Aeroflex IPO Case study

Aeroflex Industries Limited, an company operating in manufacturing of metallic hoses is coming up with IPO. This case study would cover the company and industry it is operating, and it is advised to apply in this IPO or not

Aeroflex Industries Limited

IPO Details

Overview of the company

Aeroflex industries limited are manufacturers and suppliers of metallic flexible flow solutions (e.g. braided hoses, unbraided hoses, solar hoses, gas hoses, vacuum hoses etc) to both domestic as well as international markets.

Flexible flow solutions are critical for flow of substances, from start to reach points. It includes fire sprinklers, gas supply, flow of air (conditioned / controlled) in aircrafts, fueling and hydraulics in aircrafts etc. As on March 31, 2023, the company recorded more than 1,700 Product SKUs (Stock Keeping Units) in its product portfolio.

With mind of cutting carbon emissions, company offers its specialised products specifically made of stainless steel instead of rubbers and polymers. It has numerous benefits as well, such as deployment on wide range of appliances, full vacuum, high resistance to extreme tempretures etc.

Product offerings by company-

As of January 31,2023, company’s product portfolio comprised Stainless Steel Corrugated Flexible Hoses (with and without braiding), SS Braiding, Interlock Hoses and Assemblies catering to a diverse range of end user industries, including steel, oil and gas fire sprinklers, refineries aerospace & defence, fire sprinklers & fire fighting, metals & mining, solar and other flexible flow solution, for flow of all forms of substances including air, liquid and solid.

1. Stainless Steel Corrugated Flexible Hoses (With and Without Braiding)

An SS sheet is rolled and welded to create a thin-walled, airtight tube, which is then given flexibility through outer surface corrugations. These corrugations can be annular or helical, formed via hydro-forming or mechanical processes. Annular has separate parallel corrugations, while helical features a continuous spiral corrugation, determining the hose type.

2. Stainless Steel Braiding

Braid is the outer cover made of wire of SS or similar alloy which is wound tightly over the corrugated Flexible Flow Solutions. Braiding helps the flexible hoses to withstand high pressure, widening its application segment. Braid applied can be either single braid or multiple braid, while braided braid is used on large-diameter hose.

3. Stainless Steel Interlock Hoses

Interlock hoses are helically coiled metallic strip that is mechanically locked with the adjacent edges folded together to form interlocked convolutions (two profiled lock sections). They are used in medium pressure applications and can also be used as an outer jacket for insulated pipeline

4. Assemblies

Fittings attached to both ends of the flexible hoses is used to connect it for intended applications. Fitting of various types can be welded / soldered to the hose ends. This flexibility in fittings widens the scope of applications where flexible hoses made with stainless steel corrugation can be used. Once fittings are attached to the hose, the component is termed as assembly.

Overview of the sector

Transfer of media - be it liquid, gas or semi-solids - is an integral part of any industrial process. It goes beyond industrial segment, finding applications in residential and commercial fields. Flexible Flow Solutions connects the origin and end point of the media transferred automatically becomes an integral component. It is made from a wide range of materials, including rubber, PTFE, polymer, and metal.

Stainless steel is the most commonly used metal for manufacturing Flexible Flow Solutions. Its advantages Includes-

1. Flexibility in Fitting- Ability to use virtually any type of fitting provides SS corrugated hose the flexibility to be deployed in a wide range of applications.

2. Chemical Compatibility- Ability to handle wide range of chemicals without any corrosive effect, as well as contaminating the media transferred 

3. Full Vacuum Property- Flexible Flow Solutions made with Stainless Steel Corrugation offers the best protection to maintain full vacuum. This makes it the preferred solution for application that requires full vacuum

4. Temperature Resistance- High resistance to very hot or cold temperature - both the media transferred as well as external environment where it is deployed.

Key Industry usage-

1. Chemicals- In chemical sector, of the applications in chemical plants include process piping, steam lines, chlorine transfer, cryogenic transfer line, dry bulk pneumatic transfer, loading / unloading trucks / tank etc.

2. Oil Refining- In oil refineries, Flexible Flow Solutions made with Stainless Steel Corrugation is used to transfer hydrocarbons, steam and by-products & additives associated with the refining process.

3. Steel- SS Corrugated Flexible Flow Solutions and joining units are used in blast furnaces, BOF furnaces, coke over & coke by-product transfer, boiler & generation units, high temperature lubricating lines, cooling water hoses, and vacuum degasser, among others.

