What you must know about Azad Engineering IPO?

About the Azad Engineering Ltd business model

Azad Engineering Ltd is a niche manufacturer of product lines in aerospace and defence, energy and oil and gas industries. It manufactures highly engineered, complex and mission and life-critical components. Some of its key products include 3D rotating air-foil portions of turbine engines and other critical products for defence and civil aircrafts, spaceships, defence missiles, nuclear power, hydrogen, gas power, oil, and thermal power. These are precision forged and machined components and mission-critical with “zero parts per million” defect conditions. Azad Engineering Ltd works with OEMs in aerospace, defence, energy, and oil & gas with sales reaching out to 16 countries. The company has been in operation since 2008. For most of its clients, it is a Tier-1 supplier of high-precision forged and machined components. Some of its marquee clients include General Electric, Honeywell, Mitsubishi Heavy Industries, Siemens Energy, Man Energy, Eaton Aerospace, among others. It caters to aerospace, defence, energy, and the hydrocarbon segments.

Azad Engineering Ltd has in-house capabilities and proficiency in engineering, design, tooling, material development; coupled with a range of finishing and assembly operations focussed on continuous improvements to manufacturing and quality processes. Due to the collective man hours of insights into the industry, the company is able to provide high quality and cost-effective solutions for the demanding applications of global OEMs. The company's customer base includes the US, China, Europe, the Middle East, and Japan. Azad Engineering Ltd has 4 manufacturing facilities in Hyderabad with total production area of 20,000 SFT. It plans to set up two more plants in the state of Telangana. 

The fresh issue portion will be utilized for purchase of funding capital expenditure (CAPEX) and to repay / prepay outstanding loans of the company. Some portion of the fresh funds will also be used for general corporate purposes. The IPO will be lead managed by Axis Capital, ICICI Securities, SBI Capital Markets and Anand Rathi Securities. KFIN Technologies Ltd will be the registrar to the issue.

Highlights of the IPO issue of Azad Engineering Ltd

Here are some of the key highlights to the public issue of Azad Engineering Ltd.  

• The IPO of Azad Engineering Ltd will be open from December 20, 2023 to December 22, 2023. The stock of Azad Engineering Ltd has a face value of ₹2 per share and the price band for the book building IPO has been set in the range of ₹499 to ₹524 per share. The final price will be discovered within this band via the process of book building.

• The IPO of Azad Engineering Ltd will be a combination of a fresh issue and an offer for sale (OFS). While the fresh issue tends to bring in fresh funds into the company, is also EPS and equity dilutive. However, OFS is just a transfer of ownership and does not entail dilution of equity or of EPS.

• Let us start with the fresh issue portion. The fresh issue portion of the IPO of Azad Engineering Ltd comprises the issue of 45,80,153 shares (45.80 lakh shares approximately), which at the upper price band of ₹524 per share will translate into a fresh issue size of ₹240.00 crore.

• What about the Offer for Sale (OFS). The offer for sale portion of the IPO of Azad Engineering Ltd comprises the sale of 95,41,985 shares (95.42 lakh shares approximately), which at the upper price band of ₹524 per share will translate into a total OFS size of ₹500.00 crore.

• Out of the 95.42 lakh shares offered in the offer for sale (OFS), Rakesh Chopdar, a promoter shareholder of the company, will offer 39.12 lakