The AC that keeps you cool during India’s scorching summers could actually be made by them. PG Electroplast is one of India’s leading Electronic Manufacturing Services (EMS) players.
It provides end-to-end solutions for a range of products, such as air conditioners, air coolers, washing machines, LED TVs, etc to 70+ Indian and Global brands. Additionally, it also has plastic moulding and tool manufacturing verticals for consumer durables, sanitaryware, automotive, and others.
The company till now has followed an organic growth strategy, gradually ramping up capacities and strategically venturing into newer products with high growth potential. PGEL has 5000+ employees across its 11 manufacturing units in Greater Noida (UP), Ahmednagar (MH), Bhiwadi (RJ) and Roorkee (UK).
*Source: PGEL’s Q1 FY25 Investor Presentation.
Referring to the snippet above, its revenues have grown significantly at a CAGR of ~44%, from 639 Cr in FY20 to 2747 Cr in FY24. A breakdown across its business verticals tells us that it is its product vertical that has been the major growth driver, growing at ~83% CAGR during the same period, followed by electronics, tool manufacturing, and then the plastic moulding vertical. Interestingly, the plastic moulding segment (Majority revenue contributor in FY20) is the laggard in terms of growth in the last 5 years.
The revenue share of its product vertical has grown from 23% in FY20 to 61% in FY24. And, it interests us even more as we see a lot of further headroom in this space.
India’s Consumer Electronic Market: The Ball Has Just Started Rolling?
Indian appliances and consumer electronics industry was estimated to be ~76,000 Cr in 2022 and is expected to more than double to 1.48 Lakh Cr by 2025. The Indian Room Air Conditioner (RAC) and Washing Machine (WM) market is projected to reach ~50,000 Cr and ~45,000 Cr respectively by FY29.
Another report from EY suggested that India is expected to become a powerhouse in terms of electronics manufacturing. The Indian consumer durable market is growing, driven by factors like low penetration, growing purchasing power, availability of financing options, growing penetration of electricity, etc.
This change in demand trends in the country has triggered a growing proportion of outsourcing by OEMs supporting the growth story of EMS players like PGEL. The China +1 strategy and developing a domestic electronics ecosystem are other growth factors.
*Source: EY Report on Indian EMS Industry.
Shifting Focus From Contract Manufacturing to ODMs
The EMS space has undergone significant evolution, adapting to changing demand trends. A key development has been the transition from a contract manufacturing model to an ODM model.
In simpler terms, contract manufacturing involves EMS providers sourcing components, manufacturing, assembling, and supplying finished products to OEMs. In contrast, the ODM model allows EMS companies to take on the responsibility of designing products based on OEM specifications. This process includes conceptualization, prototyping, and design iterations, all conducted in close collaboration with the OEMs.
Additionally, the ODM model covers logistics and after-sales support, offering OEMs a more comprehensive solution.
Government Initiatives Supporting Growth
The government launched a production-linked incentives (PLI) scheme for white goods (ACs and LEDs), for 7 years with a total capital allocation of 6,238 Cr in FY22.
The objective of this scheme is to establish a comprehensive component ecosystem for the ACs and LED lighting industries in India, positioning the country as a key player in global supply chains.
As of July 2024, 66 applicants have been selected as beneficiaries of the PLI scheme, with a total committed investment of 6,962 Cr. Among these beneficiaries is PG Technoplast, a wholly-owned subsidiary of PGEL. The third round of applications for the PLI scheme for white goods closed on October 12, 2024, attracting applications from 38 companies that committed investments totaling 4,121 Cr.
PGEL anticipates adding 30 Cr to PAT through the PLI initiative and an additional 6 Cr from state incentives in FY25.
Coming back to PGEL now.
Business Verticals
We have already had a glimpse of PGEL’s business verticals and understood how its product vertical is the driving force. Let’s dig deeper now-
- Product Business: This vertical encompasses its ODM capabilities for products such as Room Air Conditioners (RAC), washing machines (WMs), and air coolers.
The product business contributed 61% of its FY24 revenues, with RAC alone making 1317 Cr i.e., 48% of total revenues.
- Plastic Moulding: Its plastic moulding business serves a diverse range of industries, including automotive, consumer electronics, and sanitaryware. The segment historically has been the cornerstone of PGEL and was the majority contributor to its topline. In FY20, 68% of revenues came from this segment.However, PGEL’s strategic moves towards high-growth product business led to the segment’s revenue contribution dropping to 25% as of FY24.
