The issue was subscribed 25.32 times between November 30 and December 2, with the reserved portion of qualified institutional buyers subscribed 67.14 times and that of high networth individuals (non-institutional investors) 17.86 times. Retail investors also looked supportive, buying 4.63 times their allotted quota.
The IPO shares are available with a premium of a little over 10 percent on the final issue price of Rs 577 per share in the grey market, though this is an offer for sale, wherein all the raised money will go to the selling shareholders and the company will not get any IPO money, analysts said. The issue price band was Rs 548-577 per share.
Uniparts is one of the leading suppliers of systems and components to the off-highway market. The company's major business areas are agriculture, construction, forestry, and after-market. It has a leading market presence, a global business model, and long-term relationships with key customers.
"It enjoys a healthy financial position with continuous growth in revenue and profit and improving margins. As for the risk factor, the issue is a complete offer for sale. However, the issue is attractively priced at a P/E valuation of 15.61, which is lower than its listed peers," Santosh Meena of Swastika Investmart said.
Uniparts said its profit after tax for the year ended March FY22 grew by 79 percent to Rs 167 crore despite sharply lower other income, driven by a healthy operating performance and lower finance cost. Consolidated revenue from operations increased by 36 percent to Rs 1,227 crore compared to the previous year, largely led by exports.
International sales accounted for over 82 percent of sales in FY22. There has been a steady growth in revenues and margins in the past three fiscal years. The implied market cap at the upper price band of the issue is approximately Rs 2,604 crore and the asking P/E multiple is over 15x, which looks reasonable compared to its peers, said Manan Doshi, adding that the secondary market is at all-time highs, which should also boost the interest of investors.
The mood in equity markets has remained strong for the last couple of weeks, with the benchmark indices hitting record highs on favourable global cues and FII buying.
Per the IPO schedule, Dharmaj Crop Guard will make its debut on the BSE and NSE on December 8, while Uniparts India is set to list its shares on December 12.
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