The initial public offering (IPO) of the Noida-based contract manufacturer of room airconditioner (RAC), EPACK Durable, opened on January 19 and will accept subscriptions till January 23, 2024. The total offer is worth around ₹640 crore out of which ₹400 crore is fresh issue and ₹240 crore is an offer for sale. The proceeds from the issue will be utilised to fund capital expenditures (₹230 crore), pre/repayment of debt (₹80 crore) and general corporate purposes.

The price band of the issue has been set in the range of ₹218 to ₹230 per share. At the upper end, the company’s market cap comes to around ₹2,203 crore. Post-issue, the promoter shareholding will come down from 65 per cent to 48 per cent.

Here are four things to know about the IPO.

1. Business

Initially established as an Original Equipment Manufacturer (OEM) for AC brands, the company expanded its scope to encompass the design and manufacture of a diverse range of room airconditioners (RACs) including window inverter ACs and split ACs, as well as Small Domestic Appliances (SDAs), such as induction cooktops, mixer grinders, and water dispensers.

Presently, the company oversees operations across three manufacturing facilities, with the latest inauguration of the Sri City plant in 2023. More than 80 per cent of the company’s total revenue is derived from the RAC segment, with a predominant focus on the Indian market.

The company serves six out of the top ten Indian RAC brands (based on domestic sales in FY 2023), including Voltas, Daikin, Havells, Blue Star, Haier, and Carrier. In the SDA segment, notable clientele comprises Bajaj Electricals, BSH Household Appliances, and Usha.

2. Strengths

EPACK currently holds the second position in the Indian room airconditioner Original Design Manufacturing (ODM) space, boasting a 24 per cent market share from less than 10 per cent three years ago, underscoring its presence in a rapidly expanding market segment. The company has established enduring relationships with prominent AC brands to secure consistent supply orders.

Furthermore, EPACK has effectively reduced its debt-to-equity ratio from 3.5x in FY 2021 to 1.6x in FY 2023. It has achieved a backward integration in its manufacturing processes, producing key AC components in-house. Among various consumer durable products, such as televisions, refrigerators, and washing machines, the RAC segment exhibits a comparatively lower penetration rate of 8 per cent in India, while the global average RAC penetration stands at 42 per cent. Given this context, the ODM-RAC industry is strategically positioned to leverage potential growth opportunities as the economy and consumer consumption continue to expand.

3. Risks

While the company has successfully fostered business partnerships with specific clientele, it currently operates without any long-term contractual agreements. This absence of sustained contractual commitments may pose potential challenges to revenue visibility. Additionally, a notable concentration risk is evident as nearly 80 per cent of the company’s revenue is derived from its top five clients.

The company’s primary revenue stream is derived from airconditioners, a seasonal product with demand predominantly concentrated in the summer months. This inherent seasonality may give rise to uneven cash flow patterns throughout the year and impact working capital cycles. While the company does manufacture certain critical components internally, it relies on the import of materials such as copper and aluminium sheets, with the associated import costs accounting for close to 40 per cent of the total cost of materials in FY23. This results in EPACK’s exposure to currency rate fluctuations and as per the RHP, EPACK has not hedged its foreign currency risk with derivatives 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 peer Amber Enterprises (the RAC division contributes 43 per cent to the overall revenue).  Low-margin companies may face outsized risk in the event of a slowdown.

4. Financials and Valuations

During FY21-23, the company grew at a CAGR of 45 per cent, achieving revenues from operations totalling approximately ₹1,539 crore on account of increased sales of manufactured goods. Concurrently, the company’s EBITDA witnessed a CAGR of 56 per cent, and EBITDA margin remained in the range of 6-7 per cent.

This lack of improvement in EBITDA margins can be attributed to the inflationary pressures exerted on the cost of materials consumed.  PAT exhibited a CAGR of 102 per cent with the PAT margin growth in line (margins doubled from 1 per cent in FY 21 to 2 per cent in FY 23). In the H1 FY24, EPACK reported revenue of ₹615 crore with an EBITDA margin of 6 per cent and a net profit of ₹2.6 crore (PAT margin of just 0.4 per cent).

At the upper boundary of the price band, the company’s valuation stands at approximately 69 times its FY23 earnings, coupled with an EV/EBITDA (FY23) multiple of 21 times. Given the seasonality in business we have considered FY23 numbers instead of 1H FY24 numbers. While valuation appears relatively cheaper when compared to Amber Enterprises which trades 80 times its FY23 earnings and at an EV/EBITDA of 29 times., considering low margins and business concentration risks, the IPO appears to be priced expensively.

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