Texmo Pipes and Products IPO

Texmo Pipes' valuations look to be unjustified considering its non-differentiated product portfolio. Investors can give the IPO a miss

TEXMO Pipes and Products (TPPL) is coming out with a public issue of 50 lakh shares in a price band of Rs 85 to Rs 90 each to raise over Rs 42.5 crore to fund its expansion and diversification plans. The company proposes to invest the proceeds to expand its PVC pipes capacity by 66%, start making pipefittings and diversify in woven sacks by October 2010. Post-IPO, the promoter group's stake in the company will come down to 55.6% from the current 100%.

BUSINESS:

The plastic pipe maker with 25,000 tonne of PVC and 11,000 tonne of HDPE pipes capacity commenced its operations in 1999 as a partnership firm, which was converted into a company only in July 2008. Further, it bought assets and liabilities of three promoter group firms in August'08 and commissioned a plant in September'08. It makes various types of pipes and accessories required in the irrigation, sewerage, construction and telecom industries. It is a regional player with a presence in six states such as MP, Maharashtra, UP, Gujarat, AP and Rajasthan with 169 exclusive dealers.

GROWTH DRIVERS:

The plastic pipes industry is currently going through a boom with growing irrigation projects and increasing usage in telecom, construction and oil & gas transportation industries. However, the generic PVC pipes market for irrigation is crowded by a large number of small and medium scale manufacturers in the unorganised sector. The proposed facility to manufacture fittings will augment its existing product portfolio of pipes, enabling it to supply total solutions to its customers. The firm also wants to expand geographically by establishing dealership network in the other states, such as Tamil Nadu, Bihar, Jharkhand and West Bengal.

FINANCIALS:

Between FY05 and FY09, the company's net sales grew at a CAGR of 46.5% while net profit grew at 94%. However, the growth in the past one year was muted despite a 157% jump in its production capacity from 14,000 TPA to 36,100 TPA by the end of FY09. The company was carrying a debt-to-equity ratio of 1.7 as on October 31, 09. Its investment in working capital was 3.5 times that in its fixed assets. Its average debtors and average inventory have steadily grown in the past three years to 61 days and 59 days, respectively.

VALUATIONS:

At this price band, the shares are valued 16.6 to 17.6 times the annualised profit for FY10 on post issue equity. The price is around 1.6 times its post issue book value. Its peers, like Tulsi Extrusion, Precision Pipes, Kisan Mouldings and Astral Polytechnik, are trading in a P/E range of 3.3 to 12.8 and a price-to-book ratio of 0.5 to 2.2.

CONCERNS:

The company is into high working capital industry and its operating cashflows were negative in three out of the past five years. Considering the proposed expansion plans, the scenario is unlikely to change. Its existing and proposed products are me-too products with a lot of competition in the market. The brand name and corporate logo used by the company 'Texmo' are not registered and are currently being contested.

IPO details :
Price Band: Rs 85-90
Date: Feb 16 - 19