About the company:

Consumer adhesives and sealants player HP Adhesives is coming up with its Rs.126 crore public offering consisting of a fresh offer of 4.14 million shares for Rs.113.4 crore and an offer for sale of about 457,000 shares by shareholder AnjanaHareshMotwani aggregating up to Rs.12.5 crore. Of the net issue, 75% is reserved for qualified institutional buyers, 15 percent for non-institutional bidders, and 10 percent for retail investors.

Objects of the Offer:

As the 90% of the issue consists of fresh issue the company is planning to use the fresh proceeds for its working capital requirements and capacity expansion at its manufacturing facility at Narangi village of Raigad district in Maharashtra and an additional unit on an adjacent plot. The company will also expand installed capacities at existing product lines and add new products to its portfolio.

About the Company:

HP Adhesives Ltd is a consumer adhesives and sealants company popularly known for its consumer adhesives and sealants such as PVC, cPVC, and uPVC solvent cement and other types of sealants and PVC pipe lubricants which are sold across India as well as exported to several other countries. It also sells ancillary products like ball valves, thread seal and other tapes and FRP (fiber-reinforced plastic) products for drainage and architectural solutions that are distributed along with its products to the end customers through distribution network.

These adhesives and sealants are used in 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 industries.

Pidilite is the market leader in consumer adhesives and sealants in India with an overall market share of 65 percent. HP Adhesives has a market share of about 14-16 percent in solvents used in plastic pipes and fittings.

Strengths:

        ·         Focusing on multiple end-user industries

        ·         Established presence in International markets

        ·         Established brand presence

        ·         Wide Product Portfolio & SKUs

        ·         Extensive distribution network across India

Risks:

·     The Indian adhesives and sealants industry has historically been dominated by few major players and presents significant entry barriers. The company competes with other players on the strength of its distribution network, quality, brand recognition and ability to leverage distributor relationships to connect with the end use appliers.

·         Crude oil and other petrochemical intermediates impact the company’s raw material prices. Any volatility in crude oil prices has an adverse impact on input costs.

·         The company does not have long-term agreements with raw material suppliers.

·         A significant portion of HP Adhesive’s sales are skewed towards ‘West’ zone any materially adverse changes in the west markets can impact the company’s bottom-line.

Conclusion:

In the overall consumer adhesives market, HP Adhesives is pre-dominantly present in PVC adhesives market as 77% of its sales are coming from PVC adhesive related products. Considering the size of the overall consumer adhesives market i.e, Rs.50-55 bn, PVC adhesives market is comparatively significantly smaller and fragmented i.e, Rs.6.5 bn. Further, the company faces intense competition from not only Pidilite but also from other unorganized players. Bearing in mind factors like low capacity utilization (51% as of FY21), volatile debt position, high geographical concentration, high suppliers as well as customers bargaining power and the fact that currently there are better IPO investment opportunities available, we recommend investors to ‘AVOID’ this IPO.