PG Electroplast Ltd.               

13 October 2024

By Majid Ahamed

About the Company

PG Electroplast Limited (PGEL) is the flagship company of PG Group. While the PG Group started its journey in 1977, PG Electroplast was formally set up in 2003 and is a leading, diversified Indian Electronic Manufacturing Services provider. PGEL specializes in Original Design Manufacturing (ODM), Original Equipment Manufacturing (OEM), and Plastic Injection Molding, catering to 30+ leading Indian and Global brands. 

The company provides the following services to clients:

• Product Business
• Plastic Moulding Solutions
• Electronic Manufacturing
• Tool Manufacturing

Investment Rationale:

• The Company is well poised to grow with the expanding opportunities in the RAC Segment
•  The company has strong execution capability with experienced management
• A company with strong key marquee clients can leverage the opportunity in this segment, especially in the Consumer Durable

History of the Company:

Source: Annual Report

Business Segments:

Source: Annual Report

Product Business

The Product Business is the major component of the business which contributed nearly 61% of the total sales in FY24, for the Financial Year this segment has grown 24%, encompassing Room Air Conditioners (RAC), Washing Machines, and Air Coolers, and has been a significant revenue driver for PGEL. With a focus on consumer durables, we offer a comprehensive range of offerings that cater to the evolving consumer needs.

Plastic Moulding

This segment of Plastic Molding has been the cornerstone of PGEL’s manufacturing capabilities, which next contributes to the topline contributing nearly 25% of the total revenue, this segment has seen a growth of 8.2%, serving a diverse range of industries, including automotive, consumer electronics, and sanitaryware. This segment forms a crucial component of the service portfolio as it continues to provide high-precision molding solutions that meet the stringent quality standards of the clients

Electronics

The Consumer Electronics vertical, particularly in focusing on PCB assemblies and component manufacturing, forms an integral component of the service offerings. This segment is one of the fastest growing segments of the company which has grown 131% on YoY and contributed 13.6% of the total revenue. This segment, encompasses a wide range of products, from televisions to other electronic devices, providing end-to-end solutions to leading OEMs.

Tool Manufacturing

Tool Manufacturing vertical is pivotal in supporting our plastic molding and product business operations. This segment currently contributes less than 1% of the total revenue in FY24 and has grown 15% on a YoY basis. This segment provides custom tooling solutions that ensure precision and quality in the manufacturing of various components and products.

Geographical Classification

The majority of the Income comes from India which contributes 98% of the total revenue in FY24, The other countries contribute nearly less than 2% in FY24.

Manufacturing Facilities

The Manufacturing Facilities companies have nearly 7 Manufacturing Units, which are located in 

• Roorkee, Uttarakhand
• Greater Noida, Uttar Pradesh
• Ahmednagar, Maharashtra.

Management

• The company’s management is led by Mr. Anurag Gupta (MD & CEO) who has nearly 31 years in the industry.
• Mr. Vishal Gupta (MD- Finance) has nearly 29 years of experience in the EMS industry, and the core responsibilities include Finance & Administration, Budgeting & Planning processes of the Company.
• Vikas Gupta (MD- Operation) has nearly 29 years of experience in the EMS industry, and he ensures to create and develop business opportunities and increasing operational efficiencies with the right product mix to achieve organizational growth and objectives
• The promoter currently has a 53.56% stake in the business, which is reasonable for the size of the business
• The company board comprises Experienced Board Members who have extensive experience in Investment Banking, Private Equity, Management Consulting & Financial Services, where predominantly in financial services which ensures the financial and operational aspects are taken well and advised by the board members.

