Sachin Tendulkar backed-Azad Engineering IPO opens for subscription: Should you subscribe to the issue?

Also Read: Azad Engineering IPO: 10 things to know before subscribing to the Rs 740-crore issue

The Business

Azad Engineering is a manufacturer of aerospace components and turbines. The company primarily operates in energy (87 percent of operating revenue), aerospace and defence (9 percent), and other segments including oil and gas and scrap (4 percent). The products are highly engineered, complex and mission-critical. The customers include General Electric, Honeywell International, Mitsubishi Heavy Industries, Siemens Energy, Eaton Aerospace and MAN Energy Solutions SE. It derives nearly 80 percent of its sales from outside India and the remaining 20 per cent from within India.

Offer details

Azad Engineering's Rs 740-crore IPO consists of a combination of a fresh issue of shares worth 240 crore and an offer-for-sale of shares worth Rs 500 crore by existing shareholders. Promoter Rakesh Chopdar will be offloading Rs 204.97 crore worth of shares and investor Piramal Structured Credit Opportunities Fund will be selling off Rs 260.85 crore shares. Another selling shareholder DMI Finance will sell off Rs 34.18 crore shares in the OFS. The public offer includes a reservation of Rs 4 crore worth of shares for the company's employees. The offer excluding the employee reservation portion is the net offer. The price band for the issue has been fixed at Rs 499-524 per share.

The company will spend Rs 60.4 crore for buying plant and machinery, and repay debts amounting to Rs 138.19 crore. Its borrowings stood at Rs 154.2 crore as of September 2023. The remaining amount will be used for general corporate purposes.

Also Read: Azad Engineering IPO fully subscribed, HNI portion booked nearly 6 times on Day 1

Financials

Azad Engineering experienced financial volatility, witnessing a 71.2 percent on-year decline in net profit, amounting to Rs 8.5 crore for the year ended March 2023 due to finance costs. Revenue from operations for the same period grew 29.4 percent, reaching Rs 251.7 crore. EBITDA increased by 16 percent to Rs 72.3 crore, however, the margin saw a decrease of 330 basis points, settling at 28.7 percent compared to the preceding fiscal year. However, in H1FY24 PAT came in at Rs 28.8 crore. Net debt increased from Rs 70.5 crore in FY21 to Rs 290 crore in H1FY24.

“The fall in net profit in FY23 was mainly due to one-time provisioning payments towards interest charges and settlement on structured debt given by private equity investors. This had an off effect on Azad's financials which was the need of the hour to take it forward for IPO. Hence we believe no such surprises like this will come in future,” said Prashanth Tapse, Sr VP Research & Research Analyst at Mehta Equities Ltd.

Finance cost for the company increased from around Rs 5.3 crore in FY21 to Rs 52.4 crore in FY23 and remained at around Rs 21.8 crore in the first half of fiscal 2024. As per the RHP, the increase was primarily due to interest on compulsorily convertible debentures (CCDs) and optionally convertible debentures (OCDs) and premium on redemption of certain OCDs. As per the management, owing to IPO proceeds and the conversion of certain CCDs, the interest cost is expected to fall going forward.

Also Read: Azad Engineering IPO: Anchor investors pick Rs 221 cr of shares ahead of issue opening

Valuation

Azad Engineering’s valuation stands at a trailing P/E (H1FY24 net profit) of around 57 times (366 times considering FY23 PAT). Its EV/EBITDA (H1FY24 EBITDA annualised) comes in at around 32 times (it is 46 times considering FY23 EBITDA).

On the valuation parse at the upper price band, the issue is asking for a market cap of Rs 3,098 crore. “Based on annualized FY24 earnings and fully diluted post-IPO paid-up capital, the company is asking for earnings multiples of 57x which seems the valuations are a bit expensive but in line with its industry peers,” said Tapse.

Dependence on top 5 clients

The company is significantly reliant on specific key customers, with the top five contributors accounting for over 60 percent of revenues. Siemens Energy, which is in the top five list, suffered a net loss of €4.5 billion during FY23 and sought financial help from the government.

“Client-wise business risk is always on the cards but Azad being a mission-life critical components manufacturer, the clientele has long-standing soft orders for 2-3 years which minimises the risk,” Tapse added.

Also Read: Muthoot Microfin, Happy Forgings, Azad Engineering IPOs draw attractive premium in grey market

Should you subscribe to Azad Engineering IPO?

Canara Bank Securities: Subscribe for listing gains

The revenue of the company grew at a CAGR of 43 percent between FY21 an FY23 and PAT margin grew at a CAGR of 49 percent. “While the valuation of the company stands at 292.7x P/E which appears fully priced as compared to peers. We recommend to subscribe for listing gains,” said analysts at Canara Bank Securities.

Reliance Securities: Subscribe for long-term

“AEL is one of the fastest-growing manufacturers with one of the highest EBITDA margins among the key players, backed by marquee investors, a unique business model, strong TAM in various segments over the next few years, consistent track record of financial performance suggests a SUBSCRIBE rating for the long term,” said analysts at Reliance Securities.

Nirmal Bang: Subscribe

“Based on a stronger track record and superior outlook on growth, we expect Azad to trade at a premium to peers and thus we recommend subscribing to the IPO,” said analysis at Nirmal Bang.

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