The Hindu Business Line : Precision Pipes (IPO): Avoid

While the company appears to have grown impressively over the years, future growth prospects may not be as bright, given the ongoing slowdown in the automobile industry.

The volume-driven nature of its business and the negligible potential for after-market sales, also peg up uncertainty. In the price band of Rs 140-150, the offer is priced at about 15-16 times its likely FY-09 per share earnings on a diluted equity base.

This appears pricey given PPAP’s presence at the lower end of the value chain in the automobile industry.

At a time when established auto component manufacturers are finding the going tough despite their presence in niche and high-value products, PPAP’s business, restricted to lower end automotive sealing products appears not so attractive.

The company is highly reliant on domestic sales, with a marginal exposure to the overseas market. While the company intends to increase its exports share, it could take a couple of years for significant revenues to come by.

Investors can adopt a wait-and-watch approach to the IPO and consider investments after listing.

Business

PPAP makes automotive sealing systems and exterior products for the automobile industry. Its products range from weather strips, windshield moulding to skirt air damper and body-side moulding.

Catering to clients such as Maruti Udyog, Honda SIEL, General Motors and Toyota Kirloskar, the fortunes of PPAP have grown in tandem with its clients. It witnessed a compounded earnings growth of about 34 per cent annually, backed by a 28 per cent growth in sales during the last four years.

PPAP also caters to the white goods industry, manufacturing PVC-based customised profiles to companies such as Godrej, Voltas and Videocon; the segment contributed to about 5 per cent of revenues.

PPAP does not enjoy a significant exposure to the export market (less than 4 per cent of its revenues). However, the company proposes to increase its exports and has entered into a manufacturing agreement with the Australia-based Power Data Corporation for exporting the company’s ‘Electrical Outlet System’. On the operational front, the company has expanded its margins by improving utilisations.

For the year ended March 2007, the operating margins expanded by three-percentage points to about 25 per cent.

Expansion initiatives

The company proposes to use the proceeds from the issue towards setting up two new manufacturing plants for auto components and electrical outlet system products for Power and Data Corporation of Australia. It also plans to use the proceeds to expand capacity (to about 30 lakh kilos) in its existing plant from the current 12 lakh-levels.

Offer details

The offer is open from December 17-20. The company seeks to raise Rs 75 crore through this offer. UTI Securities and Nexgen Capitals are the lead managers to the issue and Intime Spectrum Registry is the registrar.

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