HPL Electric IPO Review: Taki jhatka na lage

HPL Electric’s upcoming IPO will be the 21st mainboard IPO in India this year. The upcoming IPO, scheduled to open on 22 September, will equal the record of 21 IPOs Indian markets created last year. Priced in the range of INR175 – 202 per share, the IPO will remain open till 26 September. At the upper end of the price band, the company will raise INR361 crore (INR3.61 billion) which will be used for repayment of debt, working capital requirements and general corporate purposes. SBI Capital Markets, ICICI Securities and IDFC Bank are the merchant banks for HPL Electric IPO.

In our HPL Electric IPO review, we try to find out if investors are better off investing in this company or in ICICI Prudential Life IPO.

HPL Electric IPO Details

Fresh shares, no OFS in HPL Electric IPO (and we like it)

This season, there is a dearth of IPOs which do not include Offer For Sale (OFS). This is natural when markets are high as investors and promoters try to maximize their investment returns. However, HPL Electric IPO has no OFS component and all the IPO proceeds will go to the company.

Out of the total, the company plans to use INR130 crore (INR1.3 billion) to reduce its debt levels by repaying debt while INR180 crore (INR1.8 billion) will be used to fund working capital requirements. Given the recent volatility in the markets, the last figure has been reduced from the INR242.7 crore (INR2.42 billion) the company was earlier planning to use for working capital requirements.

We like the fact that the IPO comprises of fresh share issue and the funds will be used towards improving the company’s financial performance.

The Delhi-based electric equipment manufacturing company is promoted by Lalit Seth, Havell’s Private Limited, HPL India Limited, and Havells Electronics Private Limited which together own 73% equity stake in the company. Almost all of the remaining shares are owned by promoter group including Praveen Seth, Rishi Seth, Gautam Seth, and Himachal Energy Private Limited.

HPL Electric’s business background

HPL Electric & Power is a manufacturer of electric equipment such as meters, switchgears, lighting equipment and wires & cables. The company has six manufacturing facilities in Haryana and Himachal Pradesh with in-house testing capabilities. HPL Electric’s manufacturing plants are in Gurgaon, Gharaunda (Karnal), Gannaur (Sonepat), Kundli (Sonepat), all in Haryana and Jabli in Himachal Pradesh. In addition, the company has two research and development (R&D) facilities in Gurgaon and Kundli.

In terms of operations and business segments, the company is largely known for its electricity meters. It claims to be the biggest player in the electricity energy meters market in India and the fifth largest player in LED lamps. The company’s products verticals and their contribution to annual revenues are as follows:

Metering Solutions – 46.62% of FY2016 revenues

Lighting Equipments – 23.96%

Switchgears – 15.40%

Wires & Cables – 13.94%

Railway Electrification Projects – 0.09%

HPL Electric ≠ Havells

After coming across several instances of Havells so far in our review of the HPL Electric IPO, our readers may end up thinking these are group companies (Havells India Limited is already listed on the Indian bourses). However, that’s not true as both are totally independent although they shared litigation over the Havells trademark.

Interestingly, despite the foreign sounding name, Havells is practically the anglicized name of Haveli Ram Gandhi. If one is interested in knowing more about Qimat Rai Gupta’s Havells, here is a brilliant account. Qimat Rai Gupta sensed pretty early that we are suckers for foreign brands and bought the Havells brand name from Haveli Ram Gandhi in 1971. What a masterstroke!!!

Anyway, we digressed. Back to HPL Energy IPO.

Financial performance

Since HPL Electric is largely into manufacturing products that are supplied to various electricity distribution companies (discoms), its business is not volatile. In the last four years, HPL Electric’s revenues have grown consistently and moved from INR724.3 crore (INR7.2 billion) in FY2012 to INR1,121.2 crore (INR11.2 billion) in FY2016. In the same timeframe, its net profit increased from INR28.3 crore (INR283 million) to INR36.6 crore (INR366 million). As it is clear from the table below, its profitability has gone nowhere and margins have remained stuck in the range of 3-4%.

Typically, manufacturing operations don’t yield much margins but another reason impacting HPL Electric’s profitability is its high debt on the balance sheet. As of 31 March 2016, the company’s total indebtness amounted to INR578.9 crore (INR5.7 billion) and its debt to equity ratio stood at 1.63.

So, all is not well, shouldn’t invest?

Considering the financial performance of the company in the recent years and its balance sheet, one may be confused if there is something wrong with the company. While there is no reason to believe this is the case, the company unfortunately operates in a segment which has low margins.

In its red herring prospectus (RHP), the company said it plans to expand its product range with focus on value added products to boost its margins. Now the intention is clearly good but the market doesn’t work on promises and there is no reason for retail investors to take this promise on face value.

We like the fact that the money will be used to reduce debt load but the INR130 crore going in this direction will only reduce the debt pile of INR580 crore slightly.

In terms of valuations, the upper end of the price band values the company at 25.6 times its FY2016 consolidated earnings while the PE ratio works to a more acceptable 22.1 at the lower end.

In the prospectus, the company lists Havells, which is nearly seven times its annual revenues in size, as its competitor. We don’t quite agree with the comparison as Havells has a much bigger footprint in consumer space than HPL Electric. Despite consumption being a favourite theme in this rally, Havells trades at a PE ratio of just 22. The gap between HPL Energy and Havells can be gauged by the return on net worth (RONW) of 10.3% and 47.2%, respectively.

Check stock discussion and latest GMP rates at HPL Electric IPO page.

Read Also: ICICI Pru Life IPO Review: Buy shares not policy

Going through the prospectus, it is very clear that HPL Electric wants to take the same road Havells took to establish the retail connection. It has doubled the advertisement budget for FY2017 and plans to further raise it in subsequent years. Since retail business segments of Lighting Equipments and Wires & Cables account for only 38% of its annual revenues, there is a lot riding on promises in HPL Electric IPO. We are not opposed to such radical changes in strategies but would like to see some groundwork before investing. For investors willing to take more risk, a small application is the way but we feel there are better options for retail investors and buying HPL Electric after listing is one of them.