Texmo Pipes and Products IPO Analysis

Investors can play it safe by staying away from the IPO of Texmo Pipes and Products. Despite the fact that the company's business does hold good potential, the asking price for the IPO appears high.

Texmo Pipes is yet to put its existing capacity into full use and the massive expansion plan therefore carries risks. Investors may be better off buying this stock in the secondary market, if the expansion plans pan out well for the company.

At the current levels of issued share capital of 62.7 lakh, the offer price would discount its trailing 12-month earnings by 15.8 times in the lower end of the price band (Rs 85) and at the upper end (Rs 90), by 16.8 times.

Post issue, when the capital base swells to 112.7 lakh shares, the PE would work out to 16.6 to 17.6 times. When compared to peers such as Precision Pipes and Profile (10.2 times PE), Tulsi Extrusion (3.3 times) and Kisan Moulding (12.8 times), the IPO of Texmo Pipes does seem stiffly priced.

Business structure

Texmo Pipes is engaged in the business of manufacturing PVC and HDPE pipes. These products find application in irrigation, agriculture, portable water supply solutions, sewerage and drainage systems, construction, telecommunications and underground water suction.

At present, sales to the agriculture sector account for a little over 50 per cent of the company's total revenues. Telecommunications and portable water supply segment are the next major pockets and contribute 25 per cent and 16 per cent, respectively, to sales. Idea Cellular, which accounts for 16 per cent of total sales, and Tata Communications (7 per cent) are some of its noteworthy customers.

In FY 09, about 47 per cent of the company's revenues were generated by HDPE pipes, while 52 per cent came from PVC pipes.

The company has two units in Madhya Pradesh and with a total capacity to make 25,094 metric tonnes per annum (mtpa) of PVC pipes and 11023 mtpa of HDPE pipes.

It plans to add another 16,580 mtpa of PVC products through the expansion plans and also add on capacities for CPVC pipes, DWC pipes, injection moulds and woven sacks. Much of the present capacity has been created by consolidating group entities only in 2008 and there is only limited track record to judge if the company has managed to scale up revenues in the past.

In 2008-09, the company's capacity utilisation at its PVC Pipe facility stood at 33.7 per cent and that on the HDPE pipe facility stood at 24.6 per cent.

Given the fragmented nature of the pipes business, it is sensitive to raw material cost increases. The spiralling prices of polymers as crude oil prices trend up, may impact margins. Raw material costs have already started climbing and are up by 50 per cent from December 2008 lows. This may dent the company's operating margins given that raw materials account for 72 per cent of its total sales.

Expansion of its current product line, namely, drip inline pipe plant has already commenced and about Rs. 343.18 lakh has been deployed on this though internal accruals. Commercial production of this product range will begin from August 2010, while that of the new products will commence from October 2010.

Out of IPO proceeds Rs 1,132 lakh will go in for expanding the drip inline pipe plant, Rs 2,206.27 lakh for setting up new product ranges and Rs 1,000 lakh for meeting working capital requirements. Texmo Pipe's IPO has been assigned ‘CARE IPO Grade 2'.

Financial scorecard

The company does not have a sufficiently long relevant financial record, as its current operations are a result of business transfer agreements with three of its promoter group entities in August 2008.

The company's net profits stood at Rs 336.38 lakh on net sales of Rs 3897.53 lakh in the first seven months of 2009-10.

There has been a substantial increase in borrowed funds (from Rs 9.2 crore in FY 08 to Rs 22.9 crore in 2008-09).

The subsequent increase in interest cost has resulted in a negative cash flow during FY 09. The situation persisted in the half year ended September 2009 also.

via BL