IPO Analysis: Azad Engineering Limited

IPO Rating: Apply for listing gains

About the issue  

Azad Engineering (AEL), one of the key manufacturers of qualified products supplying to global original equipment manufacturers (OEMs), is hitting the primary capital market, with its initial public offering. The issue of the company will open on December 20, 2023, for subscription and closes on December 22, 2023. Investors can bid for a minimum of 28 equity shares and in multiples of 28 equity shares thereafter. The public issue with a face value of Rs 2 per equity share comprising a fresh issue aggregating up to Rs 240 crore, and an offer for sale of up to Rs 500 crore by existing shareholders. The company has fixed the price band at Rs 499 to Rs 524 per equity share for its maiden public offer.  

Objects of the issue

The net proceeds of the fresh issue, i.e., gross proceeds of the fresh issue less offer-related expenses are proposed to be utilised for funding capital expenditure, repayment/prepayment, in part or full, of certain borrowings availed by the company and general corporate purposes. 

Company profile  

This company stands as a pivotal manufacturer in precision engineering, crafting intricate, mission-critical components for diverse sectors like energy, aerospace, defence, and oil and gas. Their expertise lies in producing highly engineered, faultless parts, demanded by global giants in these industries like General Electric, Honeywell International Inc., Mitsubishi Heavy Industries Ltd, Siemens Energy, Eaton Aerospace, and MAN Energy Solutions SE. 

Their product spectrum spans 3D rotating airfoil/blade portions for turbine engines, crucial components for various turbines used in industries and energy generation, as well as defence and civil aircraft. These precision pieces cater to high-pressure environments, meticulously crafted from exotic alloys using unique processes pioneered by the company. 

Their impact stretches across supplying vital elements to major commercial aircraft manufacturers like B737, B747, B777, A320, A350, Gulfstream G550, among others. Moreover, their presence extends globally, supplying to countries like the USA, China, Europe, Middle East, and Japan. 

With 15 years of operational experience, this company has solidified its position as a tier 1 supplier for highly complex forged and machined components in energy, aerospace, and defence industries. The stringent qualification process they undergo for each component underscores the high barrier to entry in their domain, taking well over a year for a vendor to qualify. Their consistent recognition and repeat orders from clients testify to their established stature in the industry. 

Operating in sectors where precision is non-negotiable, their products—essential for energy applications and air travel—undergo rigorous quality control due to zero margins for error in manufacturing. Their stringent adherence to safety protocols for life-critical engine products attests to the level of detail and reliability ingrained in their processes. 

The company recognizes the substantial barriers to entry in their industry, estimating a lengthy period of 15-20 years for a newcomer to match their current market standing. This position is fortified not just by their manufacturing prowess but also their reputation as a reliable and competitive strategic partner in the supply chain for OEMs, sustaining their remarkable trajectory in the industry. 

Financials  

The revenue surge from Rs 125.03 crore in Financial Year 2021 to Rs 261.52 crore in Financial Year 2023 showing a CAGR of 44.6 per cent, speaks volumes about their rapid growth. Their commitment to innovation and advanced technology aims to reshape the global precision manufacturing sector while actively contributing to India’s manufacturing landscape. Nevertheless, when it comes to net profit after tax it is very erratic. It dropped from Rs 29.5 crore in FY22 to Rs 8.47 crore in FY23, before increasing to Rs 26.89 crore in the first half of FY24. The reason for such volatility in the profit figure is due to volatility in the margins that have ranged from 3.37 per cent to 16.94 per cent. The company’s RONW has been 4.23 per cent for FY23, which looks very low. For the six-month ending September 2023, the revenue and profit recorded was Rs 169 crore and Rs 26.89 crore, respectively.  

Valuation and Outlook  

The issue is available at a price to earnings (PE) of 57.6x after accounting for expanded equity post-issue and annualizing H1FY24 earnings per share. Compare this with other listed players, which on average are available at much lower PE ratio. Even if we look at price-to-book value, issue seems to be fairly priced considering the lower return ratios. 

*Post issue and annualised earnings 

Looking at the valuation and business, we recommend our readers to subscribe for listing gains only as there is not much left on the table for investors. However, the euphoria around the IPO may give listing gains.