Pre-IPO placement at hefty discount does not augur well for the stock post lock-in period.
When unrelated companies are clubbed as group companies under the new Sebi-guidelines, a company helmed by the father does not qualify to be a group company even though mother is a whole-time director of the group’s flagship steered by the son!
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AEROFLEX INDUSTRIES OFFER AT A GLANCE |
|
| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 162 Cr (150 lakh equity shares) |
| Offer for Sale | 175,00,000 equity shares (Rs 189 Cr) |
| Face Value | Rs 2 |
| Price Band | Rs 102 – 108 |
| Mkt/Bid Lot | 130 Nos. |
| Imp Market Cap | Rs 1,396 Cr (at IPO cap price) |
| Implied Equity Cap | Rs 25.86 Cr |
| Implied Free Float | 33.01% |
| Lead Manager | Pantomath Capital |
| Registrar | Link Intime |
| Listing At | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
|
| Opening : 22-Aug-2023 | Closing : 24-Aug-2023 |
| Allotment : 29-Aug-2023 | Refunding : 30-Aug-2023 |
| Demat Credit : 31-Aug-2023 | Trading : 01-Sep-2023 |
The Offer
Navi Mumbai-based Aeroflex Industries Ltd (AIL) is floating an IPO of Rs 351 Cr (325 lakh equity shares at the cap price). The IPO consists of a fresh issue of Rs 162 Cr (150 lakh equity shares) from the company and an Offer for Sale of 175 lakh equity shares (Rs 189 Cr) from the promoter company. The offer is being made through the book-building route with a price band of Rs 102-108 for Rs 2 paid-up share. Incidentally, in March 2023 the company had filed a draft red herring prospectus for floating an IPO of which had an offer for sale of only 123 lakh shares from the promoter.
Applicants should bid for a minimum lot of 130 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE and NSE on Friday, September 01, 2023. Pantomath Capital is acting as the lead manager to the offer and Link Intime has been roped in as registrar to the issue. The bidding opens on Tuesday, August 22 and closes on, Thursday, August 24, 2023.
AIL proposes to utilize the net proceeds from the fresh issue (Rs 162 Cr) towards funding working capital requirements (Rs 84 Cr) and repayment of loans (Rs 32 Cr). The balance amount is earmarked for general corporate purposes.
Lineage
AIL is the second subsidiary of Sat Industries Ltd (SIL) to go public this year. The first one, Sah Polymers Ltd (SPL), made a fresh issue of Rs 66 Cr at a price of Rs 65 and listed its shares in January 2023. Three months later, the IPO, which was claimed to have been oversubscribed 17 times, was traded at a discounted price of Rs 58.96! However, on the eve of fellow subsidiary’s IPO, SPL’s stock price has zoomed over Rs 100.
SIL is not the original promoter of AIL. Aeroflex was originally incorporated as Suyog Intermediates Private Ltd on October 19, 1993 and the original subscribers to the Memorandum of Association were Atul Rasiklal Shah, Rasiklal Maganlal Shah and Sejal Atul Shah. Before the takeover of the company by the present promoter, AIL was categorised as wilful defaulter in relation to default of payment in the year 2011 with respect to consortium finance availed from State Bank of India, Axis Bank, Bank of India, Exim Bank, UCO Bank and Allahabad Bank.
On April 02, 2018, SIL acquired AIL from the erstwhile promoters of the Company. This acquisition was pursuant to settlement process as AIL had turned as non-performing and the erstwhile promoters approached SIL for bail-out by taking over the control and management of the company and settling all dues to lenders. Pursuant to the acquisition, SIL approached lenders and settled their claims.
Asad Daud-helmed AIL’s recent financial performance may exude optimism. But, what’s intriguing is the disowning of a company (Peacock Industries Ltd) controlled by his father Daud Ali which went public in December 1992. Incidentally, AIL’s fellow subsidiary Sah Polymers acquired the assets of Peacock Industries (PIL) in 1998 when PIL’s losses were mounting up. PIL is now known as PIL Italica Lifestyle and its track record is far from convincing.
