AVOID PG Electroplast IPO: V S Fernando Analysis

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Tamil Nadu’s Kalaignar (Karunanidhi) television freebee boosted New Delhi’s PG Electroplast ’s performance considerably in last two years. Citing its recent stupendous growth the eight year-old company is asking an exorbitant premium from the investing public. In the changed scenario where almost all the schemes of Kalaignar are reversed or discarded by Puratchi Thalaivi (Jayalalithaa) what will happen to the company and its investors after the IPO?

OFFER AT A GLANCE
Name	PG Electroplast Ltd
Offer Quantity	57.45 lakh equity shares of Rs 10 each
% on Total Equity	35%
Offer Price	Rs 190 to Rs 210
Offer Amount	Rs 109.16 cr to Rs 120.65 cr
Bid Quantity	30 & Multiples of 30
Bid/Offer Opens	September 7, 2011
Bid/Offer Closes	September 12, 2011
Rated By	CARE
Rating	3 out of 5
Lead Managers	Almondz Global Securities
Registrars	Karvy Computershare

Parentage

The 2003-registered PG Electroplast Ltd (PEL) was promoted by its Chairman-cum- Managing Director, Promod Gupta, who has over 35 years of experience in the field of manufacturing and assembling electronic products. He was reportedly a senior scientist with Defence Research and Development Organisation (DRDO). He started the PG Group in 1977 by making radio transistors, receivers and black & white television components. Gradually the PG Group has forayed into the manufacturing and assembling of TV sets and audio-video players simultaneously doing backward integration by setting up plastic injection-moulding and PCB assembly lines.

Business

As per the offer document, PEL has four manufacturing facilities located at Greater Noida in Uttar Pradesh (Unit I and Unit III), at Roorkee in Uttrakhand (Unit II), and at Ahmednagar in Maharshtra (Unit IV). The company has consolidated capacities of 16 lakh pieces per annum of PCB assemblies for CTVs and DVD players, 16,056 tpa of plastic injection moulding, 16.05 lakh sets of CTVs, 30 lakh pieces of PCB assemblies for CFL, 30 lakh pieces of CFL assemblies and 3 lakh pieces of DVD players. Nevertheless, Colour TVs contributed 77% of the sales in 2010-11.

Issue Objects

PEL is reportedly expanding the manufacturing facilities at Greater Noida (Unit III) and Ahmednagar (Unit IV) under two phases. Under Phase I the Company would set up plastic injection moulding line at Unit III and Unit IV with an installed capacity of 3,600 tonnes p.a. and 5,800 tonnes p.a. respectively.

Phase I, estimated at Rs. 71.07 cr, is to be funded through debts Rs 49.60 cr and balance through internal accruals or unsecured loans from promoter/promoter group. PEL plans to utilize IPO proceeds to the extent of Rs. 24.10 cr for the prepayment of debt availed by the company for the Phase I expansion.

Under Phase II, PEL intends to expand the plastic injection moulding capacity to 6,600 tonnes p.a. at Unit III and 10,000 tonnes p.a, at Unit IV. Phase II is estimated to cost Rs. 51.92 cr which is proposed to be funded through IPO proceeds.

Historical performance

Even though started operations in FY-03, PEL’s bottom line was worth less than Rs 50 lakh in FY-08. In 2009 PEL along with group entities bagged the contract for supplying 14.8 lakh 14" CTVs to Electronics Corporation of Tamil Nadu Ltd (ELCOT). This led to increase in contribution of CTVs from 24% of sales in FY09 to 68% in FY 10 and the performance attained credibility.

In fiscal 2010, turnover jumped from Rs 107 cr to Rs 349 cr and net profit leapt from Rs 1.1 cr to Rs 10 cr! In fiscal 2011, turnover surged to Rs 436 cr and net profit vaulted to Rs 18 cr which looked attractive against an equity base of Rs 10.7 cr. Interestingly products  manufactured and supplied to promoter group entities on account of ELCOT orders were as high as 51% in fiscal 2011.

Prospects

As regards consumer electronics, the industry is characterized by intense competition, short product life-cycles and significant fluctuations in product demand. It is also subject to rapid technological change and product obsolescence. Currently, MNCs dominate the Indian consumer electronics market, which have major share in most categories.

CARE has graded PEL’s IPO 3 out of 5 which is certainly on the positive side. The grading has derived strength from the experience of promoters in the consumer electronics industry and established track record of operations. But, are the prospects as secure as the recent past? The commercial production of Unit IV expansion is expected to commence by February 2011 and that of Unit III by March 2011. The commercial production of Phase II is expected to start from December 2011. Will these new capacities enable the company to sustain its recent growth?

