IPO Size: Rs. 640 cr IPO

• Rs. 400 cr is fresh issue for (i) Rs. 230 cr capex for 2 plants (ii) Rs. 80 cr debt repayment (of Rs. 370 cr gross debt)
• Rs. 240 cr is offer for sale (OFS) – half by the promoter (65% to drop to 48%) and other half by 2 PE investors (20% combined stake to reduce to 11%), clocking 43% IRR in 2.5 years

Price band: Rs. 218-230 per share

Mcap: Rs. 2,203 cr, implying 29% dilution

IPO Date: Fri 19^th Jan to Tue 23^rd Jan 2024, Listing Mon 29^th Jan 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

3^rd Party Air Conditioner Manufacturer

Epack Durable is a 10 year old contract manufacturer of air conditioners (AC) and small domestic appliances (mixer grinder, induction cooktop, water dispenser) and electronic components. It has integrated manufacturing facilities in Dehradun and Bhiwadi (Rajasthan), aggregating 2.4 million units per annum. In Dec 2023, third plant commenced operations at Sri City, Andhra Pradesh, taking company’s annual installed capacity to 3.6 million units, implying ~50% capacity addition is already in place. As it operates on a 3.5x fixed asset turnover ratio, this implies incremental annual revenue potential of about Rs. 500 cr.

Capex-Led High Growth Visibility

Besides Sri City plant which has just commercialized, company is investing Rs. 230 cr from fresh issue proceeds at Sri City and Bhiwadi to expand aggregate capacity to 6 million units per annum by FY26-end – 2.5x capacity rise from 30^th September levels.  

Epack undertakes contract manufacturing with low value-add, limiting gross margin to 14%, and EBITDA to 6-7%, with net margins wafer-thin at ~2%. It is a play on volumes and is rightly investing in capacity building, to capture the projected double-digit growth in AC consumption, PLI scheme for components and exports.

High Growth, but Slim Margin  

Between FY21-23, company’s revenue has grown at 45% CAGR from Rs. 736 cr to Rs. 1,539 cr, with PAT jumping 4x from Rs. 8 cr in FY21, to Rs. 32 cr, translating into a net margin of 2.1% and an EPS of Rs. 4.6 for FY23. This growth was supported by fixed assets tripling in 2 years - from Rs. 81 cr, as of 31.3.21, to Rs. 324 cr, as of 31.3.23.

Given seasonality of products manufactured, H2 accounts for nearly 70% of annual revenue and almost entire annual profit. Thus, H1FY24 revenue stood at just Rs. 615 cr, with PAT under Rs. 3 cr, despite gross margin maintained at 14%, as fixed costs were not absorbed.

RoE Peaked Out

FY23 RoE was reported at 14.7%, but likely to settle in lower double digits going forward since (a) denominator was lower, as net worth did not include CCPS with buy-buy option then (b) dilution in IPO.

Valued at Discount to Peers

Given 1.2 million units capacity at Sri City already commercialized from 15.12.23, FY23 profits may double in FY25E, leading to an estimated PAT of Rs. 62 cr for FY25E. This discounts the IPO price by a PE multiple of 36x, on a one year forward basis.

AC manufacturing peer Amber Enterprises, with Rs. 7,000 cr topline and similar net margin of 2.3% is ruling at a PE multiple of over 55x, while another contract manufacturer, with similar sized topline as Epack, PG Electroplast, clocked Rs. 2,200 cr revenue and 3.5% net margin, is ruling at a PE multiple of 45x. Long term sustainability of these PE multiples can be questioned, but for now, Epack is priced lower than comparable peers.

Selling Pressure Post Listing

Seling PE investor India Advantage Fund has lowered its OFS component from 73 lakh shares as per Aug 2023 DRHP, to 46 lakh shares now. The fund, being a Category II AIF, is exempt from the post IPO 6 month lock-in. Thus, lower OFS is not much of a risk for its 10% post IPO holding, but may lead to an overhang on the post listing share price.