Sealing the Deal: Is Aeroflex's IPO a Tight Fit for Your Portfolio?

Explore an in-depth analysis of Aeroflex’s IPO, weighing its potential growth, valuation, risks and investment opportunities.

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The initial public offering (IPO) of Aeroflex Industries Ltd (AIL) will remain open from today for a three-day subscription until Thursday, August 24. The IPO consists of a fresh issue of shares worth Rs 162 crore and an offer-for-sale of equity shares up to Rs 189 crore by its existing promoters and shareholders. The price band is fixed between Rs 102-108 per share, with a minimum bidding size of 130 shares. Retail investors can make applications in multiples of 130 shares after the initial minimum bid. Thus, the minimum investment checks in at Rs 14,040 for one lot.

Prior to the launch of the IPO, the stainless steel flexible hose manufacturer had successfully raised Rs 104 crore by allocating 95.99 lakh shares at Rs 108 each to 15 anchor investors on Monday. Notable participants in the anchor round included Societe Generale, Winro Commercial India Fund, Universal Sompo General Insurance Company, Nippon India Mutual Fund, WhiteOak Mutual Fund, Bank of India Mutual Fund and Invesco Mutual Fund, among others. The IPO has also received a strong response from investors - retail investors rushed in to fully subscribe to the issue within less than an hour of opening for bids.

The net proceeds from the fresh issue will be allocated towards repayment or pre-payment of certain borrowings availed by the company, funding working capital requirements of the company, general corporate purposes and unidentified inorganic acquisitions.

Market insiders have noted that Aeroflex shares have begun trading in the unlisted stock market, with shares currently enjoying a premium of Rs 68 (i.e. 63% premium) in the grey market.

About Aeroflex Industries

Aeroflex Industries Ltd (AIL) stands out as a frontrunner in crafting eco-friendly metallic flexible flow solutions. Their product spectrum is vast, with offerings that include hoses, exhaust connectors, tubes, compensators, and related end-fittings. With its footprint in over 80 countries — covering Asia, the Americas, Europe, and Africa — the company's dynamic market strategy is further bolstered by a staggering 1,700 SKUs in its product arsenal. This robust range serves a clientele of more than 700, which includes industry giants like ONGC, Arcelor Mittal, HAL, ISRO, Tata Steel, Indian Oil, Linde, and SAIL, to name a few.

A noteworthy mention is AIL's corporate lineage. It operates under the umbrella of Sat Industries Ltd, which recently marked the stock market launch of Sah Polymers’ IPO. Impressively, this debut witnessed a 30% premium on the exchanges.

Solid Performance: Aeroflex Industries Shows Impressive Growth

AIL has established a strong track record, as evidenced by their revenue witnessing an impressive 36% CAGR leap, surging from Rs 144.8 crore in FY21 to a whopping Rs 269.5 crore in FY23. Parallelly, the net profit skyrocketed from Rs 6 crore to Rs 30.2 crore, marking a CAGR growth of 124% within the same period. Additionally, the company posted an impressive Return on Equity (RoE) at 26.4% and a Return on Capital Employed (RoCE) of 31.9% in FY23.

Risk Factors To Consider

While AIL’s financial performance and growth trajectory are impressive, potential investors should be aware of a couple of risk factors. FY23 noticed a debt uptick, settling at Rs 45 crore. While this rose from its Rs 39 crore in FY22, the silver lining is the planned retirement of Rs 32 crore of debt from the IPO proceeds.

Further, there's been a bit of an inconsistency in the return ratios. FY23 posted a RoE of 26.43%, which, while impressive, did see a dip from its peak of 31.90% in FY22. Lastly, one cannot ignore AIL's substantial working capital needs, particularly with significant amounts tied up in trade receivables and inventories. Any snags in managing these or in liquidating assets can pose a challenge to their business performance.

Final Verdict: Subscribe

Aeroflex Industries undeniably occupies a unique niche - it is unrivalled in its domain with no direct local competitors. Additionally, their recurrent profitable sales and long-standing customer ties, often spanning a decade, further bolster their stance. The company's financial trajectory, demonstrating upward trends in revenue and profit, coupled with healthy return ratios and decent margins, also promises potential.

In terms of valuation, the P/E multiple works out to 46x post-issue, indicating that the IPO, though seemingly on the pricier side, discounts imminent triggers.

Yet, the long-term prospects seem promising for AIL. The company's scalable business model, its unparalleled stature in the export market, and its unrivalled product standing in India are compelling. Thus, for investors with an eye on long-term gains, this IPO could be a worthy addition to your investment portfolio.

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