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HP Adhesives IPO  Fundamental Analysis

Key Business Highlights

  • Operating as a partnership firm since 1987, HP Adhesives (the Issuer) converted into a private limited company in the year 2019. The Issuer is a multi-product, multi-category consumer adhesives, and sealants company.
  • The Issuer manufactures a wide range of consumer adhesives and sealants such as PVC, cPVC and uPVC solvent cement, synthetic rubber adhesive, PVA adhesives, silicone sealant, acrylic sealant, gasket shellac, other sealants, and PVC pipe lubricant which are sold across India, through an extensive distribution network of distributors, and exported also to several countries.
  • It also manufactures these products for select large PVC pipe manufacturing companies under co-branding or private label on an order basis. Ancillary products like ball valves, thread seals, and other tapes and FRP products for drainage and architectural solutions are distributed along with our products to the end customers through our distribution network.
  • The products manufactured have applications in multiple industries such as plumbing and sanitary, drainage and water distribution, general-purpose building/ construction and interior operations as well as for glazing operations, woodwork, footwear, automotive, foam-furnishing, and other varied industries.
  • The distribution network comprised 4 depots situated in Delhi, Kolkata, Bengaluru, and Indore and more than 750 distributors who cater to more than 50,000 dealers in India as of the end of H1FY22.
  • The Issuer’s manufacturing facility is located at Village Narangi, Raigad (Maharashtra) which is a multi-product manufacturing facility. The manufacturing facility is strategically located in close proximity to Jawaharlal Nehru Port Trust (JNPT).
  • During FY21, The Issuer’s products were sold in 21 countries namely, Bahrain, Bangladesh, Ghana, Greece, Iraq, Kuwait, Mauritius, Nepal, Nigeria, Oman, Philippines, Qatar, Republic of Malawi, Saudi Arabia, Taiwan, Turkey, UAE, Uganda, UK, USA, and Yemen. Its export business constituted 17.20% and 11.51% of sales in FY21 and H1FY22 respectively.

Financial Review of HP Adhesives

The total revenues of HP Adhesives show an increasing trend since the last three fiscals. Total revenues for FY21 increased by 26% to Rs 123.88 crore from Rs 97.91 crore in FY20. However PAT is volatile with Rs 10 crore in FY21 against a loss of Rs 4.67 crore in FY20 and Rs 4 crore in FY19. There has been a huge increase in PAT by 155% in FY21.

Debt to equity is at a higher side of 2.71x as at the end of H1FY22. Return on net worth has been 8.25%, 79.46%, -187%, and 27% for H1FY22, FY21, FY20, and FY19 respectively.

Table 1 - Financials and Ratios (Amount in Rs Crore)
Title H1FY22 FY2021 FY2020 FY2019
Total Revenue 72.73 123.88 97.91 87.97
PAT 3.1 10.06 -4.67 4
EBITDA 7.34 17.69 6.92 8.70
Total Assets 104.91 89.78 56.81 56.71
Cash generated from operations -7.44 21.53 2.84 2.29
Adjusted EBITDA Margin 10.09% 14.28% 7.07% 9.89%
Adjusted Net Margin 4.26% 8.12% -4.77% 4.55%

Valuation and Peer Comparison

The Issue is priced at 61.71x with annualized EPS of 4.44 as at the end of H1FY22 calculated at the upper price band of Rs 274 per share. P/BV is 10.38x with a NAV of 26.39 as at the end of H1FY22.

Pidilite Industries is shown as the peer of the Issuer as per the RHP. The market is primarily dominated by Pidilite Industries, commanding 60-65% of the market. However, each product category has several organized as well as unorganized players, with organized players commanding over 75% of the market.

Pidilite has a P/E of 89.25x as of 13th Dec  2021 and a P/BV of 20.64x. It should be noted that Pidilite has revenues of Rs 2640 crore for H1FY22 as against revenues of Rs 72 crore (H1FY22) of the Issuer. The valuations appear costly looking at the small size of the Issuer when compared to its peer.

The Issue Snapshot

HP Adhesives IPO opens on 14th Dec with an IPO size of Rs 125.96 crore (fresh Issue Rs 113.44 crore) with a price band of Rs 262-274 per share. The retail quota is 10% and the minimum application amount is Rs 13700. Proceeds of the Issue would be utilized towards funding CAPEX for proposed expansion (Rs 25.51 crore) and for working capital requirements (Rs 54 crore). The Issue closes on 17th Dec and is expected to list on 27th Dec 2021.

Conclusion and Investment Strategy

The market has both core manufacturers and pipes and fittings players who have entered the PVC adhesive manufacturing space. While leading manufacturers include HP Adhesives Ltd., Astral Adhesives, and Ashirvad Pipes Pvt. Ltd., the latter category has Prince Pipes, Apollo Pipes, Jain Irrigation, and Supreme Industries, among others. While these players manufacture very small volumes as compared with core manufacturers; HP Adhesives is the second-largest manufacturer, having 14-16% market share followed by Astral Adhesive with a share of 11-13%.

The growth of the consumer adhesive industry is expected to be moderate at a CAGR of 8% for the next 3-4 years.  The factors of concern are volatility in profitability margins and sustainability of margins in the future of the Issuer. The financials of the company need to be tracked for one or more years. Considering all these factors, one may look at a better entry point later and avoid this IPO.

Reviewer recommends Avoid to the issue.

Review By CA Priyanka Choudhary on 7th Dec 2021

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.


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User Reviews

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1. Rajaram Khanolkar Dec 16 2021 11:44:52 AM Reply
Nice analysis & good guidance.
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