PG ELECTROPLAST

PG Electroplast demonstrates robust growth potential, driven by its strategic diversification into EV manufacturing, enhanced capacity plans, and favourable industry trends such as urbanisation, government initiatives and rising consumer demand. However, it is trading at a PE well above the industry average[EasyDNNnews:PaidContentStart]

The electronics manufacturing services (EMS) sector has been a star performer, delivering significant returns and attracting investor attention. Stocks like PG Electroplast, Dixon Technologies, Amber Enterprises India and Kaynes Technology have doubled the investors’ funds. Here, PG Electroplast has been leading the pack with a massive 310 per cent rally in 2024 alone. This uptrend highlights the sector’s robust growth, driven by government initiatives like ‘Make in India’, the PLI scheme and the rising demand for consumer electronics and industrial automation.

Additionally, EMS stocks have gained further traction following Donald Trump’s victory in the U.S. presidential election. This is due to rising expectations of increased tariffs on China and potential shifts in trade dynamics favouring India. In the global scenario, India has proven its qualitative approach to producing electronic products and this is a factor in favour of the manufacturers. PG Electroplast, a key player specialising in plastic moulding and components for consumer durables, stands out with its strong revenue guidance.

Also, its operational expansion and focus on high-growth opportunities makes it a worthy player. Within the rapidly growing electronics sector, PG Electroplast has emerged as a standout performer. The company’s stock price trajectory has built upon significant gains in the previous years, with the stock surging 442 per cent in 2021, 40 per cent in 2022 and 110 per cent in 2023. As of January 1, 2025, PG Electroplast’s shares are trading at ₹983, indicating strong investor interest in the company’s future potential.

About the EMS Sector
The electronics sector in India is experiencing rapid growth, driven by urbanisation, digitalisation and the rising demand for electronic goods. According to a domestic broker, the sector is projected to grow at a CAGR of 26 per cent between 2023 and 2030, reaching USD 500 billion. Another international broker estimates cumulative production to rise from USD 115 billion in FY24 to USD 450 billion by FY30, highlighting the EMS sector’s expansion.

Favourable policies, a skilled labour force and India’s cost competitiveness are transforming the country into a preferred electronics manufacturing hub. The China+1 strategy and the U.S.’ tougher stance on China further support this shift, with India emerging as a competitive alternative alongside Mexico and Vietnam. Strong government support and rising domestic demand in mobile phones, automotive and industrial segments are further fuelling growth in the sector.

About the Company
PG Electroplast Limited (PGEL) is a leading player in India’s EMS sector, established in 2003 as the flagship company of the PG Group. PGEL specialises in providing end-to-end solutions, from design and manufacturing to assembly, for a diverse range of products across sectors like consumer electronics, home and kitchen appliances, automotive parts, lighting and mobile phones. The company serves a distinguished clientele, including renowned brands such as Godrej Consumer Products, Blue Star, Bajaj Electricals and global giants like LG Electronics and Whirlpool of India.

PGEL operates 11 manufacturing facilities strategically located across India in Greater Noida in Uttar Pradesh, Roorkee in Uttarakhand, Bhiwadi in Rajasthan and Ahmednagar in Maharashtra. The company has received approval under the Production Linked Incentive (PLI) scheme for white goods, granted in April 2021 for five years, covering AC component manufacturing. It operates in four key segments. In the segment of consumer electronics, it manufactures consumer durables like air-conditioners, washing machines and television sets.

In the segment of plastic moulding, it specialises in precision injection moulding and thermoforming, catering to various industries. As regards PCB assembly, it provides printed circuit board assembly services, supporting diverse electronic devices. It also offers OEM (original equipment manufacturer) and ODM (original design manufacturer) solutions, including product design and mass production, establishing itself as a reliable partner for leading brands.

Corporate Structure
PGEL is the flagship entity, operating through subsidiaries and associate companies, including:

1. PG Technoplast Private Limited - A wholly-owned subsidiary driving advancements in electronics manufacturing and integrated solutions.
2. Parker Electronics Private Limited - An associate company enhancing capabilities in specialised electronic components and assemblies.

Shareholding Pattern
As of September 2024, PGEL’s shareholding includes a 49.37 per cent stake held by promoters. Foreign institutional investors (FIIs) own 11.17 per cent, domestic institutional investors (DIIs) hold 14.81 per cent, and retail investors account for 24.47 per cent.

Recent Developments
1. Whirlpool Partnership - PGEL has expanded its collaboration with Whirlpool of India by securing a contract to manufacture semi-automatic washing machines at its Roorkee facility, building on their existing relationship in air-conditioners.

2. Strategic Acquisition - PG Technoplast, a subsidiary of PGEL, acquired Next Generation Manufacturers for ₹45 crore in FY24 to strengthen its position as a key outsourcing vendor for Amstrad India’s consumer durables and electronics.

3. EV Market Entry - PG Technoplast has entered the electric vehicle (EV) sector by partnering with Spiro Mobility in November 2024 as an exclusive manufacturer of Spiro Mobility’s EVs and lithium-ion batteries, tapping into the growing EV demand.

4. Successful Fundraising - The company raised ₹1,500 crore via a qualified institutional placement (QIP) in December 2024, earmarked for capacity expansion and technological upgrades.

