Elin Electronics IPO: Is low valuation reason enough to invest?

Elin Electronics IPO: As per the company’s Red Herring prospectus, the company’s top five customers account for about 65.43 percent of revenue from operations and top 10 customers account for about 80 percent

We are now at the fag end of the year and Elin Electronics might be among the last public offerings of 2022.

Expectations are high as the company has big shoes to fill in the electronics segment. In October, Electronics Mart India made a blockbuster debut, at a 51 percent premium to its issue price of Rs 59 per share. Last week, Bihar-based electronics retailer Aditya Vision caught the fancy of ace investor Ashish Kacholia.

Elin Electronics’ public offering consists of a fresh issue of Rs 175 crore and an offer for sale (OFS) of up to Rs 300 crore, at a price band of Rs 234-247 apiece.

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At the upper end of the price band, the electronics manufacturing services (EMS) provider looks attractively priced at 31x FY22 earnings, while peers Dixon Technologies and Amber Enterprises are trading at 140x and 62.8x FY22 earnings, respectively.

Sharekhan, Prabhudas Lilladher and Dolat Capital have a ‘subscribe’ rating on the issue as they believe the IPO is fairly priced and there’s enough value left on the table for investors.

Plus, the company is placed in a segment which has the benefits of the government’s PLI (product-linked incentive) schemes and the tailwind of increased outsourcing of manufacturing.

But, there are risks that cannot be overlooked.

Competitive market

According to global research and consulting firm Frost & Sullivan, the total addressable EMS market in India was worth Rs 2.65 lakh crore in FY21, and it is expected to grow to Rs 9.96 lakh crore in FY26. Of this, Indian EMS companies make up for 40 percent.

The Indian EMS market size of Rs 1.07 lakh crore in FY21 is expected to grow to Rs 5.97 lakh crore by FY26, at a CAGR of around 40 percent, according to F&S.

Also read | Elin Electronics: This electronics manufacturing IPO has a valuation hook

And, Elin Electronics will have a tough task, fighting for its market share from other private and unorganised players.

Elin’s current market share stands at 10.7 percent for small appliances, 12 percent in fractional horsepower motors, 7.2 percent in LED lighting and flashlights, and 0.6 percent in fans. It has different competitors in each product vertical. Some of its key competitors are Smile Electronics, PG Electroplast, Yash Electronics and Dixon Technologies.

Religare Broking, which has a ‘neutral’ stance on the offering, views competition as a key risk for the company.

Also Read: Kfin Technologies’ IPO doesn’t tick all the boxes for investors

Client concentration

While the company’s dual business model – OEM (original equipment manufacturing) and ODM (original design manufacturing) – is being praised by brokerages, the risk arising from client concentration is also being flagged by all.

As per the company’s Red Herring prospectus, the company’s top five customers account for about 65.43 percent of revenue from operations and top 10 customers account for about 80 percent. Its largest customer (across product verticals) accounts for 27-30 percent of the total revenues.

Philips, Bosch, Panasonic and Eveready are among its key clients.

“Some of our customers have been associated with us for over 20 years. The loss of any key customer may significantly affect our revenues, and we may have difficulty securing comparable levels of business from other customers to offset any consequent loss,” the company said in its RHP.

Also Read: Elin Electronics mobilises Rs 142 crore via anchor book ahead of IPO

Margin profile

During FY20-22, Elin’s revenue and net profit clocked a CAGR of 18 percent and 19 percent, respectively, while the EBITDA margin remained flat at ~7.1 percent. The EBITDA margin is higher than Dixon Technology’s 4 percent and a tad lower from Amber Enterprises’ 7.34 percent. Net profit margin for Elin stands at 3.6 percent.

“The low profitability ratio is mainly because of the business model and we may not see any significant improvement to these ratios in future. We have incurred a significant capital expenditure in the past and will continue to do so,” cautioned the company in its RHP.

In its portfolio, medical diagnostic cartridges are listed as the product with the highest margin. But, it contributes only 1.33 percent to the total revenue. Elin's involvement in medical diagnostics is limited to the supply of cartridges to Molbio, a player which has its own patented technology in rapid point of care equipment.

Scaling up this vertical can improve margins, believe analysts.

Risks aside, market participants believe retail investors are excited about the issue as the GMP (grey market premium) stood at ~Rs 40, even before the opening of the IPO. All eyes will now be on how the subscription numbers pan out.

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