HPL ELECTRIC & POWER- IPO Analysis

About the issue
New Delhi based HPL Electric and Power Ltd., has opened its IPO from September 22 – 26, 2016. The company is seeking to raise Rs 450 crore through public issue by selling 1.44 crore equity shares in the price band of Rs 175-202 a piece for face value of Rs 10 per share. HPL, directed by Lalit Sheth is looking to dilute 25 per cent of promoters' stake, carrying it to around 75 per cent post issue.
          
Purpose of the IPO
The company intends to utilise the IPO proceeds for repayment and prepayment of loans, funding working capital requirements, and for general corporate purposes.

Industry Outlook
The Indian electrical equipment sector has witnessed a considerable change and evolution in the last two decades owing to several policy and regulatory measures. This sector is going to be driven by demand for net metering and smart metering, UDAY scheme, Indian Electrical Equipment Industry Mission Plan 2012-2022, Deen Dayal Upadhaya Gram Jyoti Yojna, Make in India campaign, revival in demand for new grid and substations, rural electrification, establishment of smart cities and real estate growth.

According to Frost & Sullivan's report, electric meter, LV switch gear, LED, LT cable and wire market are expected to grow at a CAGR of 11.5 per cent, 6.1 per cent, 62 per cent and 4.5 per cent respectively over FY16‐20.

Company Outlook
HPL is engaged in the business of electrical equipment manufacturing with diversified portfolio of metering solution, switch gears, lighting equipment, wires and cables.  The company’s revenue has grown at a CAGR of 11.5 per cent over last five years. The company has earned 3.3 per cent margins in last few years. The company has largest market share in electrical energy markets (47 per cent of revenue in FY16) in India with 20 per cent market share, is the fifth largest player in LED lamps with 5 per cent market share and 5 per cent market share in LV switch gear markets. The company has a large sales and distribution network with PAN India presence. The company has experienced management team and skilled workforce.

The company is focusing on enhancing its portfolio, reducing working capital, leveraging its status, and also is expanding its geographical reach, all of which could build a long term growth story.

Financial Performance
HPL’s working capital days have risen up to 158 days in FY16 from 129 days in FY12. Debtors days also have increased to 168 days in FY16 from 110 days in FY12, which is exhibiting pressure on the net working cycle of the company. This swollen working capital cycle is largely funded by debt, which has led to increase in debt of the company. HPL has range bound ROCE cycle in the range of 10.8 per cent to 12.9 per cent since FY12, which is low as compared to peers.

HPL Electric has reported CAGR of 11.7 per cent and 6.5 per cent on revenue and profitability respectively. Also overall debt has increased from Rs 306 crore in FY12 to Rs 548 crore in FY16.The company has low PAT margins of 3.3 per cent since FY14. The company has registered PAT of Rs 36.6 crore in FY16 vs Rs 34.6 crore in FY15.

        
Peer Comparison and Valuation

The company with EPS of 7.89 has upper price band P/E of 25.6x and works out to be overpriced as compared to other peers. The company with ROE of 12.1 has not been able to create shareholder value to the extent required. So considering weak financials and overpriced status, we suggest you to stay away from the subscription. Once it gets listed one can look to buy at a discounted value.