– Prince Pipes is a leader in the pipes industry
– Proven track record of financial performance
– Operates six manufacturing units across India
– IPO proceeds to support expansion in Telangana
– Volatility in commodity prices could impact margins
Pipes and fitting manufacturer Prince Pipes is launching an initial public offer (IPO) with an issue size of Rs 500 crore which consists of primary as well as secondary sale of shares. The price band is fixed at Rs 177-178 per share and the company is being valued at Rs 1,958 crore at the upper end of the price band.
Prince Pipes is the sixth largest player in the market
Established in 1987, Prince Pipes is the sixth largest plastic pipes and fittings manufacturer in India with a market share of around 5 percent. The company manufactures a wide range of products, which are marketed under two brand names – Prince Piping Systems and Trubore. These products find usage in roof-water collection, hot and cold water applications, plumbing systems, groundwater extraction, pressure and non-pressure piping systems and drainage pipes. Prince’s revenue profile is segregated into four segments based on the input polymer: Unplasticized Polyvinyl Chloride (UPVC), Chlorinated polyvinyl chloride (CPVC), Polypropylene Random Copolymer (PPR) and high-density polyethylene (HDPE).
Industry growing at a steady rate
Over the past decade, plastic pipes have found favour ahead of traditional galvanised and ductile iron pipes because they are 40-50 percent cheaper and have a longer shelf life. The market for plastic pipes industry in India is pegged at around Rs 30,000 crore and it continues to expand at a steady rate of 7-10 percent per year. Replacement of metal pipes, new construction activities and government’s impetus on housing (mainly affordable housing), irrigation and piped water supply are the key factors driving market growth. In terms of product segments, UPVC forms bulk of the industry demand and comprises 65 percent of the overall market. CPVC accounts for 15 percent of sales and remains the fastest growing category within the market.
Revenue growth in-line, but return ratios lag
The organised segment accounts for a 60 percent share of the country’s plastic pipes industry. Supreme Industries, with an installed capacity of 419,000 metric tonnes (MT), is the largest pipe manufacturer in the country with a market share of 11 percent. Finolex Industries and Astral Polytechnik are the other listed players with a market share of 9 percent and 7 percent respectively. Prince Pipes holds a 5 percent share with an installed capacity of 241,000 MT.
While these players operate in the same industry, the operating metrics vary significantly owing to their market positioning, product profile and revenue mix. For instance, Supreme operates in four business verticals and manufactures a wide range of products from PVC pipes to storage components to protective packaging films. While Finolex has a dominant position in the agricultural pipes space, Astral has diversified its business by entering the adhesive segment.
Since FY17, Prince’s volume and revenue growth has been in line with industry peers such as Finolex and Supreme. Astral has clocked a volume growth of 17 percent owing to aggressive marketing spends and expansion of distribution network. While the revenue growth for Prince is similar to its competitors, the margin profile and return ratios have been relatively weaker due to higher brand spends and stretched working capital cycle.
New plant to strengthen geographic footprint
Prince operates six manufacturing units located in Dadra and Nagar Haveli, Uttarakhand, Rajasthan, Tamil Nadu and Maharashtra. These plants have a total production capacity of 241,000 MT per annum. In addition to this, the company also outsources it production to contract manufactures to meet its business requirements.
The proceeds of the IPO will primarily be invested for building a new factory in Sangareddy (Telangana). The company has already acquired 45 acres of land for Rs 12 crore. The new plant will have an installed capacity of 51,943 MT per annum and will commence operations from FY21. It will allow easy access to newer markets and also result in substantial freight cost savings.
Additionally, the company is also planning to triple its production capacity in Rajasthan (from 6,221 MT to 20,909 MT) by FY20-end.
Ad spends to remain high
Prince Pipes has been spending aggressively on branding and also focusing on increasing customer touch points. Last year, it hired Bollywood actor Akshay Kumar as its brand ambassador in an effort to strengthen its retail presence. In fact, advertising and marketing spends have seen a huge rise to 2-2.5 percent of revenues from the historic range of 1-1.5 percent.
In terms of geography, Price enjoys a strong presence in the northern, western and southern markets. Going forward, the company is eyeing growth in the eastern region, which contributes around 11 percent to its top line.
Raw material prices could impact margins
PVC resin forms an important constituent of the raw material basket. Raw materials are sourced both domestically and internationally on average rates and the management follows a pass-through mechanism to protect its margins. The 2019 budget announcement relating to increase in customs duty on PVC and EDC led to an increase in input prices for all pipe manufacturers. While the management has highlighted that it has been able to pass on the recent increase to dealers, if raw material prices fluctuate wildly over a prolonged period of time, they could affect its profitability.
Should you subscribe?
Although the company is expanding its production capacity, it has enough headroom to grow in the near term as the current utilisation levels are close to 53 percent. While market conditions are uninspiring due to the prevailing credit crunch and slower consumer offtake, the company stands to benefit from a weak competitive landscape as some industry players (Jain Irrigation, Kisan Moulding) are facing severe challenges due to strained balance sheet.
As the company is operating at low capacity utilisation, the timing of the IPO raises questions about the need for tapping funds through capital markets. While the business has decent fundamentals and healthy growth prospects, the valuations (21.3 times FY20 estimated earnings on a diluted basis) factor in the majority of the positives and leave little on the table for prospective shareholders.
Still, given the overwhelming response to recent market issuances, one can look forward to subscribe to the IPO purely for listing gains. Long term investors should, however, wait for the risk-reward ratio to turn favourable, either through operational efficiencies or through valuation.