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NEW ISSUE MONITOR

PG Electroplast

Contract manufacturer of consumer electronics

Low-margin, low-entry barrier business

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CM RATING

20/100

Promoted by Promod Gupta in 2002-03, PG Electroplast initially manufactured plastic injection moulding. Later, the company transformed itself into an electronic manufacturing services (EMS) provider for original equipment manufacturers (OEMs) of consumer electronic products in India. It manufactures and assembles a comprehensive range of consumer electronic components and finished products such as color television (CTV) sets and components, air-conditioners (ACs) sub assemblies, DVD players, water purifiers and compact fluorescent lamps (CFL) for third parties. As a backward integration, it also manufactures plastic injection moulding and manufactures printed circuit boards (PCB) assemblies for CTV's and DVD players.

The consolidated installed capacity at four facilities in three states includes manufacturing capacity of 1600000 pieces per annum of PCB assemblies for CTV's and DVD players; 16056 tons per annum of plastic injection moulding, 1605000 sets per annum of CTV's, 3000000 pieces per annum of PCB assemblies for CFL, 3000000 pieces per annum of CFL assemblies and 300000 pieces of DVD players. While units I and III are situated in Greater Noida in Uttar Pradesh, unit II is in Roorkee, Uttrakhand, and unit IV in Ahmednagar, Maharashtra. The company has recently set up manufacturing units for plastic injection moulding under phase I at units III and IV in July and March 2011, respectively, with total installed capacity of 3000 tonnes per annum and 5675 tons per annum, respectively. The addition of the balance plant & machinery at unit III will increase to 3600 tonnes per annum by September 11. In phase II, it intends to expand units III and unit IV by increasing installed capacity of plastic injection moulding to 5000 tons per annum and 8000 tons per annum, respectively.

So as to fund the expansions, the company is raising funds through Initial Public Offering by offering 5.74 million equity shares of face value Rs 10 each at a price band of Rs 190-210 per share. The issue would constitute 35% of fully diluted post issue paid up capital of the company. Accordingly, the company will raise Rs 109.16 crore to Rs 120.65 crore, based on the lower and upper band of the offer price. Major portion of the issue proceeds is earmarked towards expansion plans of phase II; (a) at unit III at capex of Rs 13.84 crore and (b) at unit IV at capex of Rs 37.31 crore. The company also plans to utilize Rs 24.10 crore for prepayment of term loans and line of credit facility (Standard Chartered Bank) availed for expansion of phase I; and Rs 15 crore for meeting long-term working capital requirements.

To broaden the market for its products, company intends to extend product offerings by adding set top boxes, certain automotive components, components for refrigerators, washing machines and microwave ovens in addition to manufacturing of water purifiers and LCD TV's.

The company has one subsidiary, Diamond Mattress Company Pvt Ltd, which manufactures, trades, purchases, and sells rubberized coir foam products and various type of mattress.

• Integrated manufacturing operations will help to source the contracts and repeat orders from its clients.
• Diversified products base will help in addressing larger demand for the consumer electronics business. The management intention to gradually shift the company from being EMS provider for OEMs to an original design manufacturer will also improve its margin.

• The company operates in the fast-changing technology, low-entry barrier consumer electronics industry, which has short product life cycles and intense competition.
• Related party transactions constitute major chunk of sales (54%), sundry debtors 53%, and raw materials 15%.
• Share of revenues from CTVs in total revenue has witnessed sharp jump from 17.1% in FY 2008 to 68.3% in FY 2010 and 76.8% in FY 2011. This was on account of winning orders from Electronic Corporation of Tamil Nadu (ELCOT) for supply of 14" CTV sets. With the change of guard, no more orders are planned for CTVs by the government of Tamil Nadu.
• The company has lost its ISI mark certification for CFLs due to sample failure.

Valuation:

The company has reported 20% increase in the net sales at Rs 423.97 crore and a robust 78% jump in the net profit at Rs 17.90 crore in the year ended March 2011. At the offer price band of Rs 190- Rs 210 per share and EPS of Rs 10.9 per share on the post issue equity capital, PE works out to 17.4 – 19.3 times. This is very high considering that it does not have any brand and is just a contract manufacturer for other companies. Nearest comparable listed player Trend Electronics currently trades at P/E of 2.3 times its last financial year earnings. Even MIRC Electronics trades at P/E of around 10. 

PG Electroplast: Issue Highlights
No of outstanding equity shares prior to issue	10669332
No of shares issued through IPO	5745000
Outstanding equity shares after the issue	16414332
Face Value (Rs)	10
Price band (Rs)	190-210
Amount to be raised through IPO (Rs crore)	109.16 -120.65
Promoter stake prior to issue (%)	100
Post-issue promoter stake (%)	65
Equity capital after the issue (Rs Crore)	16.41
Issue open / close	7 Sept 11 - 12 Sept 11
Listing	BSE & NSE
Rating	20/100

PG Electroplast: Financials