Will not light up your portfolio
Birla Power Solutions(BPS), the BSE-listed Yash Birla group company, was earlier known as Birla Yamaha, before Yamaha moved out. BPS is raising Rs 50.4 crore (issue of 120 lakh shares of Rs 10 each at Rs 42) from public to finance its expansion plans. The Rs 91-crore company was one of the first to manufacture portable generators in India in 1986. It has the expertise to manufacture two- and four-stroke engines. Presently, producing a wide range of generators catering to the power requirement of 500 W to 5.5 KW, it was the first to launch self-start gensets in the country. Recently, BPS pioneered the launch of emission complaint generators under the brand name Birla Ecogen. The company enjoys a 32% market share for its existing range of products.
The proposed expansion project, which is to be entirely financed from the issue proceeds, will simultaneously augment capacities and improve BPS’s existing products including diesel gensets, multipurpose engines, alternators and fuel tank and will also finance the setting up of a new plant to manufacture LPG/CNG gensets, invertors, engines and acoustic hoods. Till 28 February 2006, BPS had spent Rs 2.28 crore from internal accruals for the plant and building of the new project.
Strengths
*The proposed plans to manufacture higher KVA gensets will enable BPS to cater to high value institutional customers and export demand. The manufacture of LPG/CNG gensets will open new avenues.
*Currently, there are 619 direct dealers well versed with BPS’s products. This also helps the company to provide good after-sales services to its customers. It has entered into a marketing and distribution tie-up with the leading Chinese engine and gensets manufacturing company, Kipor, to distribute its products in India. BSP has also a co-branded agreement with Hindustan Petroleum Corporation to sale gensets and irrigation pumps.
*The proposed plant will be located in the tax heaven state of Uttaranchal and will enjoy complete tax exemption for five years. Further, the manufacturing facility will reduce BPS’s dependence on traded products, resulting in improved margin.
Weaknesses
*The power genset business requires large amount of working capital. Moreover, the track record of BPS’s working capital management is far from adequate. Debtors stood at Rs 88.31 crore on September 2005, almost equal to its sales. Around 43% of debtors are more than six months old. Loans and advances stood at Rs 40.21 crore. A significant portion is overdue for many years. Naturally, cash flow from operating activities has been negative since the past three years.
*The auditors have consistently qualified the accounts of the company for inadequate records and lack of reconciliation of receivables, advances and inventories. In fact, there is a long list of auditors’ qualifications covering many aspects of the accounting and record keeping. The list lengthens every year.
*Quarterly reviews have been filed late with stock exchanges. The review for the September 2005 quarter has still not been filed.
*The inverter market is highly competitive. Unorganised players have a dominant (40%) presence. Also, due to the involvement of low technology, many organised players have developed good presence in the market through their network. Therefore, the pressure on prices will remain a concern for BPS’s product line despite the migration of the company from trading to manufacturing. Also, due to the stiff competition from China, the margin on exports of inverters is lower than in the domestic markets.
*BPS’s proposed high capacity multipurpose engines will compete with low value products of leading engine and equipment manufacturers like Kirloskar Brothers, Greaves and TAFE. It will take some time to gain competitive advantage in this segment.
*The rise in the prices of raw material like steel, copper and zinc is likely to put pressure on the margin.
Valuation
In spite of perennial power shortages, the market for portable genesets has stagnated. BPS has tried to report growth through trading in inverters, pump sets, sprayers, vibrators, and lawn mowers. In the year ended September 2005, the company reported a net profit of Rs 3.56 crore on a turnover of Rs 91.02 crore.EPS on an expanded equity base of Rs 22.48 crore works out to Rs 1.6. TTM EPS, after factoring the December 2005 quarter results, is Rs 1.8.
The share currently trades at Rs 54 on BSE, which is at a 29% premium to the offer price of Rs 42. However, the last three- and six-month average price is around Rs 48. The offer price discounts the TTM EPS 23 times. The nearest comparable company, Honda Siel Power, in which Honda, Japan controls a 66.6% equity stake, trades at TTM P/E of 18.5. However, in view of the large overdue debtors and advances and many auditors’ qualifications, the reported financials and discounting of BPS really have no meaning