Aeroflex Industries opened in the secondary markets with a premium listing at ₹197 per share this morning (Thursday, August 31), which is 83 per cent above the upper end of its IPO price of ₹108 per share. Though it has given up 16 per cent from its opening level, the stock is still trading at a 55 per cent premium at ₹168 per share.

During the IPO, given the high valuation and impending slowdown in export markets, we recommended that investors skip subscribing to the issue and, instead, look for better entry points later. Nevertheless, if you did subscribe and have received allotment, at the current inflated valuation of 72 times FY23 earnings (46 times at the time of IPO), we recommend exiting the stock.

The company makes flexible stainless-steel hoses for industrial use in Steel, O&G, HVAC and other applications, which involve the movement of gas, liquids or solids. Aeroflex Industries operates with an 80:20 split in the export and domestic markets.

The domestic markets exposure, with possible application in new-age energy storage and battery solutions, may have driven high interest in the stock. The IPO was oversubscribed a staggering 97 times. But the battery and energy storage end-user industry has to take off for visible demand generation and valuing the opportunity may be pre-emptive.

The main export markets are expected to face increasing headwinds as high interest costs will limit capital projects in the US, the UAE and other target markets, and general worldwide economic growth is expected to be muted, which will influence demand.

The company reported revenues of ₹270 crore in FY23 and EBITDA/ PAT margins of 20/11.2 per cent. This implies flat margin growth and 12 per cent YoY revenue growth in FY23. Aeroflex Industries has a net debt to EBITDA of 0.77 times in FY23, which will decline further as fresh IPO proceeds are used to clear debt (₹32 crore) and improve working capital investments (₹84 crore), and the company will be looking for inorganic expansion with the remaining ₹46 crore. Even with capacity utilisation at 80 per cent in FY23 and availability of IPO proceeds, the company has not earmarked funds for capital projects.

Trading at 72 times FY23 earnings should imply an expected ask rate of 20-30 per cent revenue growth for the next 3-4 years. This is not supported by growth in the past year, or by demand visibility in the main export markets, or even by capital expansion. We recommend investors exit the stock at current high valuations.

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