EPACK Durable IPO review (May apply)

• EDL is the second largest player in RAC and ODM with innovative products.
• After good growth for FY21 to FY23, it marked a minor setback in line with the general trends in the segment.
• Its new unit in South has gone on stream in December 2023.
• The company is on capacity expansion spree to take benefit of revival in trends.
• Based on recent financial performance the IPO appears fully priced.
• Well-informed Investors may consider parking of funds for the medium to long term.

ABOUT COMPANY:
EPACK Durable Ltd. (EDL) is the second largest room air conditioner original design manufacturer (“ODM”) in India in terms of number of units (indoor units + outdoor units) manufactured in Fiscal 2023 through the ODM route. (Source: F&S Report). It is a customer-centric business driven by a focus on continuing innovation and operational efficiency.

Since 2003, EDL has been on a journey of evolution, where it initially started as an OEM for RAC brands. Driven by its focus on product development and innovation, the company evolved into an ODM partner for RACs for its customers. It also identified the opportunity to increase value addition in its offerings to customers, and accordingly, started manufacturing of various components such as sheet metal, injection moulded, cross flow fans and PCBA components which are actively used in the manufacturing of RACs. The company capitalized on its existing manufacturing infrastructure to strategically expand operations in the small domestic appliances (“SDA”) market, particularly considering the seasonality of the demand for RACs, and currently design and manufacture induction cooktops, mixer-grinders, and water dispensers. This evidences its continued focus on the backward integration of operations and diversification of revenue streams.

Our product portfolio currently comprises – A. – Room air conditioners: It design and manufacture complete RACs, comprising (i) window air conditioners (“WACs”), including window inverter air conditioners, (ii) indoor units (“IDUs”) and (iii) outdoor units (“ODUs”, which combined with IDUs form split air conditioners (“SACs”)) with specifications ranging from 0.75 ton to 2 tons, across a range of energy ratings and types of refrigerants. It also manufactures split inverter air conditioners. B. – Small domestic appliances: EDL currently designs and manufactures induction cooktops, mixer-grinders, and water dispensers. C. – Components: The company manufactures heat exchangers, cross flow fans, axial fans, sheet metal press parts, injection moulded components, copper fabricated products, PCBAs, universal motors and induction coils for captive consumption as well as part of its product offerings to customers.

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

Its customer list for RACs includes Blue Star Limited, Daikin Air-conditioning India Private Limited, Carrier Midea India Private Limited, Voltas Limited, Havells India Limited, Haier Appliances (India) Private Limited, Infiniti Retail Limited, and Godrej and Boyce Manufacturing Company Limited, among others, and for small domestic appliances the list includes Bajaj Electricals Limited, BSH Household Appliances Manufacturing Private Limited, and Usha International Limited, among others.

As of September 30, 2023, it had 807 employees on its payroll and additional. 1165 contract labourers.
ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its combo maiden IPO of fresh equity issue worth Rs. 400.00 cr. (approx. xx shares at the upper price band), and an Offer for Sale (OFS) of 10437047 equity shares of Rs. 10 each (worth Rs. 240.05 cr. at the upper cap). Thus the overall issue is for 27828382 equity shares worth Rs. 640.05 cr. at the upper price band. The company has announced a price band of Rs. 218 – Rs. 230 per share. The issue opens for subscription on January 19, 2024, and will close on January 23, 2024. The minimum application is to be made for 65 shares and in multiples thereon, thereafter. Post allotment shares will be listed on BSE and NSE. The issue constitutes 29.05% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 230.00 cr. for capital expenditure expansion/setting up of new manufacturing facility, Rs. 80.00 cr. for working capital and the balance for general corporate purposes.

The three Book Running Lead Managers to this issue are Axis Capital Ltd., DAM Capital Advisors Ltd., and ICICI Securities Ltd. and KFin Technologies Ltd. is the registrar of the issue.

Having issued initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 90.90 – Rs. 151.90 between September 2021 and December 2023. The average cost of acquisition of shares by the promoters/stakeholders is Rs. NIL, Rs. 10.00, Rs. 11.04, Rs. 11.57, Rs. 12.10, Rs. 14.94, Rs. 17.16, Rs. 101.36, and Rs. 223.00 per share.

Post-IPO, company’s current paid-up equity capital of Rs. 78.41 cr. will stand enhanced to Rs. 95.80 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 2203.37 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company posted a total income/net profit of Rs. 739.66 cr. / Rs. 7.80 cr. (FY21), Rs. 927.34 cr. / Rs. 17.43 cr. (FY22), and Rs.1540.25 cr. / Rs. 31.97 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 2.65 cr. on a total income of Rs. 616.32 cr.

For the last three fiscals, the company has reported an average EPS of Rs. 3.75, and an average RoNW of 15.43%. The issue is priced at a P/BV of 3.77 based on its NAV of Rs. 61.00 as of September 30, 2023, and at a P/BV of 2.51 based on its post-IPO NAV of Rs. 91.68 per share (at the upper cap).

If we attribute annualized FY24 earnings to post-IPO fully diluted paid-up capital of the company, then the asking price is at a P/E of 418.18, and based on FY23 earnings, the P/E stands at 68.86. Thus the issue appears fully priced.

According to the management, in line with general trends for the segment, they have marked a setback in its top and bottom lines, but they are ready with their capacity enhancement adding a new plant in southern region which has gone on stream in December 2023. With more expansion up the sleeve, it is poised for bright prospects with higher market share with renowned customers.

For the reported periods, it has posted PAT margins of 1.06% (FY21), 1.89% (FY22), 2.08% (FY23), 0.43% (H1-FY24), and RoCE margins of 11.72%, 13.68%, 11.85%, 2.71% respectively, on referred periods.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has adopted a prudent dividend policy in August 2023, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per offer document, the company has shown Dixon Techno, Amber Enterprises, PG Electroplast and Elin Electronics as their listed peers. They are trading at a P/E of 173.79, 250.20, 106.83, and 63.09 (as of January 16, 2024. However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
The three BRLMs associated with the offer have handled 87 public issues in the past three fiscals, out of which 26 issues closed below the offer price on the listing date.

Conclusion / Investment Strategy
The company is the second largest RAC, ODM products with innovations and engaged in related services. It has also done backward integration for domestic appliances. After posting growth for the last three fiscals, it marked a minor setback in its top and bottom lines for H1 of FY24 in line with the general trends in the segment. It is on expansion spree to take benefits of revivals in the segment. Well-informed investors may park funds for the medium to long term rewards.

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