The preliminary public providing (IPO) of Hyderabad-based precision elements producer Azad Engineering will stay open throughout 20-22 December, 2023. The entire supply is price round ₹740 crore out of which ₹240 crore is contemporary problem and ₹500 crore is a proposal on the market. The proceeds from the contemporary problem shall be utilised for pre/reimbursement of debt (₹138 crore), funding capital expenditure (₹60 crore) and normal company functions.
The worth band of the difficulty has been set within the vary of ₹499 to ₹524 per share. On the higher finish, the corporate’s market cap involves round ₹3,097 crore. Listed here are 5 issues to know in regards to the IPO.
1. Enterprise
Azad Engineering is engaged within the manufacturing of extremely engineered precision solid and machined elements which might be mission and life-critical. The corporate primarily operates in power (87 per cent of working income), aerospace and defence (9 per cent), and different segments together with oil and gasoline and scrap (4 per cent).
Inside the power house, the corporate manufactures airfoils/blades, particular machined elements, and combustion part assemblies for land-based generators with purposes in industrial and power crops utilizing completely different gas sorts resembling nuclear, hydrogen, pure gasoline, and thermal. On this house, the corporate has acknowledged Triveni Generators as its listed peer.
Aerospace and defence merchandise embrace airfoils/ blades and elements for engines, auxiliary energy items, hydraulics, flight controls, gas, and inerting sections of business and defence aircrafts and spacecrafts, amongst different defence methods. The corporate has recognised Dynamatic Applied sciences, MTAR Applied sciences, and Paras Defence and Area Applied sciences as listed friends within the house.
For the oil and gasoline trade, the corporate manufactures elements of drilling rigs resembling drill bits and different vital elements utilized in drilling tools. These elements are integral to the exploration and manufacturing phases.
The corporate’s clients embrace world authentic tools producers resembling GE, Honeywell Worldwide, Mitsubishi Heavy Industries, Siemens Vitality, Eaton Aerospace, and MAN Vitality Options. It derives almost 80 per cent of its gross sales from outdoors India and the remaining 20 per cent from inside India.
Major uncooked supplies embrace unique alloys resembling titanium, nimonic and inconel, castings, specialised metal, and aluminum. The corporate doesn’t have long-term contracts with its uncooked materials suppliers and uncooked materials is bought as per the order from the purchasers.
2. Financials and Valuation
The corporate has been in a position to develop its working income by 43 per cent CAGR throughout FY21-23 to round ₹252 crore resulting from a rise within the enterprise quantity from the sale of merchandise for power, aerospace, and defence industries, whereas it reported income of round ₹159 crore throughout H1FY24. It has been in a position to develop its EBITDA at CAGR in keeping with income development thereby sustaining its margin at round 30 per cent over the last three fiscals. Nevertheless, internet revenue has been fairly risky, primarily resulting from finance prices. Internet revenue diminished from round ₹11 crore in FY21 to ₹8.5 crore in FY23 whereas it grew to ₹28.8 crore in H1FY24. Finance value for the corporate elevated from round ₹5.3 crore in FY21 to ₹52.4 crore in FY23 and remained at round ₹21.8 crore in H1FY24. As per the RHP, the rise was primarily resulting from curiosity on compulsorily convertible debentures (CCDs) and optionally convertible debentures (OCDs) and premium on redemption of sure OCDs. As per the administration, owing to IPO proceeds and the conversion of sure CCDs, the curiosity value is anticipated to fall going ahead. Its D/E is round 1.47 occasions in comparison with almost zero debt in listed friends’ stability sheet.
The valuation stands at a trailing P/E (H1FY24 internet revenue) of round 58 occasions (366 occasions contemplating FY23 PAT). Its EV/EBITDA (H1FY24 EBITDA annualised) is available in at round 32 occasions (it’s 46 occasions contemplating FY23 EBITDA).
3. Strengths
The corporate operates in an trade with important obstacles for brand spanking new entrants on account of prolonged and stringent qualification course of. A few of these elements are life-critical and mission-critical, requiring zero elements per million defect. Usually, the approval course of takes greater than 15 months, along with the time required for establishing manufacturing infrastructure and services.
Moreover, the corporate has a long-standing buyer base that features main product OEM corporations, with Common Electrical and Mitsubishi Heavy Industries as key strategic companions. The corporate has a median relationship of over 10 years with these two companions. Moreover, the corporate has a diversified buyer base unfold throughout international locations such because the US, the UK, Europe, Japan, and the Center East.
4. Dangers
The corporate sells merchandise to clients in India and abroad, together with the USA of America, Europe, Japan, the Center East, and the UK. Consequently, it’s topic to a number of and sophisticated authorized and regulatory necessities particular to numerous jurisdictions. Moreover, the corporate faces a big dependency on the sale of its merchandise to key clients, with income focus from the highest 5 clients amounting to 60 per cent in H1FY24.The potential lack of any of those essential purchasers or a decline in income from gross sales might profoundly influence the corporate.
5. What buyers ought to do?
The corporate has been in a position to develop its income and EBITDA at a excessive CAGR of greater than 40 per cent within the final three years. The entry obstacles within the trade bode effectively for the corporate, whereas excessive finance prices have dragged PAT margins prior to now. Seen in isolation, a P/E of 57 occasions (annualised) seems excessive, however it’s in keeping with the valuation of listed friends. Lengthy-term buyers can wait and watch to evaluate sustainable income development price, stability in profitability, and the power to scale up earlier than they make the leap.
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