Thursday 31 January 2008

Tulsi Extrusions IPO Analysis



Tulsi Extrusions (TEL) is a medium scale PVC pipe manufacturing company with a presence in Gujarat, Orissa, Assam, West Bengal, Delhi and the interiors of Maharashtra. The company is engaged in manufacturing PVC pipes, PVC fabricated fittings, SWR pipes and fittings, PVC casing and Screen pipes, ASTM plumbing pipes, LLDPE pipes, HDPE pipes etc. The company has 3 manufacturing facilities located in Jalgaon, Maharashtra.

The company markets its product under the brand name ‘Tulsi’ and is marketed through 867 dealers in the 5 states that it covers. The company has a diversified product to cater to various types of end users.

Promoted by Mr. Pradip Mundhra, the company has three manufacturing facilities in Jalgaon, Maharashtra with a total area of 17,955 square meters and a total production capacity of 10,483 metric tones. The company is expanding its production capacity in its Jalgaon unit thereby increasing the capacity of the existing operations to 17,971 metric tones per annum and also expand the product range by venturing into manufacture of PVC moulded fittings, sprinkler systems, online drip irrigation system and fittings for micro irrigation.

The company is also setting up 1.5 MW windmill power plant for captive consumption at an estimated cost of Rs 10 crore. The company further plans to expand its product range by venturing into manufacture of PVC injection moulded fittings, HDPE sprinkler systems, Inline drip irrigation system and LLDPE fittings for micro irrigation.

The products manufactured by the company finds application in agriculture, potable water supply schemes, sewerage and drainage systems, construction industry, telecom industry, bore well for underground water suction etc.

India Is the eighth major consumer of plastics in the world and the plastic industry demand is expected to grow by around 10-12% p.a for the next few years. The global PVC pipe demand is expected to grow by 4% p.a. PVC pipes because of its anti corrosion features and better durability is being used extensively instead of conventional building material in various construction applications. Further on-going accelerated irrigation benefit program and major thrust given to the infrastructure development in India and the construction boom has given a fillip to the PVC building material demand in the recent past.

Strengths

  • The company has a diversified product range with in the same product line..
  • The company has also started manufacturing HDPE pipes, which is an immediate replacement for PVC pipes and is chlorine free. This provides an edge for the company, as there are no major competitors in manufacturing HDPE pipes.
  • The company is aggressively foraying into macro-irrigation sector, sprinkler irrigation, lift-irrigation which are major growth sector going forward.

Weaknesses

  • The industry is highly fragmented and unorganized.
  • Due to lower scale of operation the company would not be able to enjoy economies of scale in its operation.
  • Any increase in global crude oil prices directly influences the input cost of the company as PVC resin prices are directly linked to it.
  • The company relies on external agencies of major petrochemical companies to source its raw material and it does not have any long term agreement with any major supplier. Hence the company is vulnerable to PVC resin price risk.
  • The company has substantial outstanding debtors of Rs 6.56 crore, which is outstanding for more than 6 month.
  • Further the company has been providing around 120 days average credit period to its customers, which is quiet high. This could put severe strain on the working capital requirement of the company.

Valuation

Tulsi Extrusions has set a price band of Rs. 80 to Rs 85 per equity share of Rs 10 each, translating into a PE of 14.1x at the lower price band and 15x at the higher price band, based on the annualized earning per share of Rs 5.7 for the eight month period ended November 2007on post-IPO equity. Notably in these eight months the company has reported very high OPM of 20.4%, compared to OPM of 13.5% last year. In this period while net profit was Rs 4.72 crore, cash flow from operating activities was negative Rs 12.51 crore!

Industry leader and an integrated player Finolex Industries currently trades at a TTM P/E of around 12 and Astral Poly Technik, with a niche and fast growing product line with little competition trades at TTM P/E of around 14.