Precision Pipes and Profiles Subscription Details

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Morning Notes, Precision Pipes and Profiles

Morning Notes, Precision Pipes and Profiles

Precision Pipes IPO Avoid

Investors can avoid the initial public offering of Precision Pipes and Profiles (PPAP), which manufactures automotive sealing systems.

While the company appears to have grown impressively over the years, future growth prospects may not be as bright, given the ongoing slowdown in the automobile industry.

The volume-driven nature of its business and the negligible potential for after-market sales, also peg up uncertainty. In the price band of Rs 140-150, the offer is priced at about 15-16 times its likely FY-09 per share earnings on a diluted equity base.

This appears pricey given PPAP’s presence at the lower end of the value chain in the automobile industry.

At a time when established auto component manufacturers are finding the going tough despite their presence in niche and high-value products, PPAP’s business, restricted to lower end automotive sealing products appears not so attractive.

The company is highly reliant on domestic sales, with a marginal exposure to the overseas market. While the company intends to increase its exports share, it could take a couple of years for significant revenues to come by.

Investors can adopt a wait-and-watch approach to the IPO and consider investments after listing.
Business

PPAP makes automotive sealing systems and exterior products for the automobile industry. Its products range from weather strips, windshield moulding to skirt air damper and body-side moulding.

Catering to clients such as Maruti Udyog, Honda SIEL, General Motors and Toyota Kirloskar, the fortunes of PPAP have grown in tandem with its clients. It witnessed a compounded earnings growth of about 34 per cent annually, backed by a 28 per cent growth in sales during the last four years.

PPAP also caters to the white goods industry, manufacturing PVC-based customised profiles to companies such as Godrej, Voltas and Videocon; the segment contributed to about 5 per cent of revenues.

PPAP does not enjoy a significant exposure to the export market (less than 4 per cent of its revenues). However, the company proposes to increase its exports and has entered into a manufacturing agreement with the Australia-based Power Data Corporation for exporting the company’s ‘Electrical Outlet System’. On the operational front, the company has expanded its margins by improving utilisations.

For the year ended March 2007, the operating margins expanded by three-percentage points to about 25 per cent.
Expansion initiatives

The company proposes to use the proceeds from the issue towards setting up two new manufacturing plants for auto components and electrical outlet system products for Power and Data Corporation of Australia. It also plans to use the proceeds to expand capacity (to about 30 lakh kilos) in its existing plant from the current 12 lakh-levels.
Offer details

The offer is open from December 17-20. The company seeks to raise Rs 75 crore through this offer. UTI Securities and Nexgen Capitals are the lead managers to the issue and Intime Spectrum Registry is the registrar.

Precision Pipes and Profiles Company

Precision Pipes and Profiles Company (PPAP) is engaged in the business of manufacturing automobile sealing systems and exterior products. PPAP’s product range includes weather strips, trim door opening, windshield molding, roof molding, quarter window seal, A-pillar garnish, B-pillar garnish, skirt air damper, body side molding, among others. Additionally, it manufactures PVC based customised profiles for white goods and other industries. PPAP has five manufacturing facilities, which are located in New Delhi and Noida, Uttar Pradesh.

PPAP is an OEM supplier to the automobile industry and its client list includes Maruti Udyog, Honda SIEL, General Motors and Toyota Kirloskar. In the white goods industry, PPAP supplies customised profiles to Godrej, Voltas, Videocon and Carrier Refrigerators. PPAP derives around 90% of turnover from automobile customers, nearly 5% from white goods products and the remaining from other segments including electrical and construction.

The company has consistently been receiving various awards from its clients for the quality products and services provided to its clients. All its plants are TS 16949, ISO 14001 and OHSAS 18001 certified. PPAP has obtained ISO 14001:2004 certificate from BSI Management System, London for its unit 54-56, Okhla Industrial Estate, Delhi.

The company has chalked out capacity expansion plan at a project cost of Rs 106 crore. At present, PPAP has five manufacturing facilities in the National Capital Region (NCR) region of Delhi, with an aggregate capacity of 4.75 million kg. It has proposed a capital expenditure of Rs 95.80 crore to increase its capacity. The company plans to increase its capacity from 4.75 million kg currently to 7 million kg by March 2008, to 9.15 million kg by March 2009 and to 11.26 million kg by March 2010. The balance Rs 10.2 crore would be spent on General Corporate expense and Public Issue expense. PPAP plans to fund its expansion initiatives through term loans of Rs 25 crore and internal accruals of Rs 6 crore. The balance amount of Rs 75 crore will be met through this IPO. This expansion will be undertaken to set up a new plant in Surajpur to manufacture automobile profiles, expand the capacity of its existing facility at Noida, upgrade in-house tool manufacturing and designing capability, and set up a new plant at Badarpur dedicated to electrical outlet system products to be manufactured under the agreement with Power and Data Corporation, Australia.

Strengths

PPAP has a technical agreement with Tokai Kogyo Co (TKCL), Japan, which is a manufacturer of specialised profile sand extrusions for automobile industry. This agreement helped PPAP in diversifying into specialised products for the automobile industry.

PPAP has also entered into an Automotive Parts Licensing agreement with Nissen Chemitec Corporation, Japan. Nissen would provide PPAP new product technology in order to manufacture and deliver products in connection with automotive interior parts and related products to Honda SIEL Cars India and its affiliated companies. The company also has entered into an agreement with Power and Data Corporation, Australia for the manufacturing of electrical outlet systems for supply to the authorised distributors of PDC.

Weaknesses

PPAP’s top five customers collectively contributed approximately 83% of sales in FY 2006-07 out of which about 53% is contributed by a single customer (Maruti Suzuki). Thus like other auto ancillaries, PPAP is also vulnerable to these large clients.

Valuation

At a price band of Rs 140– 150, PPAP’s P/E works out to 14.5 – 15.1 times FY 2007 earning and 10.2-10.6 times there-months FY 2008 annualised earning on post-IPO equity. Peer group companies such as Setco Automotive, JBM Auto, ANG Auto and Lumax Automotive are trading at TTM P/E of 13.1, 6.4, 9.4 and 18.5, respectively.