Recently, TVS Supply Chain was forced to include Avalon Technologies as a group company as both the companies had a common nominee director. But, in PIL-SIL’s case, PIL is controlled by the father and SIL is managed by the son and his mother. Father Daud Ali-controlled DA Tradetech and Space Age Polymers are having direct stake in SIL. Yet, Asad Daud says he has nothing to do with his father’s companies!
Key Management
As many as five directors of SIL are on the board of AIL. Asad Daud (33) is the Chairman and Managing Director of the company. He has over 12 years of experience in the manufacturing industry and has played an instrumental role in expanding the domestic and foreign operations of the company.
Mustafa Abid Kachwala (55) years, is a Whole-time Director of the company. He has worked with Akbarallys Pharma Vet Division in Mumbai from 1986 to 2004 before joining Aeroflex Industries Limited. He has been associated with the Company since 2010 and was re-designated as the Chief Financial Officer with effect from November 28, 2022.
He currently looks after the financial affairs of the company.
Ramesh Chandra Soni, (63), Harikant Ganeshlal Turgalia (61), Partha Sarathi Sarkar (72) and Arpit Khandelwal (32) who are on the board of SIL are designated as non-executive directors of AIL.
Stakeholders
Of the pre-IPO equity capital of Rs 22.86 Cr (11.43 crore shares), the promoter group companies viz. Sat Industries and Italica Global hold 9,66,81,833 shares (84.57%) and 7,454,830 shares (6.52%) respectively. Among the 16 `public’ shareholders, Ashish Kacholia and Bengal Finance and Investment Private Ltd hold 2,315,935 shares (2.03%) each, Jagdish N Master holds 1,298,126 shares (1.14%), Carnelian Structural Shift Fund has 1,256,250 shares (1.10%) and Rosy Blue (India) Private Ltd holds 1,137,650 shares (1%).
Post-IPO, Sat Industries will hold 79,181,833 shares (61.23%) at negative cost and Italica Global will have 7,454,830 shares (5.76%) at nil cost. Of the promoters’ stake, 20% is locked-in for 18 months and the balance for six months.
Business
Aeroflex manufactures metallic flexible flow solution products including braided hoses, non-braided 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 collectively known as flexible flow solutions catering to global as well as domestic markets.
The company reportedly exports its products to more than 80 countries including Europe and USA. During the fiscal 2023, its exports were worth Rs 217 Cr which constituted 81% of the company’s revenue. It claims to supply products to a wide spectrum of industries for controlled flow of all forms of substances including air, liquid and solid. In fiscal 2023, it served 723 customers out of which 217 were across 51 countries.
Financial Track
Aeroflex has a single manufacturing facility located at Taloja in the state of Maharashtra with an installed capacity of 11 million meters per annum. The company reportedly achieved a capacity utilisation of 83%, 90% and 71% during the fiscals 2023, 2022 and 2021 respectively.
The company’s revenue, which was static around Rs 140 Cr for three years up to fiscal 2021, surged to Rs 238 Cr in fiscal 2022. Its operating margin too leapt 400 basis points from 14.3% to 18.3%. In fiscal 2023, despite having a lower capacity utilisation, the company posted higher revenue of Rs 264 Cr and improved the OPM to 18.4%. The company’s fiscal 2023 bottom line (Rs 31 Cr) looks attractive against its proposed equity base of about Rs 26 Cr. Nevertheless, against the reported cash profit of Rs 36 Cr in fiscal 2023, the net cash flow from operation turned out to be only Rs 3.8 Cr.