Investment Rationale

• Growth Potential in the Refrigeration & Air Conditioner (RAC) Segment
  • The RAC segment represents approximately 60% of the company’s total revenue and has been the primary driver of growth, with a segmental increase of 50-60%.
  • Despite its rapid growth, AC penetration in the country remains under 7%, indicating substantial growth potential.
  • Numerous multinational corporations (MNCs) and Indian companies are outsourcing production to this company, driving further expansion.
  • The management is consistently reinvesting in the RAC segment, demonstrating commitment through capacity expansions.
  • The company has provided CAPEX guidance of ₹370-380 crores to:
    • Establish a new integrated unit in Rajasthan.
    • Expand the existing super facility by adding a new building and enhancing room AC capacity.
• Strong Execution Capabilities and Experienced Management
  • Over the past three years, the company has successfully executed strategic initiatives, positioning it for higher growth.
  • Recently, the company entered into a joint venture (JV) with Goodworth Electronics, a 50:50 JV between Jaina India and PG Electroplast.
    • The JV currently generates ₹600 crores in revenue through television manufacturing.
    • This partnership is expected to drive further earnings growth, with increased demand for TVs spurred by the China+1 strategy and Production-Linked Incentive (PLI) scheme.
  • The company’s strong execution track record highlights its capability to leverage growth opportunities effectively.
• Strong Client Relationships with Key Marquee Brands
  • The company serves over 100 clients, including 10 new additions, consisting of prominent brands such as Voltas, LG, and Daikin.
  • Established relationships with these marquee clients have resulted in a robust order book and contributed to a Compound Annual Growth Rate (CAGR) of 47% in the RAC Division.
  • With the Electronics Manufacturing Services (EMS) sector projected to grow at a CAGR of 25-30% over the next 3-5 years, the company is well-positioned to benefit.
  • India’s favorable demographics, political stability, cost-effective workforce, and well-educated talent pool add to the company’s competitive advantage in this high-growth sector.

Risk/Threats

Higher Working Capital Days:  The company has higher working capital days which have increased from 40 days in FY21 to 59 days in FY24, and this was primarily due to an increase in higher inventory days, as the company grows this is usual for companies to invest massively in inventory and debtors but it’s crucial for them to reduce it ensure the company is able to re-invest in the capex and growth opportunity.

High Customer Concentration: Another risk the company faces is its high customer concentration. In FY24, the top 5 clients accounted for 60% of revenue in the AC segment, which presents a significant risk; the loss of any major client could lead to a substantial revenue decline. Although the company has reduced its customer concentration from 85% in FY23 to 60% in FY24 in the AC segment, this dependency remains a concern. Since the AC segment is a key growth driver, any client departure, coupled with low switching costs, could negatively impact the company’s revenue trajectory.

High Competitive Intensity: This company operates in a highly competitive space, where multiple competitors offer similar services, effectively making it a commodity business. The company’s value proposition largely relies on offering cost-effective outsourced solutions compared to clients’ in-house operations. However, a significant threat exists as multiple multinational corporations are establishing their own facilities, which positions the company as a price taker without any distinctive moat or competitive advantage.

Financial Analysis & Valuation

If we look at the ROE of the company, the company has steadily grown its ROE from 13% in FY22 to 19% in FY24, the primary reason they were able to increase the ROE is primarily due to the increase in the Net Profit Margin in the business which has increased from 3.3% to 5%, this is expected to increase in the coming years with innovations and R&D of their products getting realized in the coming years.

Valuation

As of October 11th, the company’s market capitalization stands at ₹15,987 Crores, with a trailing twelve months (TTM) P/E ratio of 86.5. The company’s EV/EBITDA ratio is 47.5, which appears high compared to industry peers, indicating an expensive valuation by traditional metrics. However, this premium can be better understood by considering the company’s diversified portfolio, which includes not only the Room Air Conditioner (RAC) segment but also the electronics and PCB segments. Based on its FY25 guidance, the company anticipates a significant EPS growth of 75%, which brings its PEG ratio for FY25 to a range of 1.2 to 1.5—a more reasonable valuation given the strong growth expectations. This growth is further supported by the company’s plan to reinvest approximately ₹350-370 Crores in capital expenditure (CAPEX) during FY25 to expand its RAC capacity in Rajasthan.

However, several risks should be taken into account. These include potential volatility in raw material prices, heightened competitive pressures, and a near-term threat from multinational corporations that may opt to expand their in-house production capabilities. To navigate these challenges and sustain its margins, it will be crucial for the company to focus on R&D and extend its value chain, thereby enhancing its competitive position in the market.