4. Utilities & Power Plants- Used in steam piping systems and fuel delivery lines for thermal power generation plants. Also finds application in hydropower plants as well as nuclear plants.

Global market scenario for stainless steel flexible hose-

Globally, the market for SS flexible hose was estimated to value at approximately USD 25 Billion in 2020 with the size of SS corrugated hose estimated at USD 12.5 billion which is poised to grow to USD 38 Billion and USD 18 Billion by 2027, registering a CAGR of 7.5% and 6.3%, respectively. Supported by favourable product attributes, the demand for SS flexible hoses is being driven by rapid urbanization which has accelerated the pace of the infrastructure developments and real estate construction that has triggered the demand of HVAC system and translated in promising outlook for SS flexible hoses.

The demand from traditional consumer sectors are- 

Industry sources suggest piping industry account for the largest market share amongst all end user while Asia Pacific accounted for the largest share of global stainless steel flexible hose market followed by North America. In coming years too, driven by healthy economic growth in China and India, Asia Pacific is expected to grow at the highest CAGR.

Demand in India-

In India, the demand for Flexible Flow Solutions made with Stainless Steel Corrugation was largely driven by the industrial sector – manufacturing plants and manufacturing products from chemicals to paper. The steady growth in industrial activity amidst some disruption along with the slow but steady transition from rubber / PTFE / polymer flexible hoses have resulted in a favorable demand landscape for Flexible Flow Solutions made with Stainless Steel Corrugation manufacturers.

1. Oil and Gas sector-

During Dec 31, 2022 the number of project outstanding in the sector hovered at 260 with aggregate investment value of Rs 3,500.6 billion. The large quantum of outstanding project in the oil & gas industry is expected to support increasing procurement of components and equipment used in exploration & production.

2. Steel manufacturing sector

Between June 2021 and December 2022, the steel industry completed approximately 29% of capacity expansion projects, encompassing greenfield and brownfield initiatives. This expansion significantly drove demand for Stainless Steel Corrugation-based Flexible Flow Solutions manufacturing. In FY 2022, 64 new projects were announced, investing Rs 2,270 billion.

3. Chemical & petrochemical Sector

The diverse Indian chemical industry encompasses 80,000 commercial products, categorized as bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers, and fertilizers. With capabilities spanning basic to complex chemicals, annual production of chemicals like organic, inorganic, dyes, and pesticides surged 14.09% YoY to 11.6 million tons in FY 2022. Anticipating robust demand, the industry plans significant investments to meet growing needs, supported by numerous new projects.

HVAC

Stainless Steel Corrugated Flexible Flow Solutions are chosen for HVAC systems due to their capacity to counteract thermal expansion and vibration. They offer leak-free operation, corrosion resistance, and low maintenance. The HVAC sector in India, valued at approximately USD 7.8 - 8.5 billion in FY 2022, experiences 14% CAGR growth. Increased urbanization, infrastructure projects, and changing lifestyles contribute to this growth, particularly in cooling applications. Expanding commercial spaces, driven by offices and retail, further propel HVAC industry prospects.

Competitive strengths and USP of company-

1. Company has an export oriented business model-

Company exports their offerings to more than 47 countries around the globe, with 80.85%, 84.53%, 80.90% and 74.74% of revenue was derived from exports in the ten months period ended 31st January 2023 and Fiscals ended 2022, 2021 and 2020 respectively. Their major importers are USA (29%), UAE (7%), Spain (5%), Italy and Canada (4%). Also they have appointed exclusive distributors in the United States and Brazil.

2. Company operates in industry where there are high entry and exit barriers-

The industry requires strict quality control and standards at both industry and consumer levels to operate. Also there are rigorous product approval systems with stringent design, engineering and use specifications, which act as significant entry barriers for new players.

The end products to OEM’s typically subject to stringent regulatory and industry standards where any change in the vendor of the product may require significant time and expense on part of the OEM, which could act has high exit barrier.

