Stock Market

HPL Electric and Power IPO opens: Should you subscribe or avoid?

Chillicious Bureau

New Delhi-based electric equipment products manufacturer HPL Electric and Power has opened its Rs 361-crore public offer for subscription with a price band of Rs 175-202 per share.

The company already raised Rs 108.3 crore from 8 anchor investors, including HTCL-HDFC Prudence Fund, Copthall Mauritius Investment, Nomura Singapore etc, by selling 53.61 lakh shares at higher end of price band on Wednesday, the day before issue opening.

Proceeds of the issue will be utilised for repayment of loans, working capital requirements and general corporate purposes. The issue will close on September 26.

The company reduced its issue size from Rs 450 crore that was seen in draft red herring prospectus filed in February. Post IPO, the promoter group stake is expected to reduce to around 72 percent from 99.92 percent.

Analysts are positive on the issue, advising investors to subscribe, citing strong growth opportunity, likely reduction in debt and improvement in brand visibility & utilisation.
IIFL has recommended investors to subscribe the issue as it believes there is room for upside in the stock.

As the company will repay its debt and fund working capital requirements through the IPO money, the brokerage house feels the issue is available at a huge discount to peers like Havells, V-Guard and Finolex Cables.

“Though we believe the company should trade at a discount to its peers due to low return ratios and inferior product mix, the quantum of discount is warranted,” IIFL says.

HPL has presence in four electrical equipment segments – metering solutions, switchgears, lighting equipment and wires & cables. It is the largest player in electricity energy meters (that contributed 47 percent to revenue in FY16) with 20 percent market share, fifth largest player in LED lamps with 5 percent market share and 5 percent market share in LV switchgear market.

Energy meters business contributed 47 percent to revenue in FY16, switchgears 15 percent, lighting equipment 24 percent and wires & cables segment 14 percent.

The company registered 14.2 percent CAGR in operating profit over FY12-16 due to introduction of new products, increasing reach and lower raw material costs. However, profit growth in same period restricted at 6.6 percent due to higher interest cost and even high exposure to state electricity boards (SEBs – 45 percent in FY16) increased its working capital requirement. Return ratios too impacted due to low asset turnover.

The company has invested around Rs 230 crore in various capacities in the last four years. So due to capex and high working capital, its debt on books increased significantly to over Rs 600 crore in FY16.

Prabhudas Lilladher believes improving brand visibility, reducing leverage; strong growth opportunity, lower working capital intensity and improving utilisation should help HPL deliver healthy earnings growth over the next few years. He also advised subscribing the issue.

HPL has diverse basket of products, wide dealer network and strong geographical presence. HPL is also looking at stepping-up its advertising spend significantly which should help improve brand visibility and create pull for products in the medium term.

HPL says it is focused on reducing working capital intensity by introducing measures like channel financing and clearing & forwarding agent model for inventory management. Impact of UDAY should also help improve payment cycle from SEBs, it adds.

SPA Securities is positive on the stock on account of improving utilisation level, de-leveraging balance sheet, improving return ratio and improving brand visibility.

HPL is favourably priced at P/E of around 13.1x based on FY18 earnings as compared to its peers, like Genus power/ Havells/ Bajaj Electric/ Finolex Cables, which trades at P/E multiple of 14x/33x/14x/ 21.7x FY18 earnings respectively. It recommended investors to subscribe the issue for long term gains.

Indian electrical equipment industry is likely to grow at CAGR of 8-12 percent between 2016-2020. Electric meter/LV switchgear/LED/LT cable and wire market are expected to grow at CAGR of 11.5 percent/6.1 percent/62 percent/4.5 percent, respectively, over FY16-20, according to Frost & Sullivan Report.

Given the easing out of state utility financials due to UDAY and overall penetration of electrical consumables, Antique believes the medium to long term growth prospects are healthy for the company.

“As per our analysis, the stock will be listing at a valuation of 16.9x FY17 earnings of Rs 12 and 14.6x FY18 earnings of Rs 13.8 at its upper price band of Rs 202. The company targets to reduce its working capital both under the B2B and the B2C business and focus on building up brand equity and penetration of its B2C business,” the brokerage house says.

However, Hem Securities recommended avoid on the issue as the company’s financial performance is not attractive when compare to its peer which doesn’t instil confidence in company. Also, valuations of company look expensive to its peer Havells India.

The brokerage house says following are the major reasons to avoid the issue:
> As on June 30, 2016, company had aggregate outstanding loans of Rs 623.26 crore on a standalone basis, comprising Rs 593.26 crore of secured loans and Rs 30 crore outstanding against unsecured commercial paper issued by company. Additionally, the company had availed of non-fund based working capital facilities aggregating to Rs 391.55 crore. Hence, the company has heavy debts on its books.
> Also, company’s return ratios are not healthy.

Key risks and concerns, according to ICICI Securities are:
> Its two legal disputes pending adjudication (including a trademark litigation filed against company and its promoters);
> Its operations are significantly dependent on ability to successfully identify customer requirements and preferences and gain customer acceptance for products.
> Failure to face competition effectively may also have an adverse impact on its business, financial condition, results of operations and prospects.
> If company unable to effectively manage working capital cycles or generate sufficient cash flow to satisfy any increased working capital requirements and make required payments for business, result of the operation may be negatively impacted