Valuation is a big put-off for PG Electroplast

After a disastrous show by Brooks Labs since its listing, another high-profile issue is approaching the market. This time, it’s PG Electroplast, an original equipment manufacturer (OEM) of consumer electronic products like colour TV sets, DVD players, water purifiers, air conditioners (ACs) sub-assemblies and Compact Fluorescent Lamps (CFL).

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The company operates from four manufacturing sites at Noida (two units), Roorkee and Ahmednagar. Though technically these are manufacturing units, the company is largely into assembling operations. Thus, value-addition is lower, which can be gauged from the fact that costs of material account for nearly 92 percent of total expenditure and 87 percent of sales.

Being an OEM supplier, the company operates on very thin margins. Its operating margin for financial year 2010-11 was 7 percent while for previous years, it ranged between 3 percent and 5 percent. Part of the reason for the improvement in the operating margins has been a sharp improvement in the turnover, which moved up Rs 424 crore in 2010-11 from Rs 128 crore in 2008-09.

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Improving margins have done their bit in cushioning the rising debt impact, which has jumped sharply from Rs 20.11 crore to Rs 68.46 crore. Net profit during the same period went up to Rs 17.90 crore from Rs 1.14 crore.

Mindful of the increasing pressure of loans, the company is planning to use almost 50 percent of the issue proceeds for part repayment of term loans and future working capital requirements. Most companies in the listed space in the same sector are running up losses due to higher interest payments on loans.

Incorporated in 2003, PG Electroplast derives nearly 76 percent of its revenue from TV sales. Nearly half of this sales of TVs came from Electronic Coporation of Tamil Nadu (ELCOT). This year, ELCOT reported no sales, which can ultimately lead to a sharp drop.

The current issue of Rs 120.65 crore is in a price range of Rs 190-210. The company plans to issue 5,745,000 shares, with promoters post issue holding now down at 65 percent. Post a liberal 2:1 bonus share awarded to the promoters, their average cost of holding has come down to Rs 15 per share.

Despite a risk of de-growth in the current year, the company is looking at a post issue diluted P/E ratio (price to earning) of 19.26 times. Given the fact that the company operates in an extremely competitive market and is an OEM player, which does not have much pricing power, its high valuation and a likely de-growth, the issue is best avoided.

Recommendation: ‘AVOID’