If looking at listing gains may take risk

Texmo Pipes and Products Limited (Texmo) is tapping the capital markets with an IPO opening on Tuesday the 16th of February and closing on Friday the 19th of February to raise between Rs 42.5 and Rs 45 crs, in a price band of Rs 85 to 90 per share.

Business
Texmo is involved in the manufacture of PVC and HDPE pipes used in irrigation, drinking water, sewerage and drainage systems, construction industry, telecom industry, and bore well/tube well for underground water suction.  Texmo was formed by the taking over of assets and liabilities and business transfer of three entities namely: – Shree Balaji Industries, Shree Venkatesh Industries, & Shree Padmavati Irrigation Pvt. Ltd in the year 2008-2009. These were group companies and firms of the present promoters and all business was consolidated into one single entity. The company has been in this business since the last 11 years and the parent entity was Shree Mohit Industries. The unit is located in Burhanpur in the state of Madhya Pradesh on the border with Maharashtra. Bhusaval and Jalgaon are roughly 65 and 85 kms away and the Maharashtra borders a mere 10 kms away. The location is literally the heart and centre of India and the sales of Texmo are roughly within a 200 km radius of the premises.

The product range of Texmo allows it to manufacture pipes from PVC in a range of 20mm to 315 mm and in the case of HDPE from 20mm to 630mm. Its sales are in the states of Madhya Pradesh, Maharashtra, Uttar Pradesh, Gujarat, Andhra Pradesh and Rajasthan. The business of pipe manufacturing is a highly seasonal business and virtually nothing much happens in the rainy or monsoon season as there is no agriculture related activity possible no cable related activity from the telecom season possible. Pipes are very bulky and therefore need huge storage space. In season all capacity is inadequate and therefore one finds the capacity utilisation fairly lumpy in this business. The breakup of sales between PVC and HDPE has been fairly even with 52.87% sales from PVC and 47.13% from HDPE.

Objects of the Issue

The company is expanding its product range and also setting up a facility to manufacture woven sacks or jumbo bags primarily for the export market. Secondly having established itself in the pipes business it wants to enter into the fittings market which is a complementary business of pipes but enjoys a very high margin in relation to the pipes business. The beauty of this segment is that the fittings are compatible with all other manufacturers and their products.

Financials
The sales of Texmo have been at Rs 5743.03 lakhs for the year ended March 2008, Rs 6141.07 lakhs for March 09 and Rs 3897.53 lakhs for the seven months ended October 2009. The profit after tax for the same period is Rs 426.38 lakhs for March 08, Rs 473.47 lakhs for March 09 and Rs 336.38 lakhs for seven months ended October 2009. The pat margin has been moving upwards with the same being 7.42% for March 08, 7.70% for March 09 and 8.63% for seven months ended October 2009. The sales growth has taken a beating in 2008-2009 because raw material prices fluctuated wildly and came down as an average compared to the previous year. In the current year the company would achieve on an annualised basis a turnover of Rs 6681 lakhs but because of the seasonality factor would perform much better.

Valuations
The EPS of the company based on present capital is Rs 6.80 for March 2008, Rs 7.55 for March 2009 and based on seven months ending October 2010 Rs 5.36. If one were to annualise the same then it would be Rs 9.19 for the year ending March 2010. Based on post money share capital of Rs 11.27 crs or 1.127 cr shares the EPs for March 2008 would be Rs 3.78, Rs 4.20 for March 2009 and Rs 2.98 for the seven month period ended October 2010 and on an annualised basis Rs 5.11. Based on these numbers the price earnings multiple would be between 20.2 and 21.43 times based on March 2009 numbers and between 16.63-17.61 times based on seven months ended October 2009 annualised basis for March 2010. These valuations are by no means cheap and can be classified or termed as expensive.

Comparisons
The company has compared itself with Kisan Mouldings, Precision Pipes and Tulsi Extrusions and is expensive compared to all these players. Just recently there was an issue from a company called Emmbi Polyarns Limited which is yet to list and this company is in the business of making jumbo bags and is exporting the same. The company had successfully raised its money and the objects of the issue were for expanding the production capacity from a mere 5000 tons to 17,800 tons. Here also the company is looking to raise its capacity by introducing new products and entering the fittings manufacturing business which is extremely profitable and has a huge demand. Probably the only reason the company did not enter the business so far was that this requires a large range of products and a huge investment is required in the dies and moulds for making the fittings.

There are many players in the jumbo sacks business and this is also a growing business but the key is marketing. Existing players have joint ventures or marketing tie-ups for export sales. Very clearly the key for Texmo’s success is its marketing set up and the success of its fittings business.

Conclusion
Based on current earnings and the fragmented nature of this business, the issue is expensive in nature. It is quite likely that looking at the response those small issues or IPO’s have received in the recent past, this IPO could also do well and therefore offer some listing gains as has been happening. If one wishes to play for the listing game benefit one may plunge into the same, but if one were to look at fundamentals, this issue is extremely expensive and there is a long gestation period ahead of it. I believe serious investors should give this issue a skip and wait for the price to come down or the performance of the expansion speaks for itself.

SEBI disclaimer: –  I do not intend to apply for this issue.