Financial Performance
FY24 PG Electroplast delivered robust financial results in FY24, marked by strong growth across key metrics. The company’s total income rose by approximately 27.58 per cent, from ₹2,169.43 crore in FY23 to ₹2,767.72 crore in FY24, while its consolidated profit after tax (PAT) jumped to ₹137.01 crore from ₹77.47 crore. Its operating revenues reached ₹2,746.5 crore, reflecting a 27.2 per cent YoY increase, driven by substantial contributions from the product segment, including ₹1,347 crore from room air-conditioners, ₹492 crore from washing machines, and ₹305.9 crore from television sets. The operating profit margin improved to 9.5 per cent from 8.2 per cent, indicating the company’s enhanced operational efficiency and profitability.

Financial Performance
Q2FY25 In Q2FY25, PG Electroplast reported a 45.8 per cent YoY growth in revenue from operation, reaching ₹671.30 crore, with H1FY25 revenues surging 75 per cent to ₹1,991.98 crore. The cost of raw materials as a percentage of operating revenue improved to 77.99 per cent from 79.35 per cent, while the gross contribution rose by 55.4 per cent to ₹147.74 crore. The EBITDA grew 48.2 per cent YoY to ₹60.54 crore, with the margin slightly increasing to 9 per cent. Its PAT demonstrated a significant 57.2 per cent YoY growth to ₹19.47 crore, reflecting a PAT margin of 3.1 per cent. This performance highlights strong revenue expansion, cost management and operational margin improvements.

Growth Triggers
1. Revenue and Profit Guidance - PG Electroplast projects FY25 revenue of ₹4,850 crore (+77 per cent YoY) and net profit of ₹250 crore (+83 per cent YoY), driven by 78 per cent growth in product segments like airconditioners, washing machines and air coolers. Significant AC volume growth is expected in Q4, fuelled by the upcoming summer cycle. Additionally, the Whirlpool of India partnership, extending PG Electroplast’s client portfolio in washing machines, is anticipated to boost revenues, particularly from FY26 onward.

2. Strategic Expansion - The company has planned capital expenditure of ₹370–380 crore for FY25, focusing on capacity, infrastructure and backward integration, with diversification into EV manufacturing and export markets.

3. Operational Efficiency - Its operating margins improved to 9.8 per cent in H1FY25 from 9.5 per cent in H1FY24 due to strong demand in ODM and consumer durables.

4. Investor and Industry Confidence - ₹1,500 crore raised via QIP and mutual funds holdings of ₹724 crore, as of November 2024.

5. Cash Conversion Cycle - The cash conversion cycle decreased from 41.85 days on September 30, 2023, to 36.72 days on September 30, 2024.

Key Focus Areas
1. Product and Market Diversification - PG Electroplast is expanding into electric vehicles (EVs) through a strategic partnership with Spiro Mobility to manufacture EVs and lithium-ion batteries. Additionally, it is enhancing its footprint in consumer durables and targeting export markets like the Middle East and Africa with tailored products to diversify revenue streams.

2. Capacity and Efficiency - A planned ₹370–380 crore capital expenditure for FY25 will focus on expanding product business capacities, infrastructure development, and backward integration to enhance operational efficiency. The company emphasises research and development and economies of scale to strengthen its product verticals.

3. Strategic Growth Momentum - Leveraging a strong order book and institutional backing, PG Electroplast continues to form strategic alliances, such as its expanded collaboration with Whirlpool of India for semi-automatic washing machines, to capture growth opportunities and solidify its market presence in the emerging and established sectors.

Key Concerns
1. Debt and Cash Flow Issues - The company’s net debt surged to ₹236.71 crore as of September 2024, with no immediate repayment plans. As of September 2024, PGEL has negative free cash flow compared to substantial statutory profit after tax, which is due to significant capital expenditure. This is also likely to affect the company’s ROCE.

2. Seasonality and Competitive Pressure - The AC business faces seasonal revenue fluctuations, with weaker Q2 and Q3 results. Additionally, intense competition in TVs, washing machines and ACs, along with new entrants, could pressurise the market share and margins.

3. Supply Chain and Dependency Risks - Dependence on imports for key components like compressors and mandatory BIS certification pose potential disruptions. Supply chain challenges may worsen, affecting growth.

4. Promoter Stake Decline - Promoter holding dropped from 53.42 per cent to 49.37 per cent in December 2024.

Valuation
The company is currently trading at a PE of 149 times, which is higher than the industry PE of 83 times. The price-to-book value (PBV) of the company stands at 23 times, also significantly higher compared with the industry PBV of 8.21. The company has an interest coverage ratio of 5.21 times. Its robust financials are reflected by a solid return on equity (ROE) of 18.9 per cent and a return on capital employed (ROCE) of 18.7 per cent. Additionally, the EV to EBITDA ratio of 80 times indicates premium valuation against operational performance, while the high market capitalisation-to-sales ratio of 7.96 suggests potential overvaluation relative to its revenue.

Conclusion
PG Electroplast demonstrates robust growth potential, driven by its strategic diversification into EV manufacturing, enhanced capacity plans, and favourable industry trends such as urbanisation, government initiatives and rising consumer demand. The Whirlpool of India partnership is expected to bring significant growth in the washing machines segment and boost revenues from FY26 onward. The company has delivered impressive financial performance, with sales growing at a CAGR of 57 per cent and profit at 125 per cent over three years.

However, its stretched valuation, trading at a PE of 149 times, which is well above the industry average of 83 times, and a declining promoter stake that is down to 49.37 per cent are issues that raise concerns. Additionally, negative free cash flow, seasonal revenue fluctuations, competitive pressures and supply chain challenges could weigh on its future performance. While the company’s initiatives position it well for long-term growth, the stock appears overvalued at the current levels. A price correction would provide a better entry point. Considering these factors, we recommend AVOID.

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