As rightly said-
“If you don’t like change, you’ll like irrelevance even less.”
-Michael Lombardi
- Consumer Electronics: Under its consumer electronics vertical, the company handles PCB assemblies for various applications on a turnkey basis for leading TV manufacturers, and also assembles TVs.
The TV business contributed ₹306 Cr to its topline in FY24, showing a remarkable YoY growth of 132%. However, this business has now been moved to a new 50% JV, which we will discuss later.
As a result, the company anticipates temporary degrowth in this vertical for FY25. To counter this, it is actively focusing on expanding other areas of its electronics business to mitigate the impact.
- Tool Manufacturing: This vertical serves as more of a backward integration for its plastic molding and product divisions, enabling faster turnaround for the company’s ODM projects by manufacturing critical tools in-house. This segment contributed a mere 0.4% to the company’s topline in FY24.
Across its verticals, the product business is expected to be the major growth driver for PGEL going forward. We’ve already discussed the potential for rapid growth in the Indian consumer electronics sector, driven by products like RACs and WMs—areas where PGEL holds a strong position.
Now, let’s break it down and explore how PGEL has evolved from a plastic moulding business into a leading ODM player, and what its plans are for the future.
Strategic Move Towards Becoming a Leading ODM Player
PGEL has continuously evolved its product portfolio catering to the dynamic demand trends in the consumer durable industry of the country.
Here is a quick rundown of its evolution over the years:
- 2003 – Started manufacturing plastic moulded components.
- 2014 – Focus Pivot to Product: Started manufacturing air coolers.
- 2016 – Commenced tool manufacturing vertical.
- 2017 – Started manufacturing semi-automatic top-load washing machines (SATL)
- 2018 – RACs indoor units (IDUs)
- 2021 – RAC outdoor units (ODUs) & fully-automatic top-load watching machines (FATL)
- 2022 – LED TVs
As far as the current status quo is concerned, PGEL has seen robust growth in both its products, the RACs, and the WMs.
RAC Sales Grew by ~4x in the last 3 years.
PGEL began manufacturing RAC indoor units (IDUs) in 2018, followed by outdoor units (ODUs) in 2021. It currently offers fully built RAC units ranging from 0.7 to 2.5 tons, covering fixed-speed and inverter categories across various star ratings.
To meet the rising demand in India, the company has proactively expanded its monthly capacity to 4.75 lakh units, making it the second-largest player in RAC finished goods sales to OEMs. In the last 3 years, its revenues from RACs have surged nearly 4x, reaching 1,317 Cr in FY24—accounting for 48% of the company’s total revenue.
Washing Machines: Powering RAC Growth Alongside
Alongside the substantial growth PGEL has experienced in the RAC product vertical, washing machines have also served as a significant supporting force.
It is the second-largest washing machine ODM player in the country, providing end-to-end assembly solutions for final products. The company began manufacturing semi-automatic washing machines in 2017 and now offers both semi-automatic and fully automatic washing machines in capacities ranging from 6 to 14 kg and 6.5 to 7.5 kg, respectively.
Revenues from washing machines have doubled over the last 3 years, increasing from 167 Cr in FY22 to 313 Cr in FY24. This growth is backed by a 1.7x capacity addition during the same period to cater to the burgeoning demand.
Further CAPEX on Cards
As you must have noticed in the above two charts, PGEL is further adding capacity. Its CAPEX guidance for the year stands at 370 – 380 Cr.
The management broke down its Capex plans for the year –
- Constructing 1.1 Mn Sqft. of Buildings in Supa, Bhiwadi, and Noida.
- 180 Cr to be spent on land and building.
- 125-130 Cr for plant & machinery in the RAC product vertical.
- 35-40 Cr in the WMs vertical.
- 3 Cr for Coolers
- 20 Cr for maintenance capex & sanitaryware.
These investments are expected to expand the monthly capacity for RACs from 4.5 lakh units in FY24 to 7 lakh units while increasing the capacity for washing machines from 1.15 lakh units to 2 lakh units.
In the plastic molding business, the company intends to focus its investments on the sanitaryware vertical.
Scaling its Brand Partnerships
PGEL has strong and long-standing relationships with top-tier domestic and international brands and it is constantly ramping up its brand partnerships. It added 10 more clients in FY24.
