PG Electroplast was listed among the “1000 percenters” in my recent piece. It was therefore surprising to note a few days later that notable private investors were piling into a stock that was already up 10x over the past year. This piqued my interest, and on digging a little deeper, I found that the sudden interest in this white goods producer, assembler, and parts supplying minnow wasn’t without some merit.

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Before we get into the story of PG Electroplast, and what it’s doing to get back in the reckoning, let’s get a fix on the lay of the land for original equipment manufacturers or OEM suppliers (vendors producing to brands’ specs) and original design manufacturers or ODMs (product design and development vendors offering products for sale under brands’ labels). Two prominent names in this line of work, that have hogged the market spotlight, are Dixon Technologies and Amber Enterprises.

A conducive macro

A recent report by Goldman Sachs puts numbers to the well-known consumer durables India potential story. The report focused on suppliers to consumer brands like, Dixon and Amber, says the $102 billion domestic consumer electronics sector with about 50 percent local production is seen growing in “early teens” over the medium term. It also expects the global contract manufacturing business for such products, estimated at $480 billion, and dominated by China, to grow at 5 percent a year over the medium term. That’s a sizeable and growing opportunity.

In an earlier report, HDFC Securities had placed India’s washing machine penetration at 12 percent compared to the worldwide penetration of 70 percent. The similar numbers for room air-conditioners are 5 percent and 30 percent, respectively. The report also suggested a CAGR of 10 percent for washing machines and 15 percent for room air-conditioners (ACs) in India till 2025. So, growth prospects seem fairly robust for the sector.

And within it, while Goldman Sachs sees Dixon as a “generalist”, it marks Amber as a “specialist” in ACs. It also suggests there’s “no significant competition in the ODM space” for Amber. That’s the opportunity, and where PG Electroplast can fit in as a strong number 2.

PG Electro’s backstory

PG Electroplast was born in 1977 when its founder, Promod Gupta, a BITS Pilani graduate and a scientist with DRDO, who won the President’s award for his scientific contribution, decided to quit his job and take the plunge as an entrepreneur.

After forming a good working relationship with brands like Weston, Televista and Beltek as a TV components manufacturer, PG took the bold step to manufacture complete TV sets at its facility in Noida in 1995. The consequent onslaught by South Korean and Japanese TV brands in India erased most domestic brands and marginalized even the likes of BPL, Videocon, and Onida.

This was PG’s big nightmare. It went from a flourishing business to a floundering enterprise threatened with extinction in quick time.

Its plastic moulding division—started to help the company keep a rein on costs and control quality of TV parts—turned out to be the saviour. It began to use its expertise to cater to the varying needs of consumer goods players, and even automakers, to soon emerge as the largest supplier of plastic components to the consumer goods sector in India.

Sales picked up, but margins in this business were slim. So, in 2016, the company identified air coolers, a product with high “plastic” content—its area of expertise—as one for it to design and manufacture. This proved a success, with Voltas signing on as a key client.

Next came washing machines in 2017. The company started making these for brands and developed its own design from scratch for semi-automatic machines, which it today supplies to customers like Reliance Retail, Lloyd and Flipkart.

And very soon it will be rolling out its in-house designed fully automatic top-load range.

The other, bigger, bet for PG is air conditioners (ACs). Given its expertise in plastic moulding, it had started out by supplying these for indoor units of ACs. It next moved to work as an OEM for prominent AC brands in 2020, and it is now set to launch its own-designed ACs, for which we learn a deal with a prominent brand may already be in the bag.

So, PG is slowly but surely moving up the ladder from being a plastic mouldings supplier to an ODM for prominent brands, pitting it in the race for a slice of the swelling market dominated by players like Dixon and Amber.

And here, its long-standing relationships with consumer goods brands (as their plastic components supplier) clearly offers it an edge over other mid-sized and small players.

