Analysis on IPO from HPL Electric & Power Ltd:
HPL is an established electric equipment manufacturing company in India. It manufactures a manifold portfolio of electric equipment, along with, switchgears, metering solutions, wires and cables and lighting equipment, catering to the consumer and institutional customers in the electrical equipment industry. In fiscal 2015, HPL had the largest share in the market for electricity energy meters in India having one of the widest portfolios of meters in India and the 5th largest share in the market for LED lamps during the corresponding period.
The company currently manufacture and sell products under the umbrella brand ‘HPL’, which has been registered in India since 1975. It supplies products through a network of over 2,400 authorised dealers or distributors as on March 31, 2016, to institutional, non-institutional and corporate customers. Also, HPL supply products to Power Utilities, which primarily includes the supply of meters under direct contractual arrangements to electricity boards and power distribution companies, as well as through project contractors.
Price Range and size of the issue:
Company has fixed its price range from Rs. 175 to Rs. 202 per share with no discount for the retail investors. Under this price range, the company has planned to raise Rs. 361 crore and the numbers of shares to be allotted will depend on the allotment price fixed post the close of the issue.
At the allotment price of Rs. 202 per share, the company will have to issue 1,78,71,287 shares to raise Rs. 361 crore. On the other hand, if the allotment size is fixed at Rs. 175, the company will issue 2,06,28,571 shares.
Objectives of the Issue:
Company will be using the raised funds for the below objectives:
1. Funding working capital requirements.
2. Repayment/ prepayment of certain indebtedness
3. General corporate purposes
Details of the Objectives:
1. Funding working capital requirements:
The company proposes to utilise Rs. 180 crore of the Net Proceeds in fiscal 2017, towards working capital requirements for meeting its business requirements.
2. Repayment/ prepayment of certain indebtedness:
HPL has various financing obligations with the banks. As on June 30, 2016, the aggregate outstanding amount of secured loans was Rs. 5,93.263 crore, comprising term loans of Rs. 1,41.792 crore and secured working capital loans of Rs. 4,51.471 crore. In addition to this, HPL had availed non-fund based working capital facilities aggregating to Rs. 3,91.548 crore, on a standalone basis as on June 30, 2016.
HPL intends to utilise up to Rs. 130 crore from the Net Proceeds towards repayment/prepayment of such borrowings in fiscal 2017. It aims to reduce the debt to equity ratio and finance costs by paying off some borrowings.
3. General corporate purposes:
HPL will be using the balanced amount for the general corporate purposes subject to such utilisation not exceeding 25% of the funds raised from the Offer and will be used for the below purposes:
• Strategic initiatives
• Brand building and strengthening of marketing activities
• To meet ongoing general corporate exigencies or any other purposes as approved by the Board of Directors subject to compliance with the necessary regulatory provisions.
Whether to subscribe for the issue or not?
You can keep the below points in mind before subscribing for the issue:
1. As per the objective of the issue, HPL will be utilising 36% of the funds to pay off its debt. The primary goal behind an IPO for any company is expansion and growth. But in this case, very high percentage of the funds will be utilised in paying off the debt.
2. As on September 23, 2016, at 17:00 hrs, IPO has received the bids of 4165910 shares against the total allocation of 14440001 shares which is approximately 0.29 times. Among this, bidding by Retail Individual Investors (RIIs) stands at 0.37 times i.e. 2654610 shares against the total allocation of 7220000 shares.
3. As on March 31, 2016, finance cost for the company stands at Rs. 782.37 million and total debt stands at Rs. 9936.93 million. As per its objective, if the company pays off Rs. 1300 million, it will still have the remaining debt of Rs. 8636.93 million and the new finance cost for the company will be approximately Rs. 680.02 million. So, the company will still be at a high debt.
4. The total equity of the company is Rs. 3552.8 million and total liabilities stand at Rs. 9936.93 million as on March 31, 2016. So, debt to equity ratio for HPL comes up to 2.8 which is high when compared to its peers like V-Guard Industries which has a debt to equity of 0.02 and Havells India with debt to equity of 0.00 as on March 2016.
5. EPS for HPL stands at 7.98 as on March 31, 2016, when compared to its peers Havells India which stands at 11.45 EPS and V-Guard Industries which stands at EPS of 37.22 as on March 2016.
6. On the higher price band i.e. 202 the trailing P/E ratio for HPL will be 25.31 and at lower price band i.e. 175, trailing P/E will be 21.92 when compared to its peers Havells India which stands at 47.11 trailing P/E and V-Guard Industries which stands at trailing P/E of 43.68. Also, even though HPL has low P/E compared to the industry average of 34.48, its growth perspective does not look promising.
Also read: Here is how to apply for an IPO through ASBA
Based on the above points, HPL has higher debt, high debt to equity ratio, low EPS and considerably a high P/E. It would be better to avoid this IPO looking at the current standing of the company.