Tijaria Polypipes is entering the capital market on 27^th September 2011 with a fresh issue of 1 crore equity shares of Rs.10 each, at a fixed price of Rs. 60 per share. The Rs. 60 crore issue constitutes 42.33% of the company’s post issue paid-up capital and closes on 29^th September. Hem Securities is the book running lead manager (BRLM) to the issue.

Jaipur-based Tijaria Polypipes manufactures high grade plastic based pipes such as HDPE, MDPE, LDPE, LLDPE, uPVC, PP-R pipes, drip irrigation pipes and sprinkler systems under brand name of Tijaria and Vikas. These products are used in irrigation, telecommunication, industrial, and infrastructure and housing sector. The company has a manufacturing unit at Jaipur with annual installed capacity of 20,664 MT for HDPE pipes, 7,392 MT for PVC pipes, 3,600 MT for Pet flakes and 3,600 MT for Pet granules. For the sale and marketing of its products, it has appointed 250 exclusive dealers.

It is now undertaking a massive capex of Rs. 108.5 crore for expansion-cum-diversification, to be funded via a term loan of Rs. 40 crore, promoter contribution of Rs. 8.5 crore and IPO proceeds of Rs. 60 crore. Company is looking to diversify into manufacture of polymers which it currently does not undertake such as Polyester Texturized Yarn (POY), Draw Texturized Yarn (DTY), Monofilament, Polyester Zippers, Pet Sheets and Mink Blankets. Besides the heavy dilution, company’s balance sheet will get leveraged due to this high capex. Execution risk associated with this substantial capex, being a new area of business, are quite high and thus concerning.  

Some concerns which need to be highlighted:

• Since FY10, company has also entered into business of dealing in agricultural produce such as exporting Indian grapes to Holland, which had turnover of less than Rs. 2 crore. One fails to understand the need of such unrelated diversification, leading to unnecessary shift in management focus.

• Since raw material cost form a significant 80% of manufacturing expenses, profits are particularly vulnerable to fluctuating crude oil prices, as major raw materials are petroleum derivatives.

• Its top 10 customers contributed ~70% of total sales volume in FY10, while in FY11, top 5 customers accounted for 41.3% of the sales.

• Company has a casual approach adopted towards regulatory compliance – not attaching cash flow statement to financial accounts as well as failure to disclose related party transactions, as required by regulatory guidance in previous financial years. Also, not disclosing cost of goods traded separately in FY10, when trading income accounted for over 40% of sales.

In FY11, company clocked sales of Rs. 119 crore and earned PAT of Rs. 7 crore at 5.9% margins, entailing EPS of Rs. 5.30 on equity of Rs. 13.63 crore. On net worth of Rs. 36 crore, company has debt of Rs. 32 crore, as of 31^st March 2011, which is likely to increase to over Rs. 55 crore, as capex is partly funded via term loan. Post-IPO, promoter holding will decline to 57.67% from the current 100%.

At the price of Rs. 60 per share, company is issuing shares to public at PE multiple of 11.3 times, which is aggressively high. Peer company such as Precision Pipes, having clocked sales of Rs. 203 crore in FY11, with higher net margin of 13.4% and PAT of Rs. 27 crore, is ruling at CMP of Rs. 85, translating into PE multiple of 4.4 times. Other players in this catogery are Finolex Industries, Kisan Mouldings, which are ruling at a PE of 6 to 9 times, inspite of having much larger scale of operations. On a peer comparison, there seems no justification for Tijaria Polypipes to deserve a PE multiple in double digits, even if current capex is given weightage, benefits of which will not be reflected in FY12 financial statements. It does not deserve a PE of more than 4 times, which gives a fair value to the stock at Rs.20 per share. Hence , it is priced 3 times of its fair value. One more case of aggressive pricing and operator play.

Just  avoid it.