The big shift

PG presently draws 60 percent of its revenues from the plastic mouldings business. But that’s changing swiftly. This is already down from 68 percent a year ago, even as the share of complete units (products) is up to 27 percent from 24 percent, and this is seen rising even more sharply to 50 percent by end of the current fiscal. This has big implications for its return on capital and margins, which have expanded (at EBIDTA level) from 6.6 percent in FY20 to 7.4 percent in FY21.

Industry sources suggest the margins on ODM products are likely to be in double digits and could even improve to mid-teens. The company’s return on capital employed, as a consequence, should also perk up to the high-teens over the next few years.

PG presently has an expanded washing machine capacity of 0.8 million units, much of which will be ODM, and it is set to start its new AC unit in Ahmednagar in 5-6 months. This will spell a 1 million units capacity for ACs—that’s significantly integrated with most components being produced in-house (other than motors, controls and compressors, where India lacks enough technological capabilities).

This is bound to further lift margins and add significantly to the topline. There’s also the PLI scheme for AC components that PG can become eligible for, and it has already set up a subsidiary, PG Plastronics, to avail of various Centre and State benefits. Such incentives, though, will only add a kicker, not change the business model or prospects.

But the numbers on ACs won’t show up as much this fiscal—because the summer is done this year and the next big season is only in 2022—even though products will start being rolled out from December. What’s more, building a customer base for exports, to tide over the weak non-summer domestic season, can take time.

The value proposition

If PG delivers on average the numbers reported in its Q4 over the four quarters of FY22, it would end up with revenues of Rs 1,300 crore and a profit of Rs 40 crore, implying a price-to-earnings multiple of about 20x. This, when compared to peers is at a significant discount, some of it for good reason.

But let’s take a closer look at PG’s performance over the past few years and how it stacks up against its larger peers on key parameters.

PG’s revenues have grown from Rs 239 crore in FY14 to Rs 706 crore in FY21, while its EBIDTA has trended up from just Rs 2.5 crore to Rs 52 crore. And these could see quantum leaps with new capacities and a big shift in sales mix leading to margin expansion.

But let’s take a look at how the company stacks up compared to its peers. Dixon and Amber are over 9 and 4 times larger than PG by revenues. On margins, though, PG is mostly in line with Amber. In terms of debt, PG is definitely more leveraged than its peers, but the recent equity infusion should help here. If you look at the valuation parameters though, like Enterprise Value/sales and Operating Cash Flows to Enterprise Value, PG clearly offers comfort.

Amounts in Rs crore

Important endorsement

What’s equally important for investors is the endorsement of PG's potential by prominent private investors like Baring Private Equity India, Ananta Capital (Taparia family) and members of Patni Family Office with their infusion of Rs 76.6 crore into the company.

These large investors clearly have access to more information and would have done their due diligence before putting in such a sum. What’s also comforting is the credentials of PG’s two bankers, HDFC Bank and State Bank of India, both of whom have stiff credit assessments.

A glimpse of the private investors’ expectations from PG is captured in a quote by Rahul Bhasin, Managing Partner of Baring Private Equity Partners India in the company's fundraise press release, which reads: “We are excited to partner with PG Electroplast in their transformation from a leading plastic moulding player to becoming a full-suite EMS company. The positive feedback we have received from all stakeholders, coupled with management's professionalism and execution focus, inspires confidence. The full-suite EMS space in India has tremendous growth prospects, and we are strong believers in PGEL's capability to capitalise on it.”

That, in a nutshell, sums up PG’s aspiration. And given where the valuations are currently if you wish to bet on the consumer products supply chain story in India (I reiterate my preference for value in brands versus vendors), PG Electroplast may not be a bad wager, given where valuations of its larger peers are. There’s clearly multi-bagger potential here.

But remember, betting on transformation is risky, and if PG slips up, the escalation in stock price from near Rs 36 a year ago to Rs 419 now, will acquire a whole different perspective.

(Edited by : Santosh Nair)

First Published:Jun 26, 2021 3:24 PM IST