The IPO for electronic manufacturing services provider, Elin Electronics is open for subscription till December 22. The company aims to raise ₹475 crore through the public issue, out of which ₹300 crore is an offer for sale while the rest is a fresh issue. Out of the ₹175 crore proceeds, the company aims to utilise ₹88 crore for debt repayment, about ₹38 crore for capex and the rest for general corporate purposes, post which the debt can be reduced from the current ₹103 crore levels. At the upper end of price band of ₹233-247/share, the company is valued at ₹1,226 crore. Post issue, promoters will hold around 32 per cent stake.

Business

The 40-year-old Delhi-based company is engaged in providing end-to-end product manufacturing to some of the consumer electronic brands selling lighting, fans, small appliances, and fractional horsepower (FHP) motors.

Electronic manufacturing services (EMS) contributes to 78 per cent of its revenue. This is further split into 92 per cent coming from original equipment manufacturers (OEM), while the rest 8 per cent from original design manufacturing (ODM).  Under OEM space, the company makes products based on the customer’s design, while under ODM, the company conceptualise and design the product along with manufacturing.

According the management, ODM earns higher EBITDA margin of , 1.5-2 per cent more than OEM. The company plans to further increase portion of revenue coming from ODM by partnering with online retail platforms. The overall EBITDA margin stands at 7-8 per cent.

The company also earns about 15 per cent of its total revenue from moulded and sheet metal parts and components and around 2 per cent from manufacturing medical diagnostic cartridges.

Competitive strengths

The company has a diverse product profile. In EMS segment, it commands a market share of 10.7 per cent and 7.2 per cent in lighting and small appliances, respectively. In the manufacture and supply of FHP motors, the company is a market leader with 12 per cent market share.

The company has over 10 years of relationship with brands such as Signify, Philips, Havells and Eveready for EMS products with whom they have general purchase agreement renewed every three years with a price escalation clause placing it in a better position to pass on any increase in commodity costs. Steel, copper and plastics are the basic raw materials which company uses for manufacturing products. These commodities are sourced by way of agreements renewed on a monthly or quarterly basis.

Further, the company possesses backward integration in its manufacturing process with in-house manufacturing for die, mould die, sheet metal components, plastic moulded components, aluminium die casting and surface coating supporing its all product verticals.

Risks

Despite having long-term customer relationships, Elin Electronics generates significant revenue i.e., about 47 per cent from only two customers (Signify and Philips) heightening customer concentration risk. EMS is an industry that includes listed players such as Dixon Technologies (lighting, television, laptops), Kaynes Technology (printed circuit boards, box build), Syrma SGS (printed circuit boards, RFIDS, electromagnetic parts), Amber Enterprises (air conditioner, FHP, sheet metal components). Unlisted rivals include Yash electronics, RK Lighting and Smile Electronics. As a result, this space is highly competitive with possibility of lower margins.

Financials and valuation

During 2020-22, the company grew at a CAGR of 18 per cent with revenue from operations of around ₹1,094 crore. With ability to pass on costs, Elin Electronics has generated stable but with low EBITDA margins (7-8 per cent). Further, the company has low debt level, with debt-to-equity ratio of 0.32 times as on September 30, 2022 and net debt to EBITDA of 1.27 times. However, on account of capex incurred and debt repayments, the company has seen reduction in cash levels from around ₹10 crore to ₹2 crore. As per the management, a majority of the capex has already occurred.

At the upper end of price band, the company is valued at around 31.3 times its FY22 earnings and at an EV/EBITDA (FY22) of 16.7 times. Its P/E is based on annualised FY23 earnings (based on 1H results) stands at 29.7 times. This is relatively cheaper compared to other companies in EMS space. Such difference in valuation can be explained through these companies’ respective revenue growth rates and Elin’s comparatively smaller size. While Elin’s revenue grew by 18 per cent during 2020-22, Dixon and Kaynes had a much higher CAGR of around 56 per cent and 38 per cent respectively, with revenues of ₹10,700 crore and ₹7,062 crore, respectively.

What investors should do

Despite offered with lower valuation compared to its peers, the company is having high customer concentration risk and lower revenue growth. Being a small cap stock, it can also be volatile. Hence, investors can have a wait and watch approach towards the IPO and track the company’s further quarterly earnings to make investment decision at a later time post listing.

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