HP Adhesives IPO: How good is it?

In our story, HP Adhesives IPO: Information analysis, we have shared the key details of the IPO, along with important information about the company. Here we will answer some questions about HP Adhesives and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
No. The company's earnings before tax during the last 12 months was only Rs 13.5 crore.

2) Will the company be able to scale up its business?
Yes. The company has planned to utilise the proceeds for capacity expansion and expand its distribution network, which would enable it to scale up its business.

3) Does the company have recognisable brands truly valued by its customers?
Yes. The company has a recognisable brand in the organised adhesive space. But we would like to mention that the company directly competes with Pidilite, which has a 65 per cent market share in the adhesive and sealant industry.

4) Does the company have high repeat customer usage?
No. Since the company operates in a highly competitive retail environment, it is not possible for it to have consistent repeat customers.

5) Does the company have a credible moat?
No. Even though the company has a recognisable brand in the segment, it does not offer anything unique.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
No. The company has exposure to international markets, with exports contributing 17 per cent to its FY21 revenue. On the other hand, it imported 17 per cent of raw materials during the same period. Since raw-material prices depend on the prices of crude oil, any major change in these prices would affect the company's profitability.

7) Is the business of the company immune from easy replication by new players?
No. The industry is steadily witnessing the emergence of many organised and unorganised players. Since the company does not have any kind of major leadership in its products, these products can be easily replicated.

8) Is the company's product able to withstand being easily substituted or outdated?
No. There are several direct organised and unorganised competitors that sell similar products. Thus, the company's products can be substituted.

9) Are the customers of the company devoid of significant bargaining power?
Yes. Since the company majorly operates in the retail space, customers do not have significant bargaining power.

10) Are the suppliers of the company devoid of significant bargaining power?
Yes. The company procures raw materials from various suppliers. So, no one supplier has significant bargaining power. But we would like to mention that the company does not have any long-term arrangement with suppliers. Thus, the prices of raw materials fluctuate based on the prices of crude oil.

11) Is the level of competition the company faces relatively low?
No. The company operates in a highly competitive place with the presence of both organised and unorganised players. Besides, it is directly competing with the adhesive giant Pidilite.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Its promoters Mrs Anjana Haresh Motwani and Mr Karan Haresh Motwani will continue to hold a 71 per cent stake post issue.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. The top three managers have more than 15 years of combined experience in the company. Its chairperson Mrs Anjana Haresh Motwani and managing director Mr Karan Haresh Motwani have been associated with the company for 20 years.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes. We have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes. The company has one direct tax proceeding and six indirect tax proceedings, but these do not cast any doubt on the management.

16) Is the company's accounting policy stable?
Yes. But we would like to mention that the company was converted into a private company in FY20 from a partnership firm. Therefore, it had to adopt policies and standards that are applicable to companies. Apart from these mandatory changes, the company has not changed anything in recent years.

17) Is the company free of promoter pledging of its shares?
Yes. The promoters have not pledged any of their shares.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and return on capital employed of more than 18 per cent?
No. The company managed to generate a return on equity of 27.3 per cent and a return on capital employed of 20.5 per cent in FY21. It generated a three-year average return on capital employed of 21.4 per cent, but the three-year average return on equity was -27 per cent. This huge fluctuation was due to a loss posted by the company in FY20 as a result of a huge exceptional item. During FY20, the company had to pay Rs 6.8 crore to the Sabka Vishwas (legacy dispute resolutions) scheme and Rs 55 lakh to the Mahavat Amnesty scheme.

19) Was the company's operating cash flow positive during the last three years?
Yes. The company has posted positive operating cash flow during the last three years.

20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
Yes. The company has increased its revenue by 16 per cent CAGR in the last three years.

21) Is the company's net debt-to-equity ratio less than one or is its interest-coverage ratio more than two?
Yes. The company had a debt-to-equity ratio of 0.7 and an interest-coverage ratio of 5.6 times as of September 2021.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
No. The company requires huge working capital. It has a cash conversion cycle of 82 days.

23) Can the company run its business without relying on external funding in the next three years?
Yes. The company will have sufficient capital to fund its expansion plans. So, it will not require any external funding.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. Even though its short-term borrowings increased by 5 per cent from FY19 to FY21, they decreased by 18.7 per cent from March 2021 to September 2021.

25) Is the company free from meaningful contingent liabilities?
Yes. As of September 2021, the company had contingent liabilities of Rs 2 crore - only 0.05 per cent of the equity.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No. The stock will only offer an operating-earnings yield of 3.2 per cent on its enterprise value.

27) Is the stock's price-to-earnings less than its peers' median level?
Yes. The company will trade at a P/E of 35.6 times as compared to its peer Pidilite's P/E of 90 times.

28) Is the stock's price-to-book value less than its peers' average level?
Yes. The company would trade at a P/B of 3.3 times as compared to its peer Pidilite's P/B of 20.1 times.

Also, read about HP Adhesives IPO: Information analysis to learn about the company's key IPO details and important information.

Disclaimer: The author may be an applicant in this Initial Public Offering.