Tijaria Polypipes IPO Review by MLR Securities (Avoid)

Review By MLR Securities Private Ltd on September 28, 2011

Issue Period: 27th Sep - 29th Sep
Price Band: INR 60
Issue Size: INR 60 Cr
Mcap: INR 142 Cr
Grading: ICRA IPO Grade 2
BRLM: Hem Securities
Promoter: Alok, Vikas, Praveen & Vineet Tijaria
Listing: BSE & NSE

TPIL is engaged in the manufacturing of pre�]lubricated HDPE pipes, PVC & SWR pipes, sprinkler pipes and systems, flat tubes, fittings and PET straps with a total production capacity of 35,256 MTPA. These products are used in irrigation, telecommunication, industrial, and infrastructure and housing sector. The company expanded its capacity to 12
extrusion lines from 4 extrusion lines in 2001. It markets most of its products under the brand name 'Vikas' and 'Tijaria' . Company is looking to diversify into manufacture of polymers which it currently does not undertake such as Polyester Texturized Yarn (POY), Draw Texturized Yarn (DTY), Monofilament, Polyester Zippers, Pet Sheets and Mink
Blankets.

The Company participates in tenders and supply products to government enterprises like BSNL, etc. and in private sector to Reliance Communication in bulk and sells the products in the retail segment through 250 dealers spread across the country.

The company is promoted by Tijaria Jain family, which started the business in 1982 with trading activities. In 1987, the family ventured into manufacturing of plastic pipes and fittings at Kota, Rajasthan. Since 2004�]05, its operations are based in Jaipur, Rajasthan.

Expansion cum diversification project

TPL is in the process of implementing an expansion cum diversification project for the manufacture of partially oriented yarn, zipper and mink blankets with a total capex of Rs 108.5 Cr to be funded though term loan of Rs 40 Cr, promoter contribution of Rs 8.5 Cr and IPO proceeds of Rs 60 Cr.

The company's topline witnessed a CAGR of 32% during the period FY06�]11 to Rs 119 Cr while bottomline grew by 58% during the same period to Rs 6.9 Cr. Operating margins consistently improved till FY11 on the back of better product mix and higher realizations. In FY11, it marginally declined to 11.75% from 12.4% a year ago as
the company added new capacities during the fiscal. For the last two fiscals company is able to deliver net margin of close to 6%.
The working capital intensity of TPL has remained high, which resulted into negative cash flows from operations, with net working capital/operating income ranging between 28% and 48% in the rapid growth phase from 2006 to 2011. The debtor days have remained high on account of a high percentage of sales from government clients with a credit period of 90�]120 days, thereby stressing its liquidity positions.
Leverage is quite comfortable with a debt equity level of 0.9:1 because its debt is mostly short term in nature due to the high working capital incidence in the business. Company's RoE fell from 29% in FY10 to 19% in FY11 on the back of capital infusion in FY11.

Concerns

Vulnerability to fluctuations in crude oil prices as the major raw materials are petroleum derivatives
Weak bargaining power of the company with suppliers as well as customers as the major raw materials are HDPE and PVC which are sourced from companies such as RIL, GAIL and Haldia petrochemicals
TPL is a relatively small company and is therefore exposed to intense competition from major industry
participants

Conclusion / Investment Strategy

We recommend investors to Avoid this issue. Company is asking for a valuation of 20 times FY11 EPS which is quite steep compared to its peer Finolex Industries which is trading at 11 times FY11 EPS, despite the latter having a larger scale of operations.

Reviewer recommends Avoid to the issue.