Costly pipes

Lacklustre track record, competitive industry and stiff pricing render Texmo’s IPO unattractive.

The thrust on infrastructure development and irrigation in the country could boost the demand for pipes. As per CARE Research, demand for PVC and cement pipes is expected to increase at a CAGR of 12-14 per cent over the next five years. One of the beneficiaries would be Texmo Pipes and Products, which manufactures PVC and HDPE pipes. The company is coming out with an IPO to raise Rs 42.50 to Rs 45 crore, mainly to expand its product range (Rs 11.3 crore), set up facilities to manufacture of injection moulding / fittings and woven sacks (Rs 22 crore) and, fund long-term working capital (Rs 10 crore) needs.

Expansion path
To meet the growing demand of domestic buyers for various types of pipes, Texmo proposes to expand its product range by manufacturing woven sacks and fittings. Fittings are a natural progression for pipe manufacturers and provide better margins. It is also considering manufacturing CPVC pipes (for which talks are on to tie-up for raw materials), drip inline pipes and DWC pipes. The company could cater to customers in the irrigation space namely, macro, sprinkler and lift-irrigation, which would help improve its sales to the sector that currently contributes around 10-15 per cent of sales. Besides irrigation, telecom and agriculture are the main contributors to revenue (around three-fourth of revenues). The company enjoys higher margins in the telecom space and its major customers include Idea and BSNL. In line with growth plans, the company proposes to increase its existing PVC installed capacity by 66 per cent to 41,674 MTPA.
 

NOT WIDE ENOUGH
in Rs crore	FY08	FY09	Apr-Oct 09
Net sales	57.4	61.4	39.0
EBITDA	5.5	5.4	3.3
EBITDA (%)	9.6	8.8	8.5
Net profit	4.3	4.7	3.4
EPS (Rs) *	-	7.5	5.1
P/E (x) @ Rs 85	-	11.3	16.6
P/E (x) @ Rs 90	-	11.9	17.6
* Based on annualised 7 months earnings                                   Source: Company

Conclusion
With manufacturing facilities in Madhya Pradesh at Burhanpur, the company has access to surrounding states like Maharashtra, Gujarat and Chhattisgarh. It is planning to further to take its products to other regions like Southern India, Bihar, Jharkhand and West Bengal. The company enjoys operating profit margins of about 8.5-9 per cent, which it expects to improve further consequent to change in its product mix, going ahead.

Although the sector offers reasonably good business opportunities, for Texmo, execution of the projects is an issue. The projects at Burhanpur to manufacture fittings and woven sacks are already delayed by about a year, and are now expected to complete by October 2010. Volatility of raw material prices (constitute around 80 per cent of net sales), dependence on large customers (top 10 customers account for 44 per cent of sales), presence of unorganized sector, stiff competition and working capital intensive nature of the business are some of the risks.

At the lower price band of Rs 85, the PE works out to 16.6 times its annualised 2009-10 earnings (based on 7 months performance). Even if one were to assume a 30 per cent growth in 2010-11 (which is much higher than its performance in recent past), the valuations are not cheap. Investors can skip this one.