Balaji Phosphates NSE SME IPO review (May apply)

•    The company is engaged in the manufacturing and supplying SSP and related fertilizers.
•    The company marked growth in its top lines for the reported periods.
•    The boosted bottom lines from FY23 onwards raises eyebrows and concern over its sustainability. 
•    It is operating in a highly competitive and fragmented segment.
•    Based on its recent financial performance, the issue appears aggressively priced.
•    Well-informed investors may park moderate funds for medium to long term. 

ABOUT COMPANY:
Balaji Phosphates Ltd. (BPL) is engaged in the manufacture and supply of Single Super Phosphate (SSP) in powder and granulated forms, NPK Granulated and Mixed Fertilizers and Zinc Sulphate, all conforming to the standards of Fertilizer Control Order of India. It sells products under the brand names of ‘RATNAM’ and ‘BPPL’ to a diverse range of customers, including retailers, wholesalers and state-owned cooperatives with farmers being the end users of the products.

BPL’s range of phosphate fertilizers comprising Single Super Phosphate (SSP), zinc sulphate, and NPK Granulated & Mix fertilizers – are used in agricultural soils to enhance plant growth and development. SSP addresses phosphorus deficiencies, especially in acidic soils, promoting robust root development and seedling establishment. Zinc sulphate corrects zinc deficiencies in alkaline and sandy soils, enhancing plant health and crop yield. Its NPK fertilizers provide a balanced blend of nitrogen, phosphorus, and potassium for optimal crop growth and improved productivity. In line with the initiatives of the Department of Fertilizers, Government of India, the company offers value-added, fortified SSP with zinc and boron to tackle soil deficiencies. Its products cater to farmers in Madhya Pradesh, Chhattisgarh, Maharashtra, Telangana, and Andhra Pradesh, supporting local agricultural growth.

The company recently invested in Jyoti Weighing Systems Pvt. Ltd., that enjoyed good land bank near BPL’s existing plant and is engaged in manufacturing of weighbridges up to a capacity of 633 MT. According to the management, this is a lucrative business with high margins and the company is likely to introduce new technology for weighbridges that will bring in good returns going forward. They are currently having 80:20 ration of fertilizers verses weighbridge business and hoping to have 50:50 in coming few years. 

As of March 31, 2024 BPL’s unit had installed capacities for manufacture of 1,20,000 MT per annum of Single Super Phosphate, 3,300 MT per annum of Zinc Sulphate and 49,500 MT per annum of NPK Granulated & Mix. As of August 31, 2024, it had 40 employees n its payroll. It also hires contractual labour as and when needed.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route combo IPO of 7158000 equity shares to mobilize Rs. 50.11 cr. (at the upper cap). The issue consists of 5940000 fresh equity shares (worth Rs. 41.58 cr. at the upper cap), and Offer for Sale (OFS) of 1218000 shares (worth Rs. 8.53 cr. at the upper cap). The company has announced a price band of Rs. 66 – Rs. 70 per share of Rs. 10 each. The issue opens for subscription on February 28, 2025, and will close on March 04, 2025. The minimum number of shares to be applied is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 30.10% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh issue, the company will utilize Rs. 19.00 cr. for working capital, Rs. 12.88 cr. for capex on warehouse at its facilities, and the rest for general corporate purposes. 

The company has allocated not more than 30% for QIBs, not less than 30% for HNIs and not less than 40% for Retail investors. 

The IPO is solely lead managed by Arihant Capital Markets Ltd., Skyline Financial Services Pvt. Ltd., is the registrar to the issue. NNM Securities Pvt. Ltd. is the Market Makers for the company as well as a syndicate member. The issue is underwritten to the tune of 15% by Arihant Capital, and up to 85% by NNM Securities Pvt. Ltd. 

The company has issued entire initial equity shares at par value so far, and has also issued bonus shares in the ratio of 1 for 2 in March 2023, and 1 for 1 in August 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 2.78, and Rs. 2.80 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 17.84 cr. will stand enhanced to Rs. 23.78 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 166.44 cr. 

Its current outstanding of over Rs. 35.5+ cr. borrowing, Rs. 45+ cr. trade receivables and higher other income of Rs. 1.5 cr. for 5M of FY25 raises concern. With the IPO funds, the company is aiming to mark over 80% capacity utilization for its variety of fertilizer products which is currently around 60%.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 124.12 cr. / Rs. 3.19 cr. (FY22), Rs. 144.64 cr. / Rs. 6.09 cr. (FY23), and Rs. 151.68 cr. / Rs. 6.04 cr. (FY24). For 5M of FY25 ended on August 31, 2024, it earned a net profit of Rs. 4.15 cr. on a total income of Rs. 54.85 cr. The quantum jump in bottom lines from FY23 onwards raises eyebrows and concern over its sustainability. 

For the last three fiscals, the company has reported an average EPS of Rs. 3.13 and an average RoNW of 17.96%. The issue is priced at a P/BV of 3.19 based on its NAV of Rs. 21.95 as of August 31, 2024, and at a P/BV of 2.06 based on its post-IPO NAV of Rs. 33.95 per share (at the upper cap). 

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 16.71. Based on FY24 earnings, the P/E stands at 27.56. Based on its recent earnings, prima facie, the issue relatively appears aggressively priced. 

For the reported periods, the company has posted PAT margins of 2.6% (FY22), 4.2% (FY23), 4.0% (FY24), 7.8% (5M-FY25), and RoCE margins of 17.3%, 19.8%, 16.7%, 9.15%, for the referred periods, respectively.

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Coromandel Intl., Paradeep Phosphate, and Rama Phosphate, as their listed peers. They are trading at a P/E of 30.0, 17.4 and 27.7 (as of February 24, 2025). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER’S TRACK RECORD:
This is the 3rd mandate from Arihant Capital in the last two fiscals. Out of the last 2 listings, 1 opened at par, and 1 opened with a premium of 7.50% on the date of listing.