The Hindu Business Line : APW President Systems: Invest

As equity will rise by a modest 20 per cent and the performance in the first four months of this year points to a growth of 30-40-per cent in profits, the time-lag in earnings from new facilities is unlikely to weigh on the valuation of the stock .

SHAREHOLDERS of the APW President Systems should invest in the rights offer, as there are prospects of gains linked to a further improvement in fundamentals over the next couple of years.

The rights shares are offered at Rs 40 and in the proportion of one share for every five held.

The pricing of the offer has been done in a manner that leaves sizeable gains on the table, even as the company raises resources to bankroll expansion plans.

APW President makes products that are used as enclosures for equipment in several sectors.

As it derives a large proportion of its revenues from the rapidly growing IT and telecom sectors, the prospects for APW President appear bright. Expanded facilities will also guard against capacity constraints hampering growth.

The APW President stock is not listed on the NSE or the BSE. However, it is listed on the Pune and Bangalore stock exchanges. And this would have been a major negative but for a window of opportunity that opened earlier this year.

When the BSE started the IndoNext initiative (stocks in this segment are classified into `S' group), APW President was among the chosen small-cap companies. This gives liquidity to the stock.

Trading volumes have gradually improved with intermittent sharp spikes. As a few thousand shares are traded regularly, we do not see a liquidity problem for retail investors.

So, this need not be a concern in evaluating exposures in the rights offer. The stock now trades at about Rs 120, dropping from a high of Rs 200 which it briefly hit last month.

Even if there are any downside risks, the pricing of the rights offer should ensure attractive returns for shareholders. At Rs 120, the stock trades at a price-earnings multiple of about 12 times its likely FY-07 earnings.

There has been a robust scaling up of revenues and earnings over the past five years.

Given its brand equity edge over players from the unorganised sector and a rising curve of export revenues, this trend is likely to continue over the next few years. With its key customers in the IT and telecom sectors likely to remain in investment mode, demand is bound to be buoyant.

The company has also managed to stem the effect of rising metal prices on its bottomline last year.

As metal prices are likely to settle at lower levels this year, this may impact positively on the company's profitability.

APW President has also pursued growth over the years relying on debt and earnings. It also plans to finance a substantial part of the ongoing expansion of facilities in Pune and Bangalore using debt. This should ensure that the benefits of higher earnings flow largely to shareholders.

The location of its manufacturing units confers the advantage of proximity to end-users.

A widening of its product portfolio with assistance from its global parent is also likely to pep up revenue growth over the longer term.

The benefits of the expansion programmes are, however, likely to be partially reflected in revenues and earnings from FY-07 and in a more complete manner only from subsequent years.

APW President is a small-cap stock with a market capitalisation of about Rs 70 crore. Price trends may be volatile in such stocks and volumes may slump if there is market turbulence.

This risk is integral to stocks in this space. But for investors with a one- to two-year perspective, it ought not to be of major concern. Such an investment horizon will be necessary to reap the benefits of the company's expansion plans.

The lead manager for the offer is Keynote Corporate Services. The rights offer closes on October 28.

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