Unveiling the Potential: A Comprehensive Overview of Polymatech Electronics Private Limited's Upcoming IPO
10 November 2023
Pros:
1) India's Semiconductor Market: Driving Factors and Government Support: India's semiconductor market has great potential for growth due to several factors. Firstly, India has a large population of over 1.3 billion people, which creates a significant demand for electronic devices and technologies. Additionally, India has a rapidly growing middle class with increasing purchasing power, which is driving demand for smartphones, laptops, and other electronic devices. Furthermore, the Indian government has recognized the importance of the semiconductor industry and has taken several steps to promote its growth. The Indian government has taken a number of actions to support the expansion of the semiconductor industry after realising the sector's importance. Over a dozen businesses have expressed interest in setting up ATMP operations in India as a result of the government's Semiconductor Mission, which offered financial support of Rs 76,000 crore to turn India into a semiconductor centre. Overall, the combination of a large population, growing middle class, and government support make India a promising market for the semiconductor industry.
2) Remarkable PAT Margins: Due to the global chip shortage and increase in demand, the company has experienced excellent Revenue growth of 415% y-o-y and PAT growth of 374% in FY23. Company is also sustaining very good PAT margins of around 25% from couple of years
3) Renowned customers: The company’s customers include multi-national corporations some of which are Fortune 1000 companies. Products are installed at various factories including Shin-Etsu, Japan, Vishay Precision Group, Stanley, Lohman, Okaya, Japan, AMRL Hitech City (JV with Tamil Nadu Industrial Development Corporation Limited), ASPEN Infra (formerly Suzlon Infrastructure Ltd), Mori Mura, Japan; airports such as Coimbatore airport of Everrise Electric; Stadiums such as Sawai Mansingh Stadium; gurudwaras such as Banglasaheb, New Delhi and temples such as Parthasarathi Temple, Chennai.
4) Strategic Advantages in Opto-Semiconductor Market: First Mover Benefits, Strong Entry Barriers, and Global Presence: The company enjoys first mover advantage and benefit from high barriers for entry into market due to the low availability of technology and machinery required to manufacture opto-semiconductors in India. The manufacturing plant at Oragadam, Tamil Nadu is based on 6 acres of leased land, leased from State Industries Promotion Corporation of Tamil Nadu, and is having 1,47,000 Sft. of factory building area. Apart from India, company have presence in the following countries – United States of America, Middle East and North Africa, European Union, Japan, Taiwan and Finland. At global level competition from various companies such as OSRAM GmbH, Broadcom Inc, Samsung Group, LITE-ON Technology, Lumileds Holdings, Toshiba Electronic Devices & Storage Corporation, Mitsubishi Electric Corporation, ON Semiconductor (Onsemi) as per CARE Edge Report. OSRAM GmbH of Germany and SAMSUNG of South Korea are the top competitors.
5) IPO Fund Usage: The company intends to use the fresh issue for expansion purposes for the purchase of new machinery towards enhancing the existing facility at Oragadam, Kancheepuram, Tamil Nadu.
Cons:
1) Working Capital Woes: Poor working capital management has resulted in the company having very high trade receivables of Rs. 133 Cr., which have been increasing steadily. The company is also forced to source its raw materials on a shorter credit period, which is reflected in low trade payables. This has led to an increase in working capital loans.
2) Salary Expenses: Margin Impact and Industry Benchmarks: The salary expense totals Rs. 1.26 crore, representing 0.2% of the revenue. In comparison, industry norms indicate that employee benefit expenses for manufacturing typically range between 8-10% of the revenue. This implies a potential for reduced margins for the company if employee benefit expenses align with industry standards.
3) Transparency and Efficiency Concerns: Unveiling Undisclosed Charges and High Fees: An undisclosed consultancy fee of Rs. 5.57 Crore and High manufacturing fee of Rs 7.21 Cr. This undisclosed high consultancy charge raises concerns about transparency and financial efficiency, potentially indicating a lack of clear justification for the substantial spending.
4) Company's Minimal Electricity Expenditure in Contrast to Industry Standards: It is a bit surprising to see, that with own manufacturing facitlity and capabilities the company has just expensed Rs. 52 Lakhs as the electricity expense which is only 0.1% of the revenue whereas the industry standards stand around 1-2% .
5) Less customer diversification: The company relies on specific customers who have significantly contributed to a substantial portion of our overall revenues. Cumulatively, the top five customers constituted 61.99%, 65.78%, and 72.70% of the total revenue for the fiscal years ending March 31, 2023, 2022, and 2021, respectively. The composition of the top five customers varies across these years. In each fiscal year, the largest customer (distinct in all the years) represented 22.26%, 15.91%, and 22.24% of the total revenue for the Fiscals 2023, 2022, and 2021, respectively.
6) Crisil Rating: "The Crisil rating for the company stands at BB+. Additional details can be found at the following link: https://www.crisilratings.com/mnt/winshare/Ratings/RatingList/RatingDocs/PolymatechElectronicsPrivateLimited_March%2030,%202023_RR_316143.html"
Final Verdict:
POLYMATECH's worldwide reach and robust net margins indicate investment potential, yet concerns arise from inadequate working capital management, limited customer diversification, and a lack of financial transparency. Prospective investors should approach with caution, considering risks such as foggy financials and heightened competition that could potentially result in margin reductions.