Heranba Industries: Business Analysis

Summary

Heranba Industries is a fully integrated crop protection chemical manufacturer based out of Vapi, Gujrat. The company is a leading producer of pyrethroid based pesticides and is present across entire value chain of the manufacturing process.

Heranba Industries Ltd (HIL) is one of the leading domestic producers of synthetic pyrethroids like cypermethrin, alphacypermethrin, deltamethrin, permitherin, lambda cyhalothrin etc.  Heranba’s pesticides range includes insecticides, herbicides, fungicides and public health products for pest control. It manufactures Intermediates, Technicals and Formulations and thus has a presence across the entire value chain of agro chems. 

Background:

Heranba was started by SK Shetty and RK Shetty who have more than 3 decades of experience in the agrochemical industry and have been instrumental in developing Heranba into a dominant player in the crop protection chemicals industry.

The company started its manufacturing activity in the year 1996 with production of an intermediate product CMAC. In 2001-2002, Heranba forward integrated into the manufacturing of various technicals like metametron, cypermethrin, alpha, permethrin and deltamethrin.

By the end of the FY 2004-2005, the company further expanded its product range to formulations, which are final products sold to farmers as Pesticides, Herbicides, Fungicides for crop protection. The company also entered the public health products segment in the FY 2010-11.

Owing to various integration exercises over the years, Heranba is now present in the entire product value chain of the agrochemicals industry i.e., Intermediates, Technicals and Formulations and holds registrations for eighteen Technicals for manufacture and sale in India, ninety-three Technicals & Formulations for manufacture and sale in the export markets and one hundred and sixty-seven Formulations registered for manufacturing and sale in India.

Majority of the company’s current Intermediates production is utilized for captive consumption for the manufacturing of Technicals Products. Formulations are produced and packaged in powder and liquid forms and sold to distributors for further sales to farmers.

Heranba currently has 9400 dealers to distribute branded formulations in 16 states and 1 U.T across India. The company currently has three manufacturing and packaging facilities in and around the industrial belt of Vapi, Gujarat having one hundred seventy-two reactors with an aggregate manufacturing capacity of 15,224 MTPA.

Business Segments:

Based on the products manufactured and market served, the company’s business can be divided into-

• Domestic Institutional Sales of Technicals: Heranba manufactures and supplies technicals to leading domestic and multinational agrochemical companies operating in India who in turn use the technicals for manufacturing their own products. Sumitomo Chemical India Limited, Biostadt India Limited, Sulphur Mills Limited, Crystal Crop Protection Limited, NACL Limited, Sharda Cropchem Limited, Meghmani Organics Limited, PI Industries Limited, Agro Life Science Corporation, Krishi Rasayan Group are some of the leading institutional customers of Heranba.
• Technicals Exports: Heranba exports technicals in bulk to customers outside India to various agrochemical companies across the world. The company exclusively manufacture ninety-three technicals for export purposes only and has received necessary approvals from the CIB&RC in relation to the same.
• Branded Formulations: Heranba manufactures and sells various formulations of insecticides, fungicide, herbicides and public health products under its own brand through a wide distribution network present across India. Jayam, Progress Plus, Param, Cypraplus, Dyken, Mantra etc. are some of the branded formulations of Heranba.
• Formulations Exports: Heranba exports formulations in bulk and in customer specified packaging outside India. Sales of formulations in the international markets is generally undertaken by way of tie-ups with international distribution partners who import its formulations, in bulk or final packages, after a prolonged and detailed registration process in their respective country’s regulatory authority. Heranba’s name appears on the package as the manufacturer.
• Public Health: This is a relatively small but growing segment for Heranba. It manufactures and sells general insect control chemicals to governmental authorities like municipalities by participating in public health tenders issued by them and to pest management companies under its own brand.

Export and Domestic Mix

Agrochemical Industry 

Agrochemicals are chemicals whose job is to protect crops from various types of insects, diseases and weeds which seriously hinder the agricultural output every year. On average pests destroy 20% of agricultural yields every year.

Insecticides, Herbicides and Fungicides are the most important agrochemicals.

The manufacturing of agrochemicals involves formation of intermediates, technicals and final formulation.

Pyrethroids Market:

Pyrethroids are synthetic chemical compounds that are procured from chrysanthemum cinerariaefolium flowers. They are volatile, soluble in water and have low mobility in soil. Owing to these properties, they are used to control pest insects. Pyrethroids are cost-effective alternatives for conventionally used insecticides. They exhibit biodegradable properties and are widely used as liquid powders, granules, concentrate emulsifiers, and ultra-low-volume (ULV) sprays. Additionally, they are relatively less poisonous for mammals or birds, owing to which they are used for killing bugs and flying insects in small quantities. Consequently, they are also replacing organophosphates, which were conventionally used on vegetables, such as carrots and lettuce.

