Expensive connections

Written by Rahul Jain | Updated: Sep 30 2007, 08:13am hrs
Circuit Systems is a small manufacturer of Printed Circuit Boards (PCB). It makes three types of PCB i.e., single sided, double sided, and multilayer. PCB is used as one of the components in consumer electronics, computer and peripherals, telecommunication, automobiles, process controls, defense, and industrial electronics.

Objects

Circuit systems' manufacturing capacity for PCB is 84,000 square meters. It wants to increase its total capacity to 1,50,000 square meters. The total cost of the proposed plant is Rs 25.23 crore.

It uses both debt and equity as a source of finance. The term loan has been disbursed from the bank. From the public issue it wants to raise Rs 10.50 crore excluding the promoters. The promoter's total contribution including the pre issue allotment will be Rs 4.35 crore.

It will allocate Rs 4 crore and Rs 2 crore to be utilised for working capital requirement and acquisition of business respectively. The proposed expansion will be set up in Gandhinagar electronic park (SEZ). The company has taken land on lease and a majority of the machinery is already bought.

Market dynamics

The PCB application has increased at a very rapid pace over the years due to its customised features and comparatively less cost, which reduces the cost of the end product.

However, due to its vast applications in various electronic products, there is tight competition in the international market, especially due to China, where the cost of manufacturing is the lowest. This has reduced net realisation over the years.

The company saw a reduction in realisation of exports by 23.21% in the last three years. Nonetheless, exports contributed 22.68% of the net sales in FY 2006-07. The share of exports in net sales was 29.55% in FY 2004-05. Circuit Systems exports to Belgium, USA, Italy, and New Zealand. Its domestic clients include Secure Meter, India Nippon Electricals, TVS Electronics, etc.

Financials

The major cost component and raw material used in manufacturing PCB is laminate sheets. Laminate sheets are imported from Taiwan, China, and Singapore. As the rupee appreciates, Circuit Systems will benefit more than a hedge technique, as imports are far more than exports.

The company's net sales, operating profit, and net profit in the FY 2006-07 were Rs 38.84 crore, Rs 6 crore, and Rs 2.67 crore respectively. Over the last three financial years its net profit margin has gone up slightly from 5.92% to 6.88%.

However operating margins showed a dip from 16.15% to 15.46% for the same period. The SEZ project will enhance the margins, due to lower tax liability.

Valuation

The company's post issue fully diluted earning per share is Rs 2.22. Considering the price band, the P/E comes to 15.70(x). The pricing is very steep compared to the P/E of its listed peer Fine Line Circuit at 5.30(x). Investors must consider the above factors before investing.