The number of RAC brands PGEL served doubled from 14 in FY23 to 30 in FY24. While the increase in washing machines wasn’t the same, it still added 3 more clients, taking the total to 25.
*Source: PGEL’s Q1 FY25 Investor Presentation.
PGEL’s vertically integrated model, from tool manufacturing to final assembly, allows it to maintain cost leadership while timely delivering high-quality products. This, in turn, helps it become a reliable ODM player in this competitive market.
Also, talking about cost leadership, PGEL comfortably beats its competitors on the margins front. Refer to the chart below-
Product Business Affected By Seasonality Factors
Both major drivers in PGEL’s product verticals – RACs and WMs are significantly influenced by seasonal factors. Consumers typically purchase ACs during the peak summer months, while WMs see increased sales during the monsoon season.
Capacity utilization for both product categories generally ranges from 80% to 90% during their respective peak seasons. The peak season for RACs typically runs from January through May or June, while for WMs, it spans from May to December. Consequently, WMs can help offset declining sales during the off-season for RACs, and vice versa.
During the off-season, capacity utilization drops to 20% for RACs and 40% for WMs, as per the company’s management.
Now, turning back a little. We had previously said that its TV business has moved to a new JV, let’s talk more about that –
Shifting the Television Business to a New Joint Venture
PGEL partnered with Jaina Group in Jul 2023 to form a 50:50 JV – Goodworth Electronics aimed at manufacturing Televisions. As of FY24, its TV business contributed 306 Cr to its topline, showing a remarkable YoY growth of 132% and that would make you think why transfer a business with such growth numbers?
The decision is a strategic move to capitalize on the expanding TV market, as Jaina Group is a prominent player in consumer electronics, owning brands like Karbonn, Gionee, Sansui, and Sens. Additionally, Jaina is a Google ODM licensee in India. Initially, this JV will concentrate on ODM production of Google-certified LED TVs.
As far as FY25 is concerned, the management clarified during the Q1 FY25 concall that total revenues from its electronics business are assumed to be 200 Cr, with 100 Cr already realized in Q1. A significant portion of this revenue stemmed from sales to Goodworth Electronics, involving existing electronic components and PCB assemblies for televisions. Going forward, PGEL will no longer engage in TV sales.
Management also said that it anticipates 600 Cr in revenues from the JV in its first year, projecting a PAT margin of 2%. This would result in a PAT of 12 Cr, with 6 Cr expected to flow to PGEL in line with the 50:50 JV structure.
Views and Valuation
Here is a glimpse of PGEL’s Q2 FY25 results:
- Revenue grew by ~46% YoY to 671 Cr.
- EBITDA also grew significantly by ~48% YoY to 60.5 Cr, while EBITDA margins stayed consistent.
- PAT grew by ~57% YoY to 19.4 Cr.
Even though Q2 is generally a weaker quarter for the RAC business, its still showed showed growth of 212% YoY, majorly on the back of a lower base and early monsoons last year. Its WMs also grew decently by 23% YoY.
Looking ahead, PGEL is poised for further growth, supported by factors such as increasing demand for its product verticals, a vertically integrated business model, and ongoing capacity enhancements.
The management has maintained its revenue guidance of ~4,250 crore for FY25, despite the impact from the TV business, and anticipates a PAT of ~250 crore.
In terms of valuation, PGEL is currently trading at a P/E ratio of 87 times on a TTM basis. This is comparable to peers like Amber Enterprises and Epack Durables, which are trading at P/E ratios of 100 times and 82 times, respectively, indicating that PGEL’s valuation aligns with its industry peers.
Overall, PGEL’s strong position in the EMS sector and the robust growth potential of its product business make it an attractive investment opportunity. We expect the company to continue its growth trajectory in the coming years.
Disclosure: I, Sidhanth Paul, Research Analyst, author, and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific view(s) in this report.
Research Analyst or his/her relative or Capitalmind Research LLP does not have any financial interest in the subject company. Also, the Research Analyst, his relative, Capitalmind Research LLP, or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or Capitalmind Research LLP or its associate does not have any material conflict of interest at the time of publication of this research report.
Also, PGEL is a part of our Capitalmind Premium Portfolios. This article is intended solely for informational purposes and should not be considered as an investment recommendation.
Capitalmind Research LLP is a SEBI Registered Research Analyst having registration no. INH000014003.
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