Growth prospects make HPL a buy for long term

HPL Electric & Power will raise upto Rs 361 crore from the primary market to reduce debt and to bring down cost of working capital. The immediate benefit of this will be seen in lower interest expense and higher earnings and net margin. However, the company's return on equity (RoE), which is less than half of some of its peers, may not improve in the near term due to infusion of equity capital.

Given its relatively cheaper valuation, the stock may report listing gains. Barring this, medium-term investors may not have much to look forth in the IPO. But, long-term investors with a horizon of at least two years may subscribe considering the improving condition of state electricity boards (SEBs) and its initiative to enter the consumer segment.

Business
HPL manufactures electric meters, switchgear, lighting and wire cables. It earned 47% of its FY16 revenues from sales of electric meters and commands 20% share in `3,000-crore market.

Financials
After the IPO, the company's total debt is expected to fall to `200 crore from `547 crore in FY16.

Risks & Valuation
The metering business is commoditised, while other segments are small where HPL has less than 5% market share. It plans to enter consumer business which may increase ad expense, thereby reducing profitability at least in the short term.

At upper band of `202, the stock will be valued 14.4 times the projected FY18 earnings -lower than the PE of over 30 for peers such as Havells India, Crompton Greaves Consumer Electricals and V-Guard.