Azad Engineering
IPO Size: Rs. 740 cr
- Rs. 240 cr is Fresh Issue for debt repayment (Rs. 138 cr of Rs. 154 cr) and capex (Rs. 60 cr)
- Rs. 500 cr is Offer for Sale (OFS): 40% of OFS by promoter (79% stake to drop to 66%) and 60% by venture debt funds Piramal Alternatives and DMI Finance (completely exiting their 10% combined holding)
Price band: Rs. 499-524 per share
M cap: Rs. 3,098 cr, implying 24% dilution
IPO Date: Wed 20th Dec to Fri 22nd Dec 2023, Listing Thu 28th Dec 2023
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
Hyderabad-based Precision Engineering Products Maker
15 year old Azad Engineering manufactures high precision, mission-critical, complex engineered components for energy and aerospace and defence sectors, serving leading global OEMs such as GE, Honeywell, Mitsubishi Heavy Industries, Siemens Energy, Eaton Aerospace, MAN Energy Solutions, Boeing, Hindustan Aeronautics, Tatas among others. Company manufactures ‘zero parts per million’ defect products, with 90% of Rs. 252 cr revenue from energy sector. Airfoils/ blades, one of the most critical 3D rotating and stationary parts of a turbine in the compression section, accounted for 72% of revenue.
Huge Growth Visibility
Company has 4 manufacturing facilities in Hyderabad, with installed capacity of 6.4 lakh hours per annum, operating at 90% utilisation. It is developing 2 additional plants, including a dedicated unit for Mitsubishi, with significantly larger capacity (1.7 lakh sq. mt. vis-à-vis 0.2 lakh sq. mt. at present). Growing energy needs and higher aviation demand (both commercial and defence) are strong industry tailwinds.
Declining Debt
Post conversion of compulsorily convertible debentures (CCD) issued to Piramal Alternatives, gross debt stands at Rs. 154 cr at present, of which Rs. 138 cr will be repaid from fresh issue proceeds. Considering Rs. 34 cr cash on hand, company will become net debt free post IPO. Besides, annual interest cost savings of nearly Rs. 10 cr pa (Rs. 22 cr for H1FY23 prior to CCD conversion) will also add to the bottomline Q4FY24E onwards.
Revenue Doubled Between FY21-23
Revenue grew at 43% CAGR from Rs. 123 cr in FY21 to Rs.252 cr in FY23, which further scaled to Rs. 159 cr in H1FY24. 80% of revenue is from exports, mainly to advanced nations like Japan (35% of revenue, but not Yen denominated), US (23%) and Europe (12%).
High Double-Digit Net Margins
Due to very high proportion of value add, material cost is barely 12% of revenue (employee cost is infact higher at 22% of revenue) and EBITDA margin is as high as 33%. FY23 EBITDA (adjusted for CCD conversion) stood at Rs. 80 cr, with adjusted PAT of Rs. 45 cr, translating to net margin of 17%. On H1FY24 revenue of Rs.159 cr, adjusted EBITDA and PAT stood at Rs. 53 cr and Rs.29 cr respectively, strengthening margins to 33.4% and 18.5% at EBITDA and net level respectively, in H1FY24. Thus, adjusted EPS rose from Rs. 8.25 in FY23 to Rs.5.40 in H1FY24, signifying
Priced Lower than Peers
Based on FY24E EPS of Rs. 11, shares are being offered at a PE multiple of 49x, on current year basis, which is not expensive, as peers MTAR Tech and Paras Defence, clocking 28-29% EBITDA margin, are trading at multiples of 65+ times. Even India’s leading turbine maker Triveni Turbines is ruling at 55x. With PSU exposure barely 5%, and products have high entry barriers due to stringent and lengthy qualification criteria, Azad Engineering has strong fundamentals and a unique business model.
Past Secondary Sale at Lower Price
In March 2023, promoter sold 2.3% stake to 15 individuals, including sportspersons PV Sindhu, Saina Nehwal, Nikhat Zareen, VVS Laxman, at Rs. 228 per share. Among these, shares were also sold to Sachin Tendulkar at Rs. 114 per share, at the same time. Current IPO price of Rs. 524 per share is 2.3 times the last transaction price, in just 6 months – which cannot be justified financially. Given materiality (Rs. 24 cr), nature of transaction (secondary sale) and stock markets at life-high levels, we are keeping this secondary sale price aside.
20th Dec 2023 at 10:19 am