Drivers of Agrochemical Consumption in India:

• Increasing Food Demand- Indian food grain demand is estimated to reach a volume of 355 million Tons by 2030 due to rising population. On account of reducing arable land, small land holdings and low consumption of pesticides per hectare, the requirement for increasing farming productivity is being witnessed, which is crucial for improving the overall outputs. This can be further achieved through optimum usage of farm productivity-enhancing inputs like agrochemicals.
• Increasing Government Support- With a goal of doubling farmers’ income in the near future, government has been providing the necessary support to farmers to enhance productivity. The availability of subsidized farm loans, increasing MSP are some of the factors that will boost agrochemical demand.
• Growth of Horticulture- India is the 2^nd largest producer of fruits & vegetables in the world and leader in several crops. Growth in horticulture and floriculture industries is to result in increase in demand for agrochemicals, especially fungicides.

Presence Across the Entire Value Chain of Pyrethroids will Aid Heranba's Growth

Heranba manufactures Intermediates, Technicals and Formulations which form part of the entire value chain of synthetic pyrethroids and other active ingredients in the agrochemicals business. Starting out with the manufacturing of Cypermethric Acid Chloride (CMAC), an intermediate, Heranba forward integrated into the manufacturing of technicals like Metametron, Cypermethrin, Alphacypermethrin, Permethrin and Deltamethrin. To further capitalise on the growing opportunities, Heranba entered the formulation business by launching formulants under its own brand thus, Heranba has marked its presence across the entire value chain.

Presence across the entire value chain provides Heranba the flexibility to pivot production based on the demand-supply scenario of different technicals and formulants. Integrated players also have the capabilities to move up the value chain e.g., manufacturing specialty chemicals and Custom Synthesis Manufacturing (CSM). Heranba is open to such collaboration if it along the lines of its current margins.

Strong Product Portfolio and Diversified Customer Base

Heranba manufactures and supplies technicals to leading domestic and multinational agrochemical companies operating in and outside India which are used by them for manufacturing their own products. With customers like PI Industries, Sumitomo Chemical India Limited, Sulphur Mills Limited, Biostadt India Limited, Crystal Crop Protection Limited and others, Heranba has created a stable customer base.

Formulations are used by farmers to protect crops and Heranba ensures that it reaches farmers through more than eight thousand six hundred dealers/distributors supported by our twenty-one stock depots spread across sixteen states and one union territory in the country. Heranba also participates in various exhibitions and conferences to market its products and increase visibility.

Opportunities in Highly Regulated Markets of Europe and USA

The company appoints international distribution partners to make sales in foreign markets. These distributors, with Heranba’s product and technical support, have obtained registrations for three hundred and sixty-one technicals and formulations in forty countries across the Middle East, CIS, Asia, South East Asia and Africa. Further, one hundred sixty-nine of its technicals and formulations have been filed by these distributors which are pending registration before the regulatory authorities of twenty-five countries in various regions across the world, excluding Europe.

Various technicals are going off-patent in the near future which will lead to good demand for these molecules in Europe and USA. To capitalise on the opportunities, Heranba has established a R&D facility at its Sarigam unit with latest technology and processes required to conduct research on active ingredients and formulations, mainly of the molecules going off-patent in the near future.

Strong Manufacturing Bandwidth

Heranba has a current capacity of 15,224 MTPA. It has four manufacturing units located in Vapi, Gujarat.

Unit 1 - It is a Large scale manufacturing unit for insecticides, herbicides, fungicides & their intermediates.

Unit 2 - Manufactures CMAC and all other Isomers/derivatives of CMAC as per customers' requirements. Apart from this, the unit also manufactures Cypermethrin, Alpha Cypermethrin and Permethrin technicals. 

Unit 3 - This is a formulation division which was established to exclusively focus on manufacturing various branded formulations and trading activities.

Unit 4 - This unit was commissioned in FY22 to produce highest purity products from by-products and Intermediates, which have agrochemical applications. 

The company has further planned a capex of 180cr to increase capacity by 5,000-6,000 tonnes in phase I by the end of Q4FY23, and 10,000 tonnes by the end
of FY24 providing revenue visibility in near to medium term. 

Financials

Sales/EBITDA/PAT has grown at a CAGR of 20%/40%/56% in the last 5 years.

EBITDA margin has consistently expanded except for FY22 where it dipped by 30 bps. 

The company's cash conversion has been poor with cash stuck in working capital for longer duration as is the case with most agrochemical players. Its last 5 years average CFO/PAT has been 51%. 

The company has minimal reliance on debt with Debt/Equity less than 0.1x. Heranba has been delivering consistently good return ratios with ROE/ROCE >20%. 

Valuation 

Heranba hasn't given any returns since its listing on the exchanges in August 2021. The company is currently trading at 12x its LTM earnings. While most agrochem companies don't command superior multiples, Heranba has clearly been demonstrating good growth and operational performance and can bee looked as a decent agrochem bet.