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Tulsi Extrusions, manufacturer of PVC pipes, is floating an IPO to raise Rs 45.60-48.45 crore to fund its expansion plans. The company plans to incur a capital expenditure of Rs 27.27 crore, which will help in increasing the capacity three-fold to about 30,000 tonne per annum (TPA), including new capacities for moulded fittings, LLDPE pipe fittings and HDPE pipes.

The company currently generates over 90 per cent of its revenue from PVC pipes, which are used for applications such as agriculture, potable water supply, etc. However, the company is now increasing its focus on LLDPE and HDPE pipes, which are used in the irrigation, industrial, housing and telecom sectors.

Marketing them should not be an issue given existing network of 813 dealers across the country. While expanded capacities, if fully sold, may translate into higher revenues, growing competition from established players like Finolex Industries and Jain Irrigation is a concern.

Further, there are no entry barriers in this industry and the ongoing capacity expansion of existing manufacturers would further intensify competition. Add to this, the company's brand TULSI, is not as established as those of its competitors, and is yet to be approved by the registration authority because it was opposed.

There are two other concerns as well. Firstly, the business is raw material intensive and the company has a high component of imported PVC resin, a derivative of oil and petrochemicals. In FY07, it imported 70 per cent of its PVC resin requirement (80 per cent of raw material cost). This means, operating margins could be hit on fluctuation in international oil prices.

Secondly, the company's working capital requirements have increased as a result of higher debtors (average collection period of 76 days in FY07). For eight months ended November 2007, debtor levels were high at 65.2 per cent of net sales. Little wonder, working capital as a percentage of sales was high at 36 per cent in FY07 and almost 100 per cent for eight months ended November 2007. 
 

NARROW PIPE
Rs crore	FY07	FY08E	FY09E
Net sales	59.15	62	90
Net profit	4.15	5.58	8.1
NPM (%)	7	9	9
EPS (Rs)	3.35	4.5	6.53
PE (x)  85/80	25/23	18/17	13/12

The company plans to infuse Rs 11.79 crore towards working capital from proceeds of the IPO, which may not have a positive impact on returns ratios. On the basis of annualised earnings for the FY08, the post-offer return on net worth works out to 9.4 per cent, which is less as compared with 14 per cent in case on Finolex and 23.10 per cent in case of Astral Polytechnik.

Even considering that the new capacities will start contributing to revenues in FY09 and assuming that the profits next year will grow by 50 per cent, the return on net worth is low at 12.4 per cent. The promoter group has lately consolidated all the group companies under Tulsi Extrusions.

As a result, its capacity increased from 6,000 TPA in FY06 to 10,483 TPA in FY07 and thus, revenue and profit rose by over 230 per cent each. Going forward, the company is expanding capacities further to take advantage of demand. The plans also include setting up of a captive wind power plant of 1.5 mw, which should contribute positively to margins. The same is also reflected in CARE rating of three on a scale of five.

However, the grading is constrained by company's small size of operations, large expansion plans in relation to its size, volatility in raw material prices, high working capital and unorganised and highly competitive industry. In terms of valuations, the issue is undoubtedly expensive at 17-18 times estimated FY08 earnings. Considering these factors, investors should skip the issue.

Issue opened: February 1
Issue closes: February 5