PG Electroplast, an electronics manufacturing services provider has come out with an initial public offer of 57,45,000 equity shares to raise around Rs 120 crore. The issue is being made through a 100% book-building process in the price band of Rs 190-210 per share with a face value of Rs 10 each.

At a FY'11 price to earnings multiple of 16.8, the IPO is overvalued. The company has high dependency on two clients and has a major presence in the manufacture of CRT TVs. This increases its business risk. Also out of the total proceeds of Rs 120 crore, 25% will be kept aside for general corporate purpose and other expenses which appears excessive. The company will use Rs 75 crore for capacity expansion and 15 crore for working capital. Investors can avoid this IPO. The fresh issue is equivalent to 35% of the company's post IPO equity and the issue will result in promoter's holding falling to 65%.

BUSINESS

North-based PG Electronics mainly manufactures television sets and components. It also manufactures air conditioner sub-assemblies, DVD players, water purifiers and compact lamps for third parties. It has manufacturing facilities in Uttar Pradesh, Uttarakhand and Maharashtra. The company gets around 75% of its business from just two clients ? LG (roughly 40%) and the Tamil Nadu Government (35%). In future, the company intends to diversify its product and client portfolio.

FINANCIALS

The company's net sales have grown strongly in last four years to Rs 436.2 crore in FY11. But the business has very low margins. The company's operating margins have varied from 4.6% to 7.3%, and the net profit margin between 0.5% and 4.2%. In the last five years, the company's profitability was the highest in FY11.

As on March 31, its debt to equity was 1.5, which will come down post the IPO, as the company will be using a part of the proceeds for debt repayment.

VALUATION

At the upper price band, the company is demanding a FY11 (pre IPO) price to earnings multiple of 16.8 .This is very expensive when compared to its peer MIRC Electronics which is trading at a multiple of 10. Also, considering the highly competitive nature of the business and low margins due to low bargaining power, the IPO is very expensive.