ARIES AGRO: Small Is Big

Ambitious expansion plans and aggressive marketing strategies are likely to help Aries Agro achieve future growth

COMPANY: ARIES AGRO

ISSUE SIZE: RS 54-58.5 CRORE

PRICE BAND: RS 120-130

DATE: DECEMBER 14-19, ’07

FOUNDED IN 1969 by the Mirchandani family, the Mumbai-based Aries Agro manufactures micronutrients and other nutritional products for plants and animals. The company is raising funds from the primary equity market to fund the five-fold expansion of its production capacities and to strengthen its marketing network. Investors with a 12-month horizon can consider investing in the IPO.

BUSINESS: The company markets a comprehensive portfolio of micronutrients under 41 different brands to nearly seven million farmers through a network of around 6,000 dealers. Micronutrients are elements such as iron, boron, manganese and molybdenum required for the growth of agricultural plants. The company imports certain products such as water-soluble nitrogen, phosphorus and potassium (NPK) fertilisers and markets them in India under its own brand name. It tries to provide maximum customisation in its products to suit the specific geographical and crop needs. Aries Agro has a 21,600 tonnes per annum (tpa) manufacturing capacity at four plants. This is expected to increase to nearly 1,00,000 tpa after it sets up four new plants. The company will also invest in its UAEbased subsidiary, Golden Harvest, to set up another manufacturing plant. It operates in a seasonal industry and clocks over 65% of its annual turnover from July to December, compared to the rest of the year.

GROWTH FACTORS: Aries Agro’s new plants will commence production one by one between February ’08 and September ’08. Domestic demand for micronutrients is currently estimated at 2.5 lakh tonnes, with a growth rate of over 8% per annum. It plans to purchase 100 trucks to market its products, which will improve its geographical footprint. The company focuses on R&D to bring out new products. It has established brands and strong distribution capabilities. The company also has long-term plans to enter the seeds and farm equipment businesses and has established two subsidiaries for the purpose.
FINANCIALS: Its net profit spurted multi-fold to Rs 8.7 crore in FY07 from Rs 1.1 crore in FY05. Sales during this period witnessed a CAGR of 37% to Rs 72.7 crore during FY07. It has demonstrated improved profitability over the years. Operating margin grew from 20.9% in FY06 to 23.1% in FY07. It further rose to 27.2% during the four months ended July ’07. The weakening dollar fares well for the company since it imports nearly 30% of its raw materials.

VALUATIONS: At the higher end of the price band, the P/E works out to 16.8 based on annualised EPS during the four-month period ended July ’07. Aries Agro does not have any direct peer with a comparable business profile. However, it can be broadly classified under specialty chemicals or fertilisers segment. Comparable peers under these categories, such as Ciba Specialty and Rallis India, are currently trading at an EPS of Rs 19.2 and 11.7, respectively. Considering its strong growth prospects, Aries Agro’s valuation appears reasonable. RISKS: The company has reported negative cash flows from operating activities in four of the past five years. Its business is directly linked with Indian agriculture. This exposes the business to the risk of longer credit periods. Thus, the company’s working capital will increase along with its expansion. This may accentuate the problem of negative cash flows.