PG Electroplast – Potential for cooler returns?

PG Electroplast Ltd

PGEL (established in 1977) specializes in Original Design Manufacturing (ODM), Original Equipment Manufacturing (OEM) and Plastic Injection Moulding. At current price the share is expected to give a return of 45% for next year

Business Model and Industry Analysis

Overview:

Company is into OEM manufacturing of AC, Washing Machine and Air coolers termed as Product business which contributes 61% of revenue followed by plastic moulding business. Company serves as an OEM for many leading brands such as Blue Star, Godrej, Haier, Voltas etc. Company also is an ODM where it also helps in designing products which then consumers sell them under their own brand name. It operates only in domestic market. Co pricing works as Fixed Cost + Markup where it is able to recover increase in cost but is not required to pass on any reduction. Thus the business is naturally hedged from commodity price fluctuation.

Industry Growth:

AC Industry: Expected to grow at CAGR 16.7% till 2029. Currently AC penetration in India is only at 8%

Washing Machine: Expected to grow at CAGR 7.43% till 2029. Currently AC penetration in India is only at 15%

Air Cooler: Expected to grow at CAGR 7.7% till 2029.

Plastic Molding: Expected to grow at CAGR 4.18% till 2029.

Capacity Utilisation:

The company has 5 plants namely 3 in Uttar Pradesh, 1 in Maharshtra and 1 in Uttarakhand. Co is not providing any numbers on capital utilisation. Co stands second for selling of Washing Machine units in India. Co has invested Rs150 Cr in expansion for doubling washing machine capacity while also further expand Room AC capacity to 200,000 Indoor Units and 100,000 outdoor units, along with further backward integration by adding the set up for Room AC controllers.

Opportunities:

Co has huge potential for growth in AC segment as disposable income in India is rising along with the summer temperature in India leading to higher AC sales. Further in Washing machine segment, with rising female employment, there is rise in sale of washing machine. Co is also availing grants from government under PLI scheme leading to better gross margin. It has also entered into JV with Goodworth Electronics for TV segment. This JV will help strengthen sourcing capability from China as company is planning to double its TV production. The pricing mechanism acts as a natural hedge for the company and is guarded against commodity inflation.

Risk:

Co has major risk of debt trap. With the expansion taking place the company has also been taking up debt. Although co has started mitigating this risk. To get out of the debt trap, co has raised funds from QIP for purpose of debt repayment. No other major risk is seen in company

Future Expansion:

The company has given guidance of 370cr to 380 cr of capex to expand its RAC Capacity by setting up a unit in Rajasthan and further adding up on washing machine capacity by ~60% by taking up a plant in Noida. The SUPA facilities will be expanded further with new buildings and further capacity enhancement for room AC business.

Management:

Management is genuine and decision are taken in line with investor interest. Few examples being share split to increase liquidity in market, QIP to pay off debt etc. The concerning point is that management and repalted party draw salary of around 10% from after tax profit which is significantly high. Promoters hold 53.7% in the company which is free from any pledge

Institutional Investor:

FII and DII continue to hold around 22% in the company

Historical Data and Financials

Profit N Loss Account:

* Sales have historically grown at **65%** over last 5 years and at **27%** in last year
* Margins have continuously improved and stands at around **10%** currently
* High salary withdrawl by related party amounting to 10% of PAT

Balance Sheet:

* Company has reduced its debt by raising QIP and debt/equity stands at **0.42** from **1.46** in 22/23.
* Interest coverage ratio is **4 times**
* EVA of company is negative
* Inventory days have increased from **73** days to **90** days
* Debtor days is constant
* Working Cycle and Cash conversion cycle have improved YoY
* Current ratio has improved from **1** to **3** from 22/23

Cash Flow:

* CFO/PAT is at lower side standing at 75.61% due to long working capital cycle
* FCF/Earnings is negative due to high capex investments by the company to support revenue growth

Valuation and future potential:

Valuation:

Disclaimer: This is a study report, not for any decision making or investment advisory.

Made by: Nidhi Devidan

Date:4th June 2024