IPO Analysis: EPACK Durable Ltd

IPO Rating: Apply for the long-term

About the Issue   

The company functions as an Original Design Manufacturer (ODM) for room air conditioners (RAC) and held the second-largest position in India in Fiscal 2023. It is launching its initial public offering (IPO) for equity shares valued at Rs 10 each. The IPO price range is set between Rs 218 and Rs 230 per equity share, resulting in a total issue size of Rs 640.05 crore at the upper price band. The IPO is scheduled to commence on January 19, 2024, and will conclude on January 23, 2024. The market lot size for the IPO is 65 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 845 shares or a total investment of Rs 1,94,350 assuming the upper price band.  

Objects of the Issue   

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes: 

1. Funding capital expenditure for the expansion/setting up of manufacturing facilities 

2. Repayment or prepayment, in part or in full, of certain outstanding loans of the company 

3. General corporate purposes. 

Promoter holding   

Bajrang Bothra, Laxmi Pat Bothra, Sanjay Singhania, and Ajay DD Singhania are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 42.90 per cent in the company.    

Company profile   

The company functions as an Original Design Manufacturer (ODM) for room air conditioners (RAC) and held the second-largest position in India in Fiscal 2023 based on the total number of units (combining indoor and outdoor units) produced through the ODM route. 

The company has recognized an opportunity to enhance the value it provides to customers. Consequently, it has initiated the manufacturing of diverse components, including sheet metal, injection-moulded, cross-flow fans, and PCBA components.  

Simultaneously, the company leveraged its existing manufacturing infrastructure to strategically broaden its presence in the small domestic appliances market. This move was especially significant considering the seasonal demand patterns for room air conditioners. Currently, the company is involved in the design and manufacturing of induction cooktops, mixer grinders, and water dispensers. 

The company boasts a prestigious clientele, including prominent names such as Blue Star Limited, Daikin Airconditioning India Private Limited, Voltas Limited, Havells India Limited, Haier Appliances (India) Private Limited, Godrej and Boyce Manufacturing Company Limited, Bajaj Electricals Limited, Usha International Limited, and others. 

Commencing operations with a solitary manufacturing unit in Dehradun, Uttarakhand, in 2003, the company has undergone substantial growth in its manufacturing operations. This expansion includes the establishment of Dehradun Unit II, Dehradun Unit III, and Dehradun Unit IV, along with the Bhiwadi Manufacturing Facility and the Sri City Manufacturing Facility. 

Financials    

Despite the outstanding growth the company achieved in the past few years, with its revenue doubling and net profit increasing fourfold from FY21 to FY23, the performance in H1FY24 was notably lacklustre. Projecting the half-year figures for FY24 suggests a notable potential shortfall compared to the previous performance. Considering the seasonal demand patterns, it's worth noting that the first two quarters traditionally experience lower demand for air conditioners.  

Nevertheless, there is optimism regarding a potential surge in sales during the upcoming quarters, driven by increased demand in the summer season. The last quarter (Jan-March) is anticipated to make a substantial contribution, accounting for around 35-40 per cent of the total revenue for FY24. 

The management has acknowledged that the company encountered a setback in line with overall trends in the sector. However, they are optimistic about a recovery, attributing it to a new plant that will augment the capacity. The company boasts a return on equity (RoE) and return on capital employed (RoCE) of 15 per cent and 12 per cent, respectively, for the fiscal year 2023.   

Valuation and outlook   

The issue is priced with a P/BV ratio of 3.77 times, calculated using its Net Asset Value (NAV) of Rs 61 as of September 30, 2023. When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 338. The PE ratio, calculated based on its FY23 earnings, is 50. It seems that the issue is fully priced.  

As per its official documents, the company has referenced several listed peers, including Amber Enterprises India Ltd, PG Electroplast Ltd, Dixon Technologies (India) Ltd and Elin Electronics Ltd. In comparison to its listed peers, the company demonstrated superior performance. 

Given the robust growth in recent years, the company's market position, and its esteemed clientele, it appears well-positioned for further growth. However, this outlook is contingent upon the upcoming quarters contributing to increased demand. Hence, risk-taking investors should consider subscribing to the issue with a long-term perspective.