Aeroflex Industries
IPO Size: Rs. 351 cr
- Rs. 162 cr Fresh Issue, for working cap (Rs. 84 cr) and debt repayment (Rs. 32 cr of total Rs. 45 cr debt)
- Rs. 189 cr Offer For Sale (OFS) by listed promoter Sat Industries. 91% combined promoter holding to drop to 67% post IPO.
Price band: Rs. 102-108 per share
M cap: Rs. 1,397 cr, implying 25% dilution
IPO Date: Tue 22nd Aug to Thu 24th Aug 2023, Listing: Fri 1st Sep 2023
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
Stainless Steel Hose Manufacturer
Aeroflex Industries manufactures stainless steel corrugated flexible hoses and assemblies for industrial use, in oil and gas, refinery, steel, chemical sectors, as well as emerging sectors like fire sprinkler, solar, electric vehicle, semiconductors, defence etc. It has 1,700+ SKUs with stainless steel flexible flow solutions being an alternative for rubber and polymer. Current production capacity stands at 11 million meters per annum, which is being increased by about 30% through internally funded debottlenecking efforts. Exports accounted for 80% and 88% of revenue in FY23 and Q1FY24 respectively. Since global economies are slowing down, demand from old-economy sectors (accounting for 80% of FY23 revenue) of steel, oil and gas, chemicals may reduce, although renewal energy demand is rising.
Healthy Margins
Since FY20, revenue rose at 23% CAGR to touch Rs. 269 cr in FY23. This growth was driven by volume (6%) and better realization (17%) on account of favourable product mix and higher steel prices. EBITDA margin increased from 15% in FY20 to 20% in FY23, as capacity utilization rose from 71% in FY20 to 83% in FY23 and higher value add products. FY23 PBT stood at Rs. 44 cr, with PAT of Rs. 30 cr, translating into a healthy net margin of 11% and EPS of Rs. 2.64.
Company’s Q1FY24 performance, gauged from parent Sat Industries’ quarterly earnings, showed 23% YoY rise in revenue to Rs. 84 cr and 31% YoY jump in PBT to Rs. 14 cr. Q1FY24 PAT (though not disclosed) is estimated at about Rs. 10.6 cr, translating into an EPS of 93 paise for the first quarter.
Fully Priced IPO
Annualised Q1FY24 earnings leads to FY24E EPS of Rs. 3.5 post-dilution, which discounts the IPO price by a PE multiple of about 31x, on current year earnings. This makes the IPO fully priced, as FY23’s 26% RoE may shrink, due to IPO dilution, as also, working capital-intensive nature of business, with 5.5 months outstanding in inventory and debtors.
Moreover, of the Rs. 67 cr debtors, as of 31.3.23, Rs. 12 cr debtors are outstanding for over 6 months yet not provided for. Historically, just 3% debtors were outstanding for over 6 months, but this percentage jumping to 18% just before the IPO raises eyebrows.
Promoter Cashing Out?
Promoter has sold 7.5% stake in the company to private investors in May-Jun 23, for Rs. 76 cr, which was not a part of DRHP. Now, via the OFS, 13.5% stake is put on the block (not reduced even after secondary sale). In June 2023, shares were sold at Rs. 87.56 per share. 23% premium to pre-IPO price, just 2 months ago, is not ‘investor-friendly’.
PS: Group company Sah Polymers raised Rs. 66 cr via IPO (fresh issue) in Jan 2023, and spent 17% or Rs. 11 cr as issue expenses, which is more than double the general norm. Sah Polymers is currently trading at a PE of 81x, whereas other packaging companies are ruling at PEs of 15-25x. Such sharp deviation in PE multiples (for small size of Rs. 100 cr topline and falling PAT after IPO) and hence the share price hints of ‘more than fundamentals’ being at play. Since promoter (Sat Industries) and merchant banker (Pantomath) to Aeroflex remain the same as Sah’s IPO, a red flag is also being raised.
24th Aug 2023 at 09:00 am
19th Aug 2023 at 12:52 pm
18th Aug 2023 at 12:32 pm