PG Electroplast IPO - Avoid

PG Electroplast (PGEL) is tapping the market with its IPO, to garner Rs 121 crore through an issue of 57.45 lakh shares, to be issued at a price band of Rs 190 to Rs 210. The issue opens on 7th September, 2011, and closes on 12th September, 2011.

Business Profile

Incorporated in 2003, PGEL is an Electronic Manufacturing Services (EMS) provider for Original Equipment Manufacturers (OEMs) of consumer electronic products in India. It is engaged in the manufacturing and assembly of consumer electronic products, like colour television sets (CTVs), DVD players, ACs, and so on. As part of its backward integration, PGEL also manufactures plastic injection mouldings and Printed Circuit Board (PCB) assemblies for CTVs, DVD players and Compact Fluorescent Lamps (CFLs). The company’s manufacturing facilities are located at Greater Noida (Unit I & III), Roorkee (Unit II) and Ahmednagar (Unit IV).

Objective of Issue

The company plans to expand its manufacturing facilities in Greater Noida and Ahmednagar. It plans to increase its injection moulding capacity to 5000 TPA, at a cost of Rs 13.84 crore, and at Ahmednagar to 8000 TPA, at a cost of Rs 37.3 crore.

Given that the injection moulding market is highly competitive and majorly driven by unorganised players, we fail to understand the management’s rationale behind aggressively expanding a product line which is merely used as part of the backward integration plan to further manufacture CTVs, ACs, refrigerators etc. Based on the above observations, we are highly doubtful about the positive outcome of the company’s expansion plans.

The company wishes to prepay debt amounting to Rs 24.10 crore, so as to reduce its interest outflow. This will bring the D/E ratio to 1.02x, from the earlier levels of 1.57x. On the other hand, the company estimates a total working capital requirement of Rs 44.7 crore, of which it plans to raise Rs 15 crore from the IPO proceeds, and Rs 29.7 crore through bank financing. We believe that the additional borrowing of Rs 29.7 crore will nullify the effect of its objective of repaying its earlier debt.

Financials and Valuations

On the financial front, despite reporting a five-year CAGR of 75 per cent and 195 per cent in its topline and bottomline respectively, PGEL operates at very low margins. The main reason behind this is that it operates in a highly competitive, unorganised sector, and does not have any significant product in its portfolio which can give it a competitive advantage.

However, one major factor that investors need to consider is that, in FY11, PGEL derived around 51 per cent of its revenues from the sale of manufactured products to its promoter group entities, which makes it highly dependent on these entities. Also, there is no clarity on future order flow from its PG entities as of now.

Further, the company derives 76 per cent revenues from CTVs. We are of the opinion that with LED, Plasma and LCD prices declining, there seems to be no future for the CTV business. So, growth seems to be daunting from the CTV division, which is, in fact, where the company is expanding further.

On the valuation front, based on its post issue EPS of Rs 10.90, the company is commanding a PE of 17.42x-19.26x on its lower and upper price band respectively. We, at DSIJ, believe that the company is asking for very high valuations, given that its peer company MIRC Electronics (given in RHP dated 17th August, 2011) is trading at a PE of merely 9.8x its TTM EPS of Rs 1.94. Considering the above factors, we recommend that investors stay away from this counter at the time of the IPO. Nonetheless, we shall review this counter in our post issue analysis, and update our readers about the same.

Issue Information

Shareholding Pattern