The initial public offering (IPO) of Noida-based contract room air conditioner (RAC) manufacturer EPACK Durable opened on January 19 and is accepting subscriptions until January 23, 2024. The total offering is valued at around ₹640 crore, ₹400 crore is a new issue and ₹240 crore is an offer for sale. Proceeds from the issue will be used to fund capital expenditure (₹230 crore), prepayment/repayment of debt (₹80 crore) and general corporate purposes.
The price range of the issue is between ₹218 and ₹230 per share. At the high end, the company's market capitalization is around ₹2,203 crore. Post the issue, the promoter's shareholding will come down from 65 per cent to 48 per cent.
Here are four things you should know about going public.
1. Business
Originally founded as an original equipment manufacturer (OEM) for AC brands, the company expanded its scope to develop and manufacture a wide range of room air conditioners (RACs), including window inverter ACs and split ACs, as well as small home appliances (SDAs), such as: . E.g. induction hobs, mixers, grinders and water dispensers.
Currently, the company oversees the operations of three manufacturing facilities, with the Sri City facility most recently opening in 2023. More than 80 percent of the company's total revenue comes from the RAC segment, with a primary focus on the Indian market.
The company supplies six of India's top 10 RAC brands (based on FY2023 domestic sales), including Voltas, Daikin, Havells, Blue Star, Haier and Carrier. Some of the notable customers in the SDA segment include Bajaj Electricals, BSH Household Appliances and Usha.
2. Strengths
EPACK currently ranks second in the Original Design Manufacturing (ODM) space for indoor air conditioners in India and commands a market share of 24 percent, up from less than 10 percent three years ago, underscoring its presence in a fast-growing market segment. The company has established lasting relationships with well-known AC brands to ensure consistent delivery orders.
Additionally, EPACK has effectively reduced its debt-to-equity ratio from 3.5x in FY2021 to 1.6x in FY2023. It has achieved backward integration in its manufacturing processes and manufactured key AC components in-house. Among various consumer durables such as televisions, refrigerators and washing machines, the RAC segment in India has a comparatively lower penetration rate of 8 percent, while the global average RAC penetration is 42 percent. With this in mind, the ODM RAC industry is strategically positioned to capitalize on potential growth opportunities as the economy and consumer consumption continue to grow.
3. Risks
Although the Company has successful business partnerships with certain customers, it currently operates without long-term contractual arrangements. The lack of ongoing contractual obligations can present potential challenges to revenue transparency. In addition, there is significant concentration risk as almost 80 percent of the company's revenue comes from its five largest customers.
The company's main source of revenue is air conditioners, a seasonal product whose demand is predominantly concentrated in the summer months. This inherent seasonality can result in uneven cash flow patterns throughout the year and impact working capital cycles. While the company manufactures certain critical components internally, it relies on importing materials such as copper and aluminum sheets, with associated import costs accounting for nearly 40 percent of total material costs in FY23. This leaves EPACK exposed to exchange rate fluctuations and, according to RHP, EPACK has not hedged its foreign currency risk through derivative instruments.
The ODM and Electronics Manufacturing Service (EMS) space is highly competitive, with established players such as Amber Enterprises, PG Electroplast, Dixon Technologies and Elin Electronics. EPACK's profitability margins, including gross profit, EBITDA and PAT margins, are low compared to its closest competitor Amber Enterprises (the RAC division contributes 43 percent of total revenue). Companies with low margins could be at outsized risk in the event of an economic slowdown.
4. Financial Data and Valuations
During FY21-23, the company grew at a compound annual growth rate of 45 per cent and achieved a total operating revenue of approximately ₹1,539 crore due to increased sales of industrial goods. At the same time, the company recorded an average annual growth rate (EBITDA) of 56 percent and the EBITDA margin remained in the range of 6 to 7 percent.
This lack of improvement in EBITDA margins is due to the inflationary pressure placed on the cost of materials consumed. PAT showed a CAGR of 102 per cent with PAT margin growth in line (margins doubled from 1 per cent in FY21 to 2 per cent in FY23). In the first half of fiscal 2024, EPACK reported a revenue of ₹615 crore with an EBITDA margin of 6 percent and a net profit of ₹2.6 crore (PAT margin of just 0.4 percent).
At the upper end of the price range, the company's valuation is around 69 times FY23 earnings, coupled with an EV/EBITDA (FY23) multiple of 21. Given the seasonality in the business, we have the FY23 numbers instead of the Figures for the first half of fiscal year 24 are taken into account. While the valuation appears relatively cheaper compared to Amber Enterprises, which trades at 80 times its FY23 earnings and an EV/EBITDA of 29 times, the IPO appears to be expensively valued given low margins and business concentration risks.
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