PG ELECTROPLAST

PG Electroplast is entering the capital market on 7^th September 2011 with a public issue of 57.45 lakh equity shares of Rs.10 each, in the price band of Rs. 190 to Rs. 210 per share, aiming to raise Rs. 109-121 crore. The issue, comprising a dilution of 35% of the company's post issue paid-up capital, closes on 12^th September.

With a book running lead manager like Almondz, a marketing agency like Concept, fund-raising size of about Rs. 100 crore and Ahmedabad based operator involved in the issue (which we do not wish to name for obvious reasons), the issue does not warrant any fundamental analysis, as these four points suffice to give a big negative call. We'd like to alert all our readers against the issue with a clear opinion to stay away! This is a clear case of looting of gullible investors.

PG Electroplast provides electronic manufacturing services to Indian OEMs of consumer electronic products by manufacturing / assembling consumer electronic components and finished products such as colour television sets, air conditioner sub-assemblies, DVD players, water purifiers and compact fluorescent lamps (CFL) for third parties, having four manufacturing facilities in Greater Noida, Roorkee (Uttrakhand) and Ahmednagar (Maharashtra). As backward integration, company also undertakes plastic injection moulding and manufactures printed circuit boards assemblies.

IPO proceeds will be utilized to finance expansion at Greater Noida and Ahmednagar plants, for Rs. 75 crore, of which, Rs. 24 crore would be debt pre-payment for loan availed from Standard Chartered Bank to part-finance the expansion. Another Rs. 15 crore will be used for long-term working capital financing. In addition, company will resort to bank borrowing of Rs. 30 crore to finance additional working capital.

There are some serious concerns with respect to the company:

1. Company has lost its ISI mark certification for CFLs due to sample failure.

2. Client concentration - In FY11, top 5 customers accounted for ~94% of sales, of which, 51% was to group companies / related parties.

3. Related party transactions - Company undertakes sales to promoter group entities on a regular basis, which constituted 54% of total revenue in FY11, as also, resulting in 53% debtors as of 31^st March 2011 being promoter group companies. Also, raw materials are sourced from group companies (26% and 15% of total requirement in FY10 and FY11 respectively). These related party transactions do raise an eyebrow on the fairness of dealings.

4. Company is involved in a lot of legal cases, some having serious implications - Directorate of Revenue Intelligence conducted search and seizure on company's factory and promoters' residence in March 2011, as a result of which company deposited anti-dumping duty of Rs. 1.3 crore with respect to import of picture tubes from Malaysia. Also several sales tax, excise and customs duty cases are pending against the company.

5. Company has used funds raised on short-term basis for long term investments in FY08 as well as in FY11, as per the qualified audit report, which shows the weak fundamentals of the business.

For FY11, company reported sales (net of excise) of Rs. 424 crore and earned PAT of Rs. 18 crore, amounting to 4.2% net margin. In FY10, it had sales and PAT of Rs. 354 crore and Rs. 10 crore respectively, indicating 2.8% net margin. While in FY09, just a year before, company's sales and PAT numbers were Rs. 126 crore and a mere Rs. 1.1 crore respectively, entailing 0.9% net margin. Even this Rs. 1.1 crore was contributed by traded goods (unlike company's core manufacturing activity), as sale of traded goods stood at Rs. 27.9 crore in FY09, against cost of Rs. 22.9 crore. In all the other years (both prior to and after FY09), traded goods have been realized at near cost price only.

Thus, the financials do not give any comforting picture and one gets the impression that margins have suddenly improved in the run-up to company's IPO. What else can explain the jump in net margins from a paltry 0.9% in FY09 to 4.2% in FY11, when surging raw material cost and inflation have been giving sleepless nights to even the most well-managed and large-sized manufacturers!

As of 31^st March 2011, company's net worth stood at Rs. 44 crore, while it had debt of Rs. 69 crore, as per the balance sheet, with BVPS of Rs.40.93.

At the price band of Rs. 190 to Rs. 210, company is issuing shares at PE multiple of 11.3x and 12.5x which is quite expensive for a third-party manufacturer. As long as the company remains an outsourcing agency for other OEMs, without owning any brand of its own, its margins will remain wafer-thin as cost pressures keep mounting, even if volumes increase. Expected market cap of Rs. 345 crore (at Rs. 210) on listing and enterprise value (EV) of about Rs. 400 crore is very aggressive, considering sales multiple of about 0.9x on the EV.

The issue is definitely over-priced and NOT WORTH MORE THAN Rs. 60 per share and hence must be given a miss, as it lacks any fundamentals whatsoever. Such issues are instrumental in killing the already weak primary market.