The auto industry is booming here in India, new players are entering and new models are being launched at various price points, catering to customer needs. This has certainly benefited auto component manufacturers here in India.

Business

Precision Pipes and Profiles Company (PPAP) is a Delhi based original equipment manufacturer of various auto components. PPAP caters to the requirements of Maruti Udyog, Honda SIEL, General Motors, and Toyoto Kirloskar. The company also manufactures customised profiles used in refrigeration systems and supplies to Godrej, Voltas, Videocon, and Carrier Refrigerators. The company has five manufacturing facilities having a total capacity of 47,50,000 kg.

The company derives 90% of its turnover from its automobile segments, 5% from white goods, and the remaining from other segments, including electrical and construction. The company generates 53% of the total turnover from a single customer – Maruti Udyog.

Financials

PPAP has shown a rise in total income from Rs 41.11 crore in FY2002-2003 to Rs 109.73 crore in FY2006-2007, denoting a CAGR of 27%. On the other hand, the net profit has grown from Rs 4.27 crore to Rs 13.87 crore over the same period of time, connoting a CAGR of 80%. For the three months ended June 30, 2007, PPAP registered a topline of Rs 30.62 crore and a bottomline of Rs 4.93 crore. The net profit margin stood at a hefty 16%. Crisil has assigned a SME 1 rating to PPAP denoting ‘highest level of creditworthiness adjudged in relation with other SMEs’

Objective

The company intends to tap the capital market to finance expansion plans at its existing facility. This is expected to go on stream by June 2008. It also intends to set up a new plant for manufacturing auto components at Surajpur. The commercial production at this new plant is expected to commence in October 2008. PPAP has entered into an agreement with Power & Data Corporation (PDC) for contact manufacturing of ‘electrical outlet system’ (EOS) – a patented product from PDC. The first phase will be on stream in March 2008 and the second phase will be on stream by the end of CY2008.

Outlook

PPAP is a preferred supplier for its customers. Most of the clients are on expansion mode in India and have been introducing new models and aiming high volumes. The technical collaborations of PPAP ensure that the company gets access to the best technology and most updated manufacturing practices. PPAP is expected to remain on the high growth path in the near future. The entry into the new business of EOS is expected to add to the bottomline and help the company to diversify. Crisil has given an IPO grade of 4/5, denoting above average fundamentals.

The stock on offer is 14 to 15 times at the upper and lower end of the price band on the fully diluted post issue equity capital. Investors should however note that the company is highly dependent on few customers in the auto component business, especially Maruti Udyog. Also the EOS business will have only one customer – PDC. The company’s ability to sustain its margins in the wake of pressure from both the rising input prices and the customers, to reduce the components’ prices, would decide the future of the company.