IPO Analysis: Aeroflex Industries Limited

IPO Rating: Apply for long term

About the issue:

Incorporated in 1993, Aeroflex Industries Limited, previously known as Suyog Intermediates Private Limited, manufactures and supplies environment-friendly metallic flexible flow solution products. The company is coming out with its initial public offering (IPO) of equity shares with a face value of Rs 2 per equity share. The price band of the issue has been fixed at Rs 102 to Rs 108 per equity share. The issue size is Rs 351 crore at a higher price band.

The IPO opening date is August 22, 2023, and it will be closing on August 24, 2023. The issue is likely to be listed on the exchange on September 01, 2023. The IPO market lot size is 130 shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 14 lots (1820 shares or Rs 196,560) at the upper price band.

Objects of the Issue

The company intends to utilise the net proceeds from the issue towards the funding of the following objects:

1. Full or part repayment and/or prepayment of certain outstanding secured borrowings (including foreclosure charges, if any) availed by the company,
2. Funding working capital requirements of the company, and
3. General corporate purposes and Unidentified Inorganic Acquisitions.

Promoter holding

The pre-issue shareholding is 91.09 per cent, post the IPO the promoter stake will be 66.99 per cent.

About the company

The company is a manufacturer and supplier of environment-friendly metallic flexible flow solution products catering to global as well as domestic markets. The company also export its products to more than 80 countries including Europe, the USA and others. AIL exports contributed to 80.85 per cent, 84.53 per cent, 80.90 per cent and 74.74 per cent of its revenue from operations, for the ten months period ended January 31, 2023, and Fiscals 2022, 2021 and 2020, respectively. The company supply its products to a wide spectrum of industries for the controlled flow of all forms of substances including air, liquid and solid. During the ten months ended January 31, 2023, the company supplied its products to 633 customers.

Flexible flow solutions play a critical role in the transfer of substances (air, liquid and solid) in any industrial or commercial ecosystem, connecting the origin and end points of various processes. For example, flow solution products are required in fire sprinklers, gas supply, the flow of air (conditioned/controlled) in aircraft, fueling and hydraulics in aircraft. The company has the capability to provide customised solutions up to the assemblies level enabling it to tap the flexible flow solutions value chain. Its product categories include braided hoses, unbraided hoses, solar hoses, gas hoses, vacuum hoses, braiding, interlock hoses, hose assemblies, lancing hose assemblies, jacketed hose assemblies, exhaust connectors, exhaust gas recirculation (EGR) tubes, expansion bellows, compensators and related end fittings. As on January 31, 2023, AIL had more than 1,700 Product SKUs (Stock Keeping Units) in its product portfolio.

The company is into metallic flexible flow solutions made of SS. AIL has recently developed products made of bronze. Its products replace flow solutions made of rubber and polymers. Flexible flow solutions made with stainless steel corrugation are becoming a preferred solution because of their numerous advantages. Metallic flexible flow solutions made with stainless steel produce significantly lower carbon emissions than those made with synthetic rubber making AIL’s products environment-friendly and business model green & sustainable.

Its flexible flow solutions made with stainless steel corrugation conform to BS 6501 Part 1, ISO 10380 and PED CE and are manufactured as per type A, B, and C flexibility. AIL offer a range of metallic flexible corrugated hoses with diameters starting from ¼ inch to 14 inches. Its solutions are capable to handle varied environmental and work conditions and are designed to handle temperature levels from negative 196 degrees Celsius to 982 degrees Celsius and a pressure handling capacity of up to 300 bars. In addition to certifications, its customers, especially the Original Equipment Manufacturers (OEMs), who use the products as a component in their own end products, perform detailed evaluation procedures on its product quality, processes, manufacturing facility and operations before approving us as their supplier. The stringent customer protocols act as a natural quality benchmarking and at the same time pose meaningful trade barriers.

Financials

On the financial performance front, for the last three fiscals, AIL has (on a consolidated basis) posted a revenue/net profit of Rs 144.73 crore/Rs 6.02 crore (FY21), Rs 240.8 crore/Rs 27.58 crore (FY22), and Rs 269.38 crore/Rs 30.16 crore (FY23).

Valuation and Outlook

If we attribute FY23 earnings to post-IPO fully diluted paid-up capital, then the asking price is at a P/E of around 46.35xThe issue is priced at a P/BV of 10.82 based on its NAV of Rs. 9.98 as of March 31, 2023, and at a P/BV of 5.06 based on its post-IPO NAV of Rs. 21.35 per share (at the upper cap). Thus, the issue appears fully priced.

The company has paid a dividend of 10% for FY22 and FY23 and has also adopted a dividend policy based on its financial performance and future prospects.

The company has demonstrated steady growth in its topline and bottom line. Furthermore, the company has a virtual monopoly as there are no listed peers with similar business. Hence, we recommend investors to subscribe to the issue with a long-term perspective.