3. company has Experienced and dedicated senior team across key function-

senior management possesses relevant experience across various aspects of the flexible flow solutions industry, including business development, research, operations, administration, marketing, and HR management. This expertise, led by figures such as Chairman and Managing Director Asad Daud, Chief Financial Officer Mustafa Abid Kachwala, and heads of Production, R&D, Sales and Marketing, and Quality Assurance, drives operations and expansion. Additionally, company provide ongoing in-house training to engineers and workforce to enhance their skills and adapt to evolving manufacturing technologies. company's parent company, Sat Industries Limited, has a history of successfully scaling diverse businesses through acquisition-led strategies, influencing our strategic direction since our acquisition in 2018. Alongside Aeroflex Industries Limited, Sat Industries acquired Sah Polymers Limited (2015) and Fibcorp Polyweave Private Limited (2022), each headed by their respective leadership and boards. Moreover, Sat Industries Ltd has invested in over 125 startups spanning 30 sectors.

About management

Asad Daud is the Managing Director and Chairman of the Company. He holds a bachelor’s degree in accounting and finance from Hassaram Rijhumal (H.R.) College of Commerce and Economics, Mumbai and a master’s degree in accounting and finance from London School of Economics, London. He has over 12 years of experience in the manufacturing industry and has played an instrumental role in expanding the domestic and foreign operations of our Company. He’s involved in bringing about innovation in the operations and products of the Company. His input has helped our Company to diversify its operations and activities.

Mustafa Abid Kachwala is the Whole-time Director and CFO of the Company. He holds a bachelor’s degree in commerce from Mumbai University. He has worked with Akbarallys Pharma Vet Division in Mumbai from 1986 to 2004 before joining Aeroflex Industries Limited. He has been associated with the Company since 2010 and was re-designated as the Chief Financial Officer with effect from November 28, 2022. He currently looks after the financial affairs of the Company.

Financial performance

1. Balance sheet

2. Income statement

3. Cash Flow statement

Objectives of the Issue-

Company proposes to utilize the Net Proceeds towards funding of the following objects:

1. Full or part repayment and/or prepayment of certain outstanding secured borrowings (including foreclosure charges, if any) availed by our Company;

2. Funding working capital requirements of our Company; and

3. General corporate purposes and Unidentified Inorganic Acquisitions.

Risks of the issue-

1. Company gains more than 80% of the revenue by export to foreign countries. Any disruption or restrictions could affect their earnings

2. Company has only one single manufacturing plant. Any mishappening in plant could have adverse effect on business

3. Company has no long term contracts set up by other companies and rely upon purchase orders only.

4. Company operates in very niche segment of market. If any substitute product is developed by other company which is better than current offering and low in cost could adversely effect the business

Personal views on the IPO:

Aeroflex industries limited operates in very niche market segment of manufacturing of stainless steel hoses, which they say are better alternatives to rubber based hoses which are both environment friendly and more durable. However company has no alternate product line in their portfolio, which could jeopardize their business in case of any adverse conditions in this market segment. However company has strategy to increase their product portfolio and it is seen in their increase spending in R&D of the new products.

The industry did not seem much more appealing to an individual, The product line is not much sophisticated and there are large number of small players operating in the Industry. also one could not much understand the industry the company is working upon. There are no listed peer who operates in same business portfolio as that of company which makes company much more difficult to compare with other peers.

In the DHRP, company talked about various industries and their growth prospects, however it did not talked about how directly their products are involved in their industries. For example company talked about gas distribution network across India with major players as GAIL, IOCL etc, but company has not (yet) got any orders from the foresaid companies.

The valuations which company is asking is again not appealing, with Rs. 108 per share price the market cap comes around 1396.6 Crores, with P/E of more than 46 times, the issue seems to be much overvalued. Also big investors, Ashish Kacholia and Vikas Khemani invested Rs. 76 Crores on 15 May 2023, at price of Rs. 88. Now the company came up with main IPO at 1.4 times the valuation in just 3 months which seems questionable to its valuations.

In my opinion, the IPO would be fairly valued if company asked price of Rs. 85-90 per share, making room for investors to make money during listing. However at current valuations, it seems that company did not give any room for investors to make money during listing.

The GMP of this IPO is between 45-50% in most of websites, which makes company highly overvalued if listing is followed by the GMP. In recent days we saw IPO of Ideaforge Ltd. and Netweb technologies which came in rather high valuations and had high listing gains, but they operate in much different sector as that of Aeroflex. The issue size is also relatively small which could attract many investors to apply, and there could be high subscriptions levels, but one should be cautious about the valuations and apply accordingly. So it is advisable to buy IPO for only long term horizon, rather than short term gains. Cautious Investors could wait add shares after listing if share price comes below the listing price.

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