Well in the current year, the company is yet to execute any direct or indirect order of ELCOT obviously due to the change of regime in Tamil Nadu. The loss of business or significant reduction in the volume of work from ELCOT would certainly affect the company’s revenues and profitability in the near term.

Valuation

PEL which has not declared any dividend during the last five years is asking a price of not less than Rs 190 for Rs 10 paid-up share. In other words it is asking the investing public to shell out a premium of over Rs 100 cr when the company’s reserves after eight years of operation are worth less than Rs 35 cr. In fact, the cost of acquisition for the promoters who would be holding 65% of the post-issue equity is less than Rs 16 a piece.

Mirc Electronics, which offers a dividend yield of more than 5%, is currently available at a P/E of less than 10x and the industry’s current composite P/E is only about 8x. Compared to these, PEL’s price at a P/E of more than 13x certainly looks steep.  

How PG Electroplast compares with peers

SCRIP	NOS	M-CAP	P/E	P/BV	P/FV	P/R	OPM	YIELD	PRICE
(5-Sep-2011)		(Rs Cr)	(x)	(x)	(x)	(x)	(%)	(%)	(Rs)
Videocon Industries		5,450	8.2	0.6	18.1	0.4	18.2	0.6	180.50
Mirc Electronics		270	9.9	1.0	19.0	0.1	4.0	5.3	19.05
Sharp India		68	-	1.5	2.6	0.6	-	0.0	26.20
Trend Electronics		36	2.0	0.3	4.8	0.0	4.5	2.1	47.50
MVLIndustries		34	7.4	0.3	1.3	0.1	7.6	0.0	13.02
Calcom Vision		1	-	-0.1	0.4	0.1	1.0	0.0	4.10
Consumer Electronics	6	5,859	8.3	0.6	15.5	0.3	14.7
Market Composite	2,907	6,066,308	15.4	2.4	29.3	1.5	22.6
PG Electroplast	High	345	14.8	2.1	21	0.8	6.5	0	210
	Low	312	13.4	2.0	19	0.7	6.5	0	190

Almondz-managed IPOs

PEL’s IPO is managed by Almondz Global Securities whose past issues have a frightening record. None of the public issues managed by Almondz in last three years is quoting above offer price today. Of the nine IPOs, seven have lost more than a half of the investment value. In fact, three issues including the most recent one have inflicted a loss of more than 80%!

Performance of Almondz-associated IPOs in last three years

Issuer	IPO	FV	IPO	Listing	3-Mon	6-Mon	1-Yr	2-Yr	3-Yr	Current
	Date		Price	Gain%	Gain%	Gain%	Gain%	Gain%	Gain%	Gain%
Bang Overseas	28-Jan-08	10	207.00	-17.0	16.0	14.3	-55.7	-77.3	-84.3	-89.3
Tulsi Extrusion	1-Feb-08	10	76.50	65.8	-22.4	-59.7	-83.6	-68.2	-76.4	-84.3
Anu's Lab	12-May-08	1	10.50	27.7	47.0	26.5	77.0	-43.7	-69.7	-77.8
First Winner	9-Jun-08	10	125.00	-28.4	-64.6	-82.0	-85.6	-78.2	-84.5	-88.6
Astec Life	29-Oct-09	10	82.00	2.3	-42.3	-29.8	-25.1			-57.6
Texmo Pipes	16-Feb-10	10	90.00	52.5	-47.7	-39.7	-62.1			-58.9
Omkar Special	24-Jan-11	10	98.00	-52.9	-34.6	-40.1				-26.6
PTC India	16-Mar-11	10	28.00	-11.1	-37.5					-42.7
Bharatiya Glob	11-Jul-11	10	82.00	-62.3						-84.5

N.B.: Price adjusted to post-issue stock-splits                      (Source:India Aarthik Research)

Concerns • Limited number of customers and over dependant on single customer poses serious threat to immediate prospects. 
• Heavy sales and purchase transactions with related parties and more than a half of Sundry Debtors are due from related parties. 
• PEL has taken its registered office on lease from promoter group which is also the registered office of eleven other group entities, six of whom have same business as PEL. Manufacturing facility located at Unit II Roorkee is also taken on lease from one of the promoters/group entities.
• No long term agreements with customers, many of sale contracts are for durations of less than one year. 
• Promoters were served summons early this year by the Directorate of Revenue Intelligence in connection with anti-dumping duty on import of picture tubes from Malaysia and they have deposited Rs 1.3 cr towards the anti-dumping duty. 
• No external appraisal of the proposed expansion project or funding requirements. 
• Low profit margin as substantial portion of the revenue is derived from “turnkey” manufacturing. 
• Orders for plant and machinery, utilities, etc. for the proposed project under Phase-II are yet to be placed.