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Aeroflex Industries Financials (in Cr) |
|||||
| Year Ended |
Mar-23 |
Mar-22 | Mar-21 | Mar-20 |
Mar-19 |
| Revenue |
264.15 |
237.56 | 142.85 | 141.95 |
138.29 |
| Operating Profit |
48.72 |
43.46 | 20.41 | 19.37 |
21.17 |
| OPM% |
18.4 |
18.3 | 14.3 | 13.6 |
15.3 |
| Other Income |
0.02 |
0.19 | 0.06 | 0.6 |
0.03 |
| EBIDTA |
48.74 |
43.65 | 20.47 | 19.96 |
21.2 |
| EBIDTA % |
18.7 |
18.7 | 14.6 | 14.4 |
15.7 |
| Interest |
4.55 |
6.25 | 8.94 | 11.31 |
14.35 |
| Depreciation |
5.22 |
4.18 | 3.78 | 3.92 |
4.01 |
| Exceptional Item |
2.24 |
3.65 | 0.29 | -1.18 |
2.13 |
| Tax |
10.19 |
8.33 | 0 | 0 |
0 |
| Net Profit |
30.80 |
27.50 | 6.01 | 4.69 |
7.08 |
| Equity (Implied) |
25.86 |
22.86 | 22.86 | 22.86 |
22.86 |
| Reserves (Implied) |
250.23 |
63.36 | 35.85 | 29.84 |
24.86 |
| Borrowing |
45.01 |
39.13 | 53.07 | 63.46 |
72.97 |
| Fixed Assets |
57.00 |
52.70 | 43.50 | 44.40 |
46.80 |
Valuation
The IPO cap price discounts AIL’s latest earnings more than 45 times which is certainly on the higher side. The post-issue record of group stocks is anything to go by, the price-earnings multiple could drop significantly once the group’s fund-raising exercise is over. Moreover, the promoter company has privately sold large quantity of shares just three months ago at a hefty discount of 19% over the IPO price.
Among the 16 `public’ shareholders who collectively hold 10,183,707 shares (8.91%), 10 shareholders acquired 8,695,207 shares from the promoter-company in May/June 2023 at a lower price of Rs 87.56 a share as against the IPO cap price of Rs 108. These shares may depress the stock price after the lock in period of six months.
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HOW AEROFLEX COMPARES WITHIN THE GROUP |
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|
Financials |
||||
| (Amount in Cr) |
Aeroflex |
Sat Ind | Sah Poly |
PIL Italica |
| Market Cap |
1397 |
1471 | 277 |
231 |
| Borrowing |
45 |
105 | 25 |
11 |
| Fixed Assets |
57 |
109 | 45 |
16 |
| Revenue |
264 |
466 | 95 |
85 |
| Other Income |
0 |
16 | 2 |
0 |
| EBIDTA |
49 |
70 | 9 |
6 |
| Interest |
5 |
7 | 2 |
1 |
| Net Profit |
31 |
45 | 4 |
3 |
| Equity Cap |
26 |
23 | 26 |
24 |
| Reserves |
250 |
285 | 62 |
46 |
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Stock Features |
||||
| Current Price (Rs) |
108.00 |
130.09 | 107.54 |
9.83 |
| Face Value (Rs) |
2 |
2 | 10 |
1 |
| Book Value |
21.35 |
27.19 | 33.94 |
2.96 |
| Promoter Stake % |
67.0 |
51.6 | 60.5 |
50.1 |
| Debt/Equity |
0.16 |
0.34 | 0.29 |
0.16 |
|
Profitability |
||||
| OPM % |
18.4 |
11.8 | 7.3 |
6.8 |
| Net Margin % |
11.7 |
9.4 | 3.9 |
3.6 |
| Cash EPS |
2.79 |
4.42 | 1.87 |
0.16 |
| Earnings Per Share |
2.38 |
3.78 | 1.32 |
0.13 |
|
Growth |
||||
| CAGR 3Yr Sales % |
25.2 |
29.3 | 27.3 |
19.9 |
| CAGR 3Yr EBIDTA % |
34.7 |
53.6 | 49.6 |
6.1 |
|
Return |
||||
| RONW % |
27.0 |
14.7 | 4.3 |
4.4 |
| ROCE % |
27.4 |
15.3 | 6.5 |
6.3 |
|
Discounting |
||||
| Price/Earnings |
45.3 |
34.4 | 81.2 |
75.9 |
| Price/Cash EPS |
38.8 |
29.4 | 57.6 |
60.2 |
| Price/Book Value |
5.1 |
4.8 | 3.2 |
3.3 |
| Price/EBIDTA |
28.7 |
20.9 | 31.7 |
39.4 |
| Price/Revenue |
5.3 |
3.2 | 2.9 |
2.7 |
| Price/Fixed Assets |
24.5 |
13.5 | 6.1 |
14.7 |
|
Distribution |
||||
| Dividend % |
10 |
10 | 0 |
0 |
| Yield % |
0.2 |
0.2 | 0 |
0 |
| Pay-out % |
8.4 |
5.0 | 0 |
0 |