By Geetanjali Kedia
HPL Electric and Power is entering the primary market on Thursday 22nd September, 2016, to raise Rs. 361 crore, via a fresh issue of equity shares of Rs. 10 each, in the price band of Rs. 175-202 per share. Based on the price discovered, company will issue 2.06 crore to 1.79 crore equity shares at the lower and upper end of the price band, which represents 30.8% and 27.8% of the post issue paid up equity share capital respectively. Issue closes on Monday 26th September.
HPL Electric and Power manufactures low voltage electric equipment such as metering solutions, switchgears, lighting equipment, wires and cables, through its 7 manufacturing facilities in Haryana and Himachal Pradesh. Marketing products under ‘HPL’ brand, company has a pan-India distribution network of 2,400 dealers catering to 15,000 retailers. About 50% of revenue is accounted by metering solutions, while lighting equipment makes up for 23%, with rest comprising of switchgears (14%) and wires and cables (13%).
Company’s FY16 consolidated revenue grew 7% YoY to Rs. 1,116 crore, while EBITDA rose 12% to Rs. 146 crore, thanks to cheaper material costs, leading to EBITDA margin of 13%. Finance cost, at Rs. 78 crore, is quite high, having risen 12% YoY. Despite higher EBITDA margin, tax rate increased in FY16, keeping the net margin unchanged at 3.3%. Its PAT for FY16 stood at Rs. 37 crore, translating into EPS of Rs. 7.89, on equity of Rs. 46.43 crore, post 3:2 bonus issue made in Nov 2015.
As of 31st March 2016, company’s networth stood at Rs. 354 crore. It had total outstanding debt of Rs. 580 crore, as on 31-3-16, and cash equivalents of Rs. 52 crore, leading to a high debt/equity ratio of 1.5:1, on a consolidated basis, although this will contract to 0.6:1 post expansion of equity post fresh issue and debt repayment of Rs. 130 crore, from the IPO proceeds. Out of the balance fresh issue proceeds, Rs. 180 crore would be used for working capital requirements.
The working capital position of the company is quite precarious, due to elongated credit periods extended to power utilities. Its debtors are very slow moving, with outstanding receivables of Rs. 512 crore (31-3-16) representing 5.5 months of sale. Inventory of Rs. 317 crore (31-3-16) is also on the higher side, representing 3.4 months of sale. Its current working capital cycle extends up to 5 months, and given ~45% revenue share from power utilities, possibility of improvement in working capital cycle are only slim.
With effect from 9th May 2016, Himachal Energy, with annual sales of about Rs. 100 crore and net profit of Rs. 12 crore, became a 97.15% subsidiary of the company. Thus, company’s FY17 consolidated topline and bottomline will get enhanced proportionately.
At the upper end of the price band, HPL Electric will have a market cap of Rs. 1,300 crore and enterprise value (EV) of 1,700 crore. This translates into PE multiple of 25.6x for FY16 and 20.9x for FY17 (estimated EPS of about Rs. 9.7, including Himachal Energy), at the upper end of price band. On EV/EBITDA basis, multiple works out to 11.6x for FY16 and 9.5x for FY17.
Havells India, having over 7x sales as compared to HPL Electric and Power, at Rs. 7,600 crore, with better net margins, in high single digits, coupled with superior brand recall, net cash balance sheet and RoE of over 21% (vis-à-vis HPL’s 10.3% for FY16), is currently trading at FY17E PE multiple of nearly 40x and EV/EBITDA multiple of 24x.
Genus Power, offering a complete range of electricity meters, with annual topline of over Rs. 800 crore, and net margins of 9%+ (stronger than HPL), is currently ruling at EV/EBITDA multiple of 9x and PE multiple of 15x on estimated FY17 earnings. Other remotely listed peer players include Finolex Cables, market leader in wires and cables, ruling at PE of 19x and LED and CFL maker Surya Roshni, ruling at PE multiple of 17x, based on FY17 estimated earnings.
Thus, on a peer comparison, HPL Electric IPO is aggressively priced. Besides, its sub 4% net margins, low RoE and high working capital position do not bode well either. Moreover, the company operates in a highly competitive industry landscape, with many participants in the organized and unorganized sector as well as Chinese threat.
Due to weak fundamentals coupled with expensive valuations, the issue is a clear avoid.
Disclosure: No Interest.