Prince Pipes IPO Analysis

Prince Pipes IPO – What Should Investors Do?

Introduction

In this article, we are going to do Prince Pipes IPO analysis. Here, we have discussed IPO details, Pipe Industry and financial highlights, valuation of company. What should investors do?

Prince Pipes IPO Analysis

Company & Industry Overview

• Prince Pipes and Fittings Ltd. is one of the leading polymer pipe and fitting manufacturers in India and has 3 decades of experience into manufacturing polymer pipes using four different polymers –
  1. UPVC : Unplasticized Polyvinyl Chloride
  2. CPVC : Chlorinated Polyvinyl Chloride
  3. PPR : Polypropylene Random Copolymer
  4. HDPE : High Density Polyethylene
• The company is not only in pipe manufacturing but also providing end-to-end piping system solutions. Its products have a wide range of applications in the fields of plumbing, irrigation and soil, waste and rainwater management
• It has more than 30 years of strong legacy in the polymer pipes segment and it markets their product under 2 brands : Prince Piping system and Trubore. It acquired Trubore brand in October, 2012 which mainly caters into south Market.
• With its 6 strategically located manufacturing plants with total installed capacity of 2.41 Lakh Tonnes per annum as on October 2019. The company plans to set up a new manufacturing plant in Telangana with a total estimated installed capacity of around 52,000 Tonnes per annum by FY21.
• It’s focus on creating a strong brand recall has supported healthy sales growth over the years. With the extensive distribution network of over 1,400, the company has a strong pan India presence.

Pipe Industry

• Price Pipes is a strong player of domestic pipes segment with 5% market share of organised players and it is the 6th largest player in terms of sales at the end of FY19.
• % market share of major players as on FY19 is shown in the above diagram.
• The total market size of pipe industry (in terms of Net sales) is around Rs.30,000 Cr as on FY2019. So, the market share of Prince Pipes comes out to be Rs.1,500 Cr. (5% of Rs.30,000 Cr).
• Apart from Supreme Industries, Prince Pipes is the only company which manufactures pipes using all four polymers. The industry is heavily skewed towards retail sales and hence the company too increased its focus on marketing and branding

Prince Pipes IPO Details

• As a part of its Initial Public Offering (IPO), Prince Pipe and Fittings Ltd is raising total Rs.500 Cr :
  • Rs.250 Cr through fresh equity and
  • Another Rs.250 Cr through offer for sale, selling Rs.250 Cr worth of existing equity shares
• % Allocation of Offer Size :
  • 50% : Qualified Institutional Buyers (QIB)
  • 15% : Non Institutional Buyers (NIB)
  • 35% : Retail Investors
• Pre-Placement Offer :
  • As a part of Pre IPO Placement, the company has undertaken a private placement of 59,65,000 equity shares for cash consideration aggregating to Rs.106.18 Cr.
  • Accordingly, the size of fresh issue which was Rs.356.18 Cr earlier has reduced by Rs.106.18 Cr to Rs.250 Cr.
• The promoter’s holding Pre IPO is around 90%, whereas the holding will come down to 66% post-IPO.

Objectives of IPO

Key objectives for which IPO is issued by the company are enlisted above. In accordance with it, the company intends to utilise the net proceeds from the fresh IPO and Pre IPO placement for the above mentioned reasons.

Financial Highlights

• Company reported a profit of Rs.83 Cr in FY2018-19, a growth of 14.6% over previous year and revenue grew by 19% to Rs.1,571.8 Cr in same period.
• The Net Sales breakup by polymers is :
  1. UPVC : 73.7% vs 65% for Industry
  2. CPVC : 17.7% vs 15% for Industry
  3. PPR : 6.6%
  4. HDPE : 2%
• Operating profit Margin % for FY2019 is shown in the below diagram. We can get a clear idea that the operating profit margin of Prince Pipes is very low, 12% as compared with its peers in pipe industry.

• Debt to Equity Ratio
  • Loans outstanding as on March-19 is Rs.1,000 Cr, with D/E ratio of 0.74. While interest coverage ratio is 4.06.
  • While, for as on March-18, D/E ratio was 1.15 and interest coverage ratio was 3.64.
  • Thus, we can say that the company has reduced its debt which is a positive sign for the company.

Valuation

• The Price to Earnings Ratio of Prince Pipes and its peers are :
  • Prince Pipes : 23
  • Astral Polytechnik : 71
  • Supreme Industries : 33
  • Finolex Industries : 19
• Thus, on valuation front, Prince Pipes is valued at a P/E of 23 on FY19 EPS at upper price band of Rs.178, which is decent considering the company’s promising long-term growth prospects.
• Although the valuation multiple it demands appears fair when compared with peers, there are some risks (discussed here) that might lead to investors skipping the IPO.
• Also, taking into account company’s debt position and the increased competitiveness of the market it operates in, the stock does not look attractive.

Key Risks

1. Outstanding Due : Certain promoters and directors have outstanding litigations of over Rs.900 Cr with respect to their exposure to real estate projects. The promoters may be required to pledge certain equity shares.
2. Fund Requirements : For the new manufacturing plant in Telangana, fund requirement has not been appraised by any bank or financial institutions. So there could be cost overruns.
3. Contingent liabilities : Other major business-related risks include the contingent liabilities of Rs.72 Cr up to June 30, 2019. This mainly includes the guarantee given by the company to the banks for the loans taken by the customers (Credit risk of distributors).
4. High degree of competition : The plastic pipes industry remains highly competitive. The organised industry is 60-65% and over six organised players compete against each other with each owning not more than 11%. Prince Pipes’ market share is 5%. As we have discussed earlier, other major players include Supreme Industries, Finolex Industries, Astral Polytechnik and Ashirvad Pipes.
5. Demand of Irrigation related products is influenced by growth of Agriculture segment : The level of growth in agriculture segment is majorly impacted by the monsoon every year. Any reduction in agriculture segment due to monsoon could have adverse effect on demand of products used in irrigation and thereby impacting company’s business.