EPACK Durable's Rs 640-crore IPO opens today: Should you subscribe to the issue?

EPACK Durable IPO: The company is is India’s second-largest original design manufacturer (ODM) of room air conditioners (RAC)

The public issue of EPACK Durable is set to open for subscription on January 19. The stock’s grey market premium (GMP) has jumped to 13 percent from 6 percent in the last two days.

Several analysts have assigned a ‘subscribe’ rating to the issue owing to reasonable valuation, decent financial performance and dominance in the RAC ODM space.

However, there are a few concerns that can’t be ignored such as client concentration, hefty debt load of Rs 369 crore, lower return ratios in H1FY24 compared to peers, a highly competitive RAC industry, and imports of some of the raw materials from China.

The business

EPACK Durable is India’s second-largest original design manufacturer (ODM) of room air conditioners (RAC). The company also manufactures components such as sheet metal parts, injection moulded parts, cross-flow fans, and PCBA components that are actively used in the production of RACs.

The company commenced operations with a single manufacturing unit in Dehradun, Uttarakhand, in 2003, and has since expanded manufacturing operations with Dehradun Unit II, Dehradun Unit III and Dehradun Unit IV, Bhiwadi Manufacturing Facility and Sri City Manufacturing Facility.

The company’s customer base includes Blue Star, Daikin Airconditioning India, Carrier Midea, Voltas Limited, Havells India, Haier Appliances (India), Panasonic Life Solutions India, Godrej and Boyce Manufacturing Company and Bajaj Electricals.

Also Read: EPACK Durable IPO: 10 things to know before subscribing to Rs 640-crore issue

The company is focusing on diversifying its product portfolio, expanding beyond RAC to include semi-commercial air conditioners, air coolers, hair dryers, induction water heaters, Nutri blenders, tower fans, kitchen chimneys, and dual ICTs to reduce reliance on seasonal RAC demand by tapping into the consistent demand for SDAs (small domestic appliance).

Offer details

EPACK Durable plans to raise Rs 640.05 crore from the IPO. The public offer consists of a fresh issue of 1.73 crore shares worth Rs 400 crore and an OFS of 1.04 crore shares worth Rs 240.05 crore. The price band for the issue, which will close on January 23, has been fixed at Rs 218-230 per share. Bajrang Bothra, Laxmi Pat Bothra, Sanjay Singhania, and Ajay DD Singhania are the company promoters.

The company plans to use the net proceeds to fund capital expenditure requirements for setting up manufacturing capacities in Bhiwadi, Rajasthan and Sri City, Andhra Pradesh. Further, funds will be utilised to purchase equipment for the Bhiwadi manufacturing facility and repayment or prepayment of certain outstanding loans of the company. The remaining funds will be used for general corporate purposes.

Anchor investors

The company raised Rs 192.02 crore from institutional investors through its anchor book on January 18. Optimix Wholesale Global Emerging Markets Share Trust, Integrated Core Strategies (Asia), Societe Generale Copthall Mauritius Investment, and HDFC Mutual Fund were some of the marquee names invested in the company through the anchor book.

Also read: Epack Durable IPO | Institutional investors pick Rs 192 crore shares via anchor book

Insurance companies, including SBI Life Insurance Company, HDFC Life Insurance Company, Aditya Birla Sun Life Insurance Company, Bajaj Allianz Life Insurance Company, SBI General Insurance Company, Reliance General Insurance Company, and Universal Sompo General Insurance Company, also showed good interest in the company, investing Rs 116 crore.

Financials

The Bothra and Singhania-promoted company recorded healthy financial performance in the past years but there was pressure on the operating margin due to higher input costs. Net profit grew 83.4 percent on-year to Rs 32 crore for the in FY23, and revenue from operations during the same period increased by 66.5 percent to Rs 1,539 crore.

EBITDA (earnings before interest, tax, depreciation and amortisation) in FY23 came in at Rs 102.5 crore, increasing by 49 percent compared to FY22. However, the margin dropped 78 bps to 6.66 percent in the same period. The top line for H1FY24 was Rs 616.32 crore.

In FY23, the revenue contribution from the top 10 customers was 93.17 percent, while the top 5 contributed 82.66 percent of total revenue. As of September 30, 2023, the company had a total outstanding indebtedness of Rs 369.57 crore.

The company imports some of the raw materials from China and any restriction whether from the state or central government may adversely affect the business. As of September 30, 2023, the cost of materials imported as a percentage of the total cost of materials purchased stood at 39.87 percent.

Valuation

The price-to-earnings (P/E) ratio based on diluted EPS (Rs4.64) for FY23 at the upper end of the price band comes at 49.56 times and at the lower end, it stands at 46.98 times, which is comparatively cheaper than Amber Enterprises (66.28x), PG Electroplast (67.27x), Dixon Technologies (139.96x) but more than Elin Electronics (24.28x).

Also Read: Four IPOs worth Rs 738 crore to hit Dalal Street on January 19

As of September 30, 2023, EPACK Durable had one of the lowest RoE (0.67 percent), RoCE (2.71 percent) and PAT margin (0.43 percent) in its peer group. The debt-to-equity ratio stood at 0.78x.

Should you subscribe to the EPACK Durable public issue? Let's hear out what analysts have to say...

Choice Equity Broking: Subscribe with caution

In FY24, there would be a slowdown in the demand for RACs, but the medium-term growth drivers are intact for the domestic air conditioning market.

“EPACK claims to be a 100 percent ODM player with one of the highest integrated operations, however, the benefits are not getting reflected in the profitability margins and return ratios. Considering the medium-term growth levers and stretched valuations, we assign a ‘Subscribe with Caution’ rating for the issue,” Choice Equity Broking analysts wrote in a note.

Arihant Capital: Subscribe for long-term

The new product launches in the appliances portfolio would reduce the business fluctuation due to seasonality going forward.

“At the upper band of Rs 230, the issue is valued at an EV/EBITDA of 20.2x based on FY23 EBITDA. We are recommending ‘Subscribe for long term’ for this issue,” said analysts at Arihant Capital Markets wrote.

BP Equities: Subscribe

On the financial performance front, the company’s revenue/EBITDA/PAT grew at a CAGR of 44.6 percent/56.2 percent/102.5 percent during the FY2021-23 period.

“On the upper price band, the issue is valued at a P/E of 49.6x based on FY2023 earnings which we feel is fairly valued and is lower than its comparable peers. We, therefore, recommend a ‘Subscribe’ rating to the issue from a medium to long-term perspective,” BP Equities said.

Swastika Investmart: Subscribe for mid to long-term

EPACK Durable is India's second-largest RAC ODM. “However, some key risks warrant consideration. The company's dependence on a limited number of major customers. Additionally, the RAC industry is highly competitive, and the business experiences seasonal fluctuations. We recommend that investors apply for this IPO with a mid to long-term view,” said an analyst at Swastika Investmart.

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