Prince Pipes and Fittings IPO opens today. Should you subscribe?

Prince Pipes and Fittings, one of India's leading pipe and fitting manufacturers, is slated to open its initial public offering (IPO) on Wednesday. It has 5 per cent share in the organised market and was the sixth largest player in terms of sales at the end of FY19.

The offer will be a combination of both fresh issue of shares and offer-for-sale (OFS). The proceeds will be utilised to repay partial debt and expand capacity at Rajasthan and Telangana plants. Price band of the offer has been fixed at Rs 177-178. The bid lot consists of 84 shares and multiple thereof. The issue will close on December 20 (Friday). Post issue, the promoters' holding in the company will come down to 65.80 per cent from 90.06 per cent.

Strong brand in piping segment, comprehensive product portfolio across polymers, strategically located manufacturing facilities, large and growing distribution network are some of the major strengths of the company.

Should you subscribe?

Given the attractive valuation, most analysts recommend 'subscribe' rating to the issue with long-term view while listing gain may depend on HNIs' subscriptions.

At an upper price band of Rs 178, the company is fairly valued at 23x PE on FY19 EPS of Rs 7.6, says IDBI Capital. "We recommend subscribing to this issue, considering healthy sales growth driven by higher volume and improvement in net profitability driven by lower interest outgo, which strengthens its near term growth prospects," the brokerage added.

Santosh Meena, Senior Analyst at TradingBells notes that the company's peers Astral Poly Technik is trading at PE of 70x, while Finolex Industries is trading at PE of 20x. The average PE of the industry, according to them, is around 40x. "Prince pipes IPO is fairly priced. It is pure play of infra and real estate sector. Looking at the growth opportunities in India for this sector, one can subscribe to the issue," Meena added.

Those at Equirus Securities, too, agree with the valuation comfort and say the discount to peers and industry tailwind will provide listing gains. "IPO is to fund Telangana plant (Rs 200 crore) and to reduce leverage at Promoter group level; Pre-money at FY19 EV/EBITDA of 11x, P/E of 20x; 20%-80% gap with peers provides one-time valuation jump to IPO investors," wrote analysts Maulik Patel and Vikas Jain in a pre-IPO note.

Sneha Poddar, research analyst at Motilal Oswal Financial Services (MOFSL), says there are concerns on promoter’s pledge and related party transactions but valuations seems reasonable vis-à-vis peers, given its financials and return ratios. Hence, investors can subscribe the IPO from a listing gains perspective. 

Key risks

Increase in raw materials cost

The company's primary raw materials comprise UPVC, CPVC, PPR and HDPE resins, which are derived from crude oil by-products. Crude oil prices are volatile and any increases in the crude oil price can lead to a rise in raw material cost, analysts say. That apart, the company has not entered into any long-term supply contracts for such raw materials.

Outstanding litigation

Two of the company’s promoters, Jayant Shamji Chheda (chairman and managing director), and Heena Parag Chheda, are also partners in M/s Aditya Developers, a partnership firm that forms a part of Promoter Group, in which they each own a 10 per cent interest. Aditya Developers had entered into a JV agreement dated December 30, 2010 with Montana Developers. Montana initiated arbitration proceedings against Aditya and its partners, including Jayant Shamji Chheda and Heena Parag Chheda, seeking specific performance of all the obligations under the JV Agreement along with damages from Aditya and its partners.

Significant investment in DWC

Prince Pipes, according to reports, has made a significant investment (Rs 50 crore) in Double Wall Corrugated Duct (DWC) pipe with capacity of 42,000 MT. The FY19 revenue, however, was only Rs 47.1 crore, said analysts at Equirus Securities in a note. "If DWC pipes doesn’t get acceptance from state/municipalities utilisation will be a drag. Overall utilisation is also low at 52 per cent vs 65-75 per cent for listed peers," they said.

Near-term weakness

Prince has nearly 40 per cent sales from North India against 20-30 per cent for other players. Construction ban in certain areas in North India will impact near term growth. Post anti-dumping duty on CPVC resin from China/Korea, Prince was forced to raise CPVC price higher than others and this is expected to impact growth/profitability.