Riding on Maruti

IPO REVIEW

The returns from Precision Pipes will depend upon its ability to sustain margins and timely execution of new projects

Delhi-based Precision Pipes and Profiles is setting up a greenfield unit in Noida at a cost of Rs 68 crore to manufacture auto parts.

It is also increasing its existing production capacity and is enhancing its in-house tool manufacturing and design capabilities. The cost of these expansions is pegged at Rs 106 crore, which the company plans to partly fund through a Rs 75-crore IPO.

Precision is a supplier of automobile sealing systems and auto exterior products. Mundane as it may appear, the sealing systems perform an important role including preventing water from seeping into the vehicle.

Precision sells these products to Maruti Suzuki, General Motors India, Toyota Kirloskar Motors and Honda SIEL among others. These four companies account for over 80 per cent of sales and Maruti alone accounts for half of its revenues.

While the company is heavily dependent on them, the customised nature (model specific) of the product and the company's track record of uninterrupted supply should stand it in good stead and act as entry barriers for competitors.

However, since 90 per cent of its revenues come from the automotive sector (exports and sales to consumer durable manufacturers contribute 5 per cent each), it is certainly a risk factor until the time the company diversifies its revenue streams.

Collaborative success
Precision has three tie-ups: a technical collaboration with Tokai Kogyo, Japan for making specialised profiles for the automobile industry, a manufacturing and marketing arrangement with Power Data Corporation (PDC), Australia and a parts licensing agreement with Japan's Nissen Chemitec.

Precision makes auto parts at its five manufacturing centres, which have a combined capacity of 5 million tonne and operated at 82 per cent utilisation rate in 2006-07. The expansions and the greenfield unit is expected to double capacity to 11 million tonne, in phases over the next two years.

Says Ajay Kumar Jain, managing director of Precision Pipes, "The enhanced capacity, a new plant and augmentation of the tool manufacturing unit will help the company meet customer requirements for new models and improve efficiency."

The company is also setting up a plant to manufacture electrical outlet systems. The entire production will be exported to the Australian collaborator PDC under a buyback plan.

Higher margins
For a supplier of low-value auto parts, Precision has operating margins of 26 per cent and net profit margin of 13 per cent in FY07, which is notable in a sector struggling to find its feet. Compared with other auto parts players which suffer single-digit net profit margins, Precision is more efficient.

Jain imputes this to its tie-ups that ensures flow of technology, customised products which differ from commodity businesses and the technology that Precision brings to the table.

The management is confident of maintaining margins as it can pass on the increase in raw material prices to its clients. Says Jain, "If the price rise of raw materials such as PVC is above 20 per cent then that will be passed on to the customer. If there is a price decline by a fifth the benefit has to be given to the customer as well."

The company believes that the investment towards expansions and R&D will help bring down costs and absorb minor cost fluctuations.

Valuations
At the higher end of the price band at Rs 150, the stock trades at 13 times its FY08 earnings while at the lower end of Rs 140 it is available at 12 times. While this makes it expensive compared to its peer group, considering the established clientele and growth potential, the premium seems justified.

Issue opens: December 17
Issue closes: December 20