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PG Electroplast - Hardly Competitive

| 10/10/2011 5:37 PM Monday

PG Electroplast (PGEL) came up with an IPO on 7th September, 2011, pricing its issue within a band of 190-210 per share, and settled for the upper price band of 210. The scrip was listed on the BSE at a price of 200 on 26th September, 2011, surged upwards, and ended at 411.65, at a premium of 96.02 per cent. Given its performance on debut, one may consider it as a multi-bagger scrip. However, we, at DSIJ, beg to differ and continue to remain bearish on the counter.

The main reason for our skepticism is that the company derives 76 per cent revenues from CTVs. With LED, Plasma and LCD prices declining, there seems to be no future for the CTV business. Thus, growth from the CTV division seems to be suspect, which is, in fact, where the company is expanding further. Moreover, PGEL operates in a fragmented market with very high competition levels. Though the opportunity in the electronic appliances space is huge, technological obsoleteness is also high, leading to higher expenditure on design and development costs. Moreover, the company’s plans to diversify its product line into plastic injection moulding is highly irrational, as it is merely being used as a part of the backward integration plan to further manufacture CTVs, ACs, refrigerators etc. The company’s objective of meeting a part of its working capital requirement through bank financing will also nullify the effect of its objective of repaying earlier debt, and will further add to the debt pileup on its balance sheet.

Another major factor that investors need to consider is that PGEL derives around 51 per cent of its revenues from its promoter group entities, which makes it highly dependent on them. Also, as of now, there is no clarity on future order flow from its PG entities. Now, apart from domestic competition, the industry faces competition from global players as well, including China. Hence, it would be very difficult for PGEL to have bargaining power, which could result in margin pressures. According to recent reports, the market regulator SEBI has initiated a probe against the alleged price rigging of the PGEL shares.

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 sec-tor, and does not have any significant product in its portfolio that can give it a competitive advantage.

At a CMP of 251 per share, the scrip is available at whopping 22.93x its FY11 post issue EPS of 10.9 per share. Listed plastic moulding players like Time Technoplast (diversified product profile) and Precision Pipes are trading at PE of 15.7x and 4.5x, respectively. Even an OEM like Mirc Electronics is available at a PE of 9.6x its FY11 earnings. South Korea’s listed OEMs like Samsung and LG are also trading at a PE of 7.3x and 7.6x respectively. Hence, in our opinion, PGEL is an expensive buy considering the competition in the industry, the growth prospects of PGEL and sustainable margin pressures on the company.

 

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