Astec Lifesciences Limited (ALL) is tapping the capital market with an issue to raise Rs 57.75 crs to Rs 61.50 crs. The issue has opened on Thursday the 29th of October 2009 and closes on Wednesday the 4th of November 2009.

Business
Astec is in the business of manufacturing Active ingredients and intermediates for the agrochemicals and the pharmaceutical segment. Almost 84% of the turnover comes from the agrochemical segment while 16% comes from the pharmaceutical segment. Some of the key products manufactured for the agrochemical segment include Hexaconazole, Tebuconazole, Propiconazole and Metalaxyl. All these products are primarily used in crop protection. Dicap is a key pharmaceutical intermediate manufactured by the company and it is used as an antifungal agent.

ALL has its manufacturing facilities in Mahad, an industrial town of Maharashtra on the Mumbai Goa highway. It also has a Research and Development Lab, pilot plant and manufacturing facility in Dombivli. The present capacity of the company is 2800 metric tons per annum which would post the expansion be increased to 3950 mts, an increase of 41%.

The company has exports to East Asia, Europe, Middle East and the USA. It has relationships with large number of multinationals and roughly half its sales come from top ten clients. Some of its marquee clients include Syngenta, Irvita Plant Protection N.V., Nufarm UK Ltd, United Phosphorus Limited and others.

Objects of Issue
The company is raising money for increasing its capacity from the existing 2800 mts to 3950 mts.
The details are as follows:-

Risks
Business of agrochemicals or agriculture is fraught with risks and the monsoon is a big factor in the same. To mitigate this biggest risk and the cyclicality involved the company has developed the export markets where the monsoon is not a concern and second where the seasons and requirement of products fits in with our lean season.

The pattern of this industry is such that it requires a high working capital cycle with typically 90 day inventories of raw materials and roughly 90 days of debtors. The debtor days reduce in case of exports and going forward with the introduction of contract manufacturing the working capital cycle will see some reduction or improvement.

ALL is not in the business of preparing formulations which are sold direct to the consumer/farmer. This results in lower debtor days and eliminates the possibility of bad debts.

Valuations
The company made a profit after tax of Rs 10.73 crs or an EPS of Rs 11.38 on pre issue capital. For the first three months of the current year the company has made a net profit of Rs 3.43 crs or an annualised profit of Rs 13.72 crs. This would translate into an EPS for the current year based on an annualised basis of the first quarter of Rs 14.55.

The money being raised from the IPO would result into capacity expansion and the first full year of benefit of the same would only be in 2010-2011. The company would certainly be able to grow the business substantially but the really big driver is two quarters away. If one were to consider the PAT for the year ended March 2010, on a conservative basis the same would come to roughly Rs 15 crs, which on a fully diluted equity would be a EPS of Rs 8.86. This would translate into a PE multiple of 8.69 and 9.25 at the lower and higher price band respectively.

It must be mentioned that the expansion being done by the company is huge and there would be an increase in capacity of 40%. The expected profits for FY 10-11 are in the region of Rs 22 crs or double of what they were in March 2009. The opportunity is tremendous and it appears very reasonably priced.

The industry is fairly fragmented and there is no exact business model company which ALL can be compared with. Some of the players in the agrochemicals space include players like Sabero Organics, Meghmani Organics, Bharat Rasayan, Hikal Chemicals and Bayer Crop sciences.

ALL is favourably placed with its peers and looks attractively priced and valued, leaving money on the table in the medium term for investors.

Promoters
The promoters of the company are Mr Ashok Hiremath and Dr P.L.Tiwari. Mr Hiremath is a Chemical Engineer from University of London. He has been in this business since 1980, initially working with his brother in Hiremath Chemicals now known as Hikal Chemicals and since 1994 started Astec Lifsciences.

Dr P.L.Tiwari is a practicing cardiologist in Mumbai. He is a MBBS and MD (Medicine) from Banaras Hindu University and has been with the company since 1994. The promoter group would post the IPO hold 55.69% of the equity and the balance 44.31% would be held by the public. It may be mentioned that prior to the issue the promoters hold 99.99% of the equity of the company.

Key Drivers

• Astec is the only producer in the world with full backward integration into Propiconazole.
• Astec is now entering into contract manufacturing for a few of its leading MNC relationships, which will leverage its technical skills and manufacturing expertise built over the years.
• Diversified product range comprising of a mix of high volume – medium margin and low volume-high margin products.
• Registrations – 43 registrations in 20 countries

Strong focus on R & D with DSIR approved facility and pilot plant.

Conclusion
Reasonably attractive pricing, growing business with niche products, slowly spreading itself into Europe with contract manufacturing and registrations, growing world markets and with non-registration being an automatic entry barrier, ample growth opportunities.

I recommend subscribe to the issue with a medium term perspective. Investors looking to make a 20-30% return in about six to eight months should invest. 

Sebi disclaimer:- I intend to subscribe to the issue