Share has good prospects in the medium to long term: Buy post listing

PG Electroplast Limited is tapping the capital markets with its IPO which opens on Wednesday the 7th of September and closes on Monday the 12th of September in a price band of Rs 190-210. The issue would raise Rs 109.15 crs at the lower end and Rs 120.64 crs at the upper end of the price band.

Business
PG Electroplast is an Electronic Manufacturing Services (EMS) provider for Original Equipment Manufacturers of consumer electronic products in India. The company manufactures and/or assembles a comprehensive range of consumer electronic components and finished products such as colour television sets and components, air conditioners sub-assemblies, DVD players, water purifiers and Compact Fluorescent Lamps (CFL) for third parties. As backward integration, the company also does plastic injection moulding and manufacture of Printed Circuit Boards (PCB) assemblies for colour TV’s, DVD players and CFL. The company is a supplier to some of the leading brands in the electronic products market.

The company has four operational units with one of them in Roorkee in Uttrakhand, 2 in Grater Noida in UP and one in Ahmednagar in Maharashtra. Major expansion is n=being done at the latest y=unit which has been set up at Ahmednagar and keeping in mind the potential the company has built facilities which could be expanded four times from the present palnned capacity at the location. This palnning will help and ensure that incremental capacity will be available at about 40% of cost as land and common utilities have already been invested in.

The substantial increase in capacity of injection moulding gives the company great flexibility in diversification an de-risking the business model in case some products or technology becomes out-dated or obsolete. The Tamil Nadu government was a big buyer of CTV’s and with the change of Government the business of procuring television sets has been discontinued. The TN government is now looking at providing lap-tops and it is to be seen when the same is finalised. PG Electroplast has the capability of being a supplier for such products as well as it is an assembler of various types of electronic products and has the capability of making the moulded products and the PCB boards.

Objects of the Issue
The objects of the issue are as follows: –

Financials
The company reported revenues of Rs 125.97 crs in the year ended March 2009, which rose to Rs 354.29 crs in March 2010 and to Rs 423.97 crs in the year ended March 2011.The net profit was Rs 1.14 crs which rose sharply to Rs 10.04 crs and then almost doubled to Rs 18.90 crs in the year ended March 2011.

The net margins have improved from just under 0.9% to 2.84% and in the year ended March 2011 to 4.19%. Going forward with a reduction in the CTV business which included the supply to the TN Government, the margins will improve significantly. Secondly the company has chosen to expand with backward integration into component manufacturing of plastic injection moulding products which involve precision and capex in terms of dyes and moulds. It also ensures that the product/component is made only by you as these are normally single moulds.

Comparisons
The company has no listed entity in the same line of activity. There are however players in different parts of the activity that the company does and accordingly one should look at them as well. For purposes of valuation and comparison they have chosen people from the CTV space. The two companies chosen are MIRC Electronics and Samtel Colour. MIRC had a topline of Rs 1940 crs and a net profit of Rs 29 crs implying a net margin of a mere 1.49%. The other company is Samtel Colour with a top line of Rs 900 crs and a net loss of Rs 84 crs. The activity of PG should be looked as that of a manufacturer who does not have any brand, does not do any direct distribution or selling but is present in the manufacturing process and dealing with large companies. Being a critical supplier he is able to collect payments quickly and efficiently and his sundry debtors are less than 20 days sales on an average, helping his interest and financial charges being under control.

Valuations
The pre-IPO equity of the company is 1066.93 lacs and the EPS based on this was Rs 9.41 for the year ended March 2010 and Rs 16.77 for March 2011. Based on the pre-money equity the PE multiples for the company based on March 2011 numbers is 11.32 times at the lower end of the price band of Rs 190 and 12.52 times based on the upper end of the price band of Rs 210.

If one were to look at the post money comparison the same even though it is not strictly comparable, the EPS would be Rs 10.90 based on March 2011 numbers. The PE multiple based on the same would be 17.42 times at the lower end of the price band and 19.25 times at the top end of the price band.

Growth Drivers
The business is growing very rapidly and the two critical things needed are the client or customer’s confidence and the ability to add product lines by forward or backward integration. PG has both these things going for it and this will help the company going forward as well.

Talking about the prospects of the company even though the CTV business has taken a hit with the Tamil Nadu order not being there, it will not affect the company in any big manner because of the new expansions that have been done. Secondly the TN order was a low margin order which will now help in increasing margins from the present 4.19% to 5.5% by the time the full capacity is available in 2012-13. One should expect the top line by 50% in the next two years from the present Rs 425 crs to about R 660-680 crs with a net margin in the region of 5.35%-5.5%.

Conclusion
The business is interesting and looking at the growth in the electronics industry has tremendous growth potential. The issue on hand is the current valuation which looks little stretched and the lack of comparison with any other listed player. I believe there are two options for investors, one apply in a small lot in the share so that the stock is in your portfolio and add after the share has listed and stabilised, or the second option by the share on listing and stabilising. This share looks promising with a medium and long term prospective.

I believe one should apply with a long term prospective or look at investing post listing.

SEBI Disclaimer: – I do not intend to subscribe to the issue currently but would do so post listing.