IPO Snapshot:

Apollo Micro Systems has entered the primary market with CY2018’s maiden public issue, on Wednesday 10^th Jan 2018 to raise Rs. 156 crore, via fresh issue of equity shares of Rs. 10 each, in the price band of Rs.270 to Rs. 275 per share, with discount of Rs. 12 per share to retail investors and employees. At the upper end, company will issue about 57 lakh new shares, which represents 30.11% of the post issue paid-up share capital. Issue closes on Friday 12^th Jan while listing is expected on 22^nd Jan.

Company Overview:

Apollo Micro Systems, manufacturing electronic and electro-mechanical systems, engineering designs and high-performance, mission and time critical solutions, supplies hardware to the defence sector, catering to Defence, Space and Home Land Security for Ministry of Defence, PSUs and private sector companies. It offers custom built COTS (Commercially off-the shelf) solutions based on specific requirements to defence and space customers. IPO is 100% fresh issue, with no offer for sale.  Funds raised will augment working capital by Rs. 119 crore while balance Rs. 37 crore will be used for general corporate purposes.

Financials:

Historic growth has been healthy, with 54% revenue CAGR for 4 years between FY13-17. EBITDA and PAT CAGR for this period were extremely healthy at 58%. FY17 revenue stood at Rs. 211 crore, with EBITDA margin of 20%, up from FY16’s 16% margin. On an EBITDA of Rs. 42 crore in FY17, PAT of Rs. 19 crore was earned, leading to an EPS of Rs. 13.54 for FY17, against an EPS of Rs. 7.29 for FY16. Strong financial show continued into H1FY18, with revenue of Rs.109 crore, EBITDA of Rs. 20 crore and PAT of Rs. 7 crore, translating into an EPS of Rs. 4.89.

While RoE is strong at 29% (FY17), business is extremely working capital intensive business – both inventory and debtor days are very high at 6 months and 4 months respectively, which have been rising over the years, as the company is growing. As of 30-9-17, net worth stood at Rs. 76 crore, BVPS Rs. 54. Total debt Rs. 106 crore and cash is Rs. 6 crore. Hence debt equity ratio is high at 1.3:1, which will reduce to 0.43:1, once equity expands post IPO. Promoter holding is 88.5%, which will contract to 67% post IPO. Other existing investors include private corporate bodies and senior management. 

Valuation:

At Rs. 275 per share, market cap will be Rs. 541 crore, with an EV of Rs. 641 crore, which leads to PE multiple of 20x and EV/EBITDA multiple of 14x, based on FY18E. Peers include Bharat Electronics and Centum which are ruling much higher at PE multiples of 30x, while Astra Microwave (market cap Rs. 1,040 crore) is trading at a PE of 18x, but its growth rates are much lower than Apollo Micro. Hence, Apollo Micro looks promising. The retail discount of Rs. 12 per share or ~4% of upper price band is an added sweetener.  

Conclusion:

Company’s historic growth rates have been very attractive. Although business eats up a lot of working capital resources, incoming funds should address that need. Also, leverage will become leaner in relative to the equity, making Apollo Micro Systems a good bet. Since sector prospects are very bright, one can apply in the issue with a long term view.

Disclosure: No interest.