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Prince Pipes IPO opens today; should you subscribe or avoid?

According to Motilal Oswal, investors can subscribe the IPO from a listing gains perspective.

December 18, 2019 / 09:35 AM IST

The Rs 500-crore initial public offering of Prince Pipes and Fittings opens for subscription on December 18, with a price band at Rs 177-178 per share. It would be the last main board IPO of the year 2019.

The public issue comprises a fresh issue of Rs 250 crore and a similar amount of offer for sale where promoters are selling shares - Jayant Shamji Chheda (Rs 20 crore worth of shares), Tarla Jayant Chheda (Rs 140 crore), Parag Jayant Chheda (Rs 50 crore) and Vipul Jayant Chheda (Rs 40 crore).

Prince Pipes will utilise fresh issue proceeds and pre-IPO placement funds for repayment of certain outstanding loans (Rs 50 crore), financing the project cost towards establishment of a new manufacturing facility either set up directly or indirectly (Rs 180 crore), upgradation of equipment at manufacturing facilities (Rs 80 crore); and general corporate purposes.

Most brokerages advised subscribing the public issue which is scheduled to be closed on December 20, for listing gains, citing reasonable valuations, diverse product portfolio, strong distribution network, strong brand awareness etc. However, the major risk they see is high debt burden on the company.

"Post issue on the expanded shareholding, the valuation works to 23.41X to 23.54X the earning per share. On FY21 basis, the stock is trading at 16X price earning multiple. We recommend a subscribe for listing gains," said Ventura Securities.

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Going forward the brokerage expects company's revenue, EBITDA and PAT to grow at a CAGR of 5 percent, 14 percent and 18 percent to Rs 1,967 crore, Rs 242 crore and Rs 117 crore, respectively.

For FY21, the stock is available at the offer price of 177-178 at 16X on a fully diluted basis, it feels.

Prince Pipes' profit in FY19 grew by 14.6 percent to Rs 83.35 crore and revenue increased by 19 percent to Rs 1,571.8 crore compared to previous year, though profit declined 1.9 percent and revenue fell 0.71 percent in FY18 over FY17. For three months period ended June 2019, its profit stood at Rs 26.67 crore on revenue of Rs 380 crore.

During FY13-19, its revenue and PAT witnessed 12 percent and 13 percent CAGR, respectively while the average EBITDA and net margin stood at around 11 percent and around 4 percent, respectively for the same period.

"With over 30 years of industry experience, the company has an advantage of being one of the leading organized players in this highly fragmented market. It has a market share of 5 percent in FY19 and is amongst the top six organized players in the market. Its fitting segment enjoys a higher margin due to the specialized nature and precision required," said the brokerage.

"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 added.

Equirus also recommended subscribing the issue as valuation discount to peers and industry tailwind will provide listing gains.

"Prince Pipes, the 6th largest pipe player in the industry with largest SKUs of fittings, is well placed to capitalize on ongoing megatrend of unorganized to organized, higher irrigation spending, replacement and new demand from plumbing/drainage," the brokerage said.

With EBITDA margin at 12 percent against 14-16 percent for Supreme/Astral there is likely upside in margin with operating leverage, according to the brokerage which said IPO was to fund Telangana plant and to reduce leverage at Promoter group level; Pre-money at FY19 EV/EBITDA of 11x, P/E of 20x; 20-80 percent gap with peers provided one-time valuation jump to IPO investors.

Prince, one of the leading players in PVC pipes segment with market share of 5 percent, is planning to increase its capacity to around 3,00,000 by FY22 from around 241,000 currently with focus on higher margin business.

It has healthy return ratios with average return on equity (RoE) of 22 percent and return on capital employed (RoCE) of 20 percent for the same period.

"Assuming revenue growth of 13 percent CAGR through FY19-21E, the company is valued at 14x of FY21E earnings, which appears to be justified considering its business model, steady growth and healthy return ratios. Hence, we recommend subscribe to the issue," Reliance Securities said.

As of October 2019, the total installed capacity of Prince Pipes' six existing plants was 2,41,211 tonnes per annum and Prince Pipes plans to expand the installed capacity at its plant in Jobner in Rajasthan from 6,221 tonnes per annum as on October 31, 2019 to 17,021 tonnes per annum by December 31, 2019 and to 20,909 tonnes per annum by the end of fiscal year 2020.

As at October 2019, Prince Piping Systems products sells its products to 1,151 distributors in India. It sells Trubore products directly to wholesalers and retailers.

Going forward, Religare Broking believes Prince Pipes performance would continue to improve as well as the company would gain market share in the organized segment driven by positive sector outlook, better product mix and increased focus on high margins business.

"On valuation front, the company is valued at a P/E of 23.5x on FY19 EPS at upper price band of Rs 178, which is decent considering the company’s promising long-term growth prospects," the brokerage said.

However, the company has higher debt compared to its peers but on absolute basis it at comfortable levels (D/E 0.6x), it added.

According to Motilal Oswal, investors can subscribe the IPO from a listing gains perspective. "The issue is priced at 23.5x FY19 EPS (fully diluted). While there are concerns on Promoter’s pledge and related party transactions, valuations seems reasonable vis-à-vis peers, given its financials and return ratios," the brokerage said.

BP Equities was the only brokerage which advised avoiding the issue as valuations are not attractive.

"The management in the analyst meet said that the Q2 performance along with the outlook ahead was good, however, we feel that Prince Pipes and fittings is expensively priced at 20.6x P/E (weighted average EPS taken) and 3.4x Price to book. We feel that there are much better players already listed such as Finolex Industries which trades at 19.6x P/E and 1.8x price to book having better return ratios and comfortable debt levels. Therefore, taking into account its debt position and the increased competitiveness of the market it operates in , the stock does not look attractive," it explained.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Dec 18, 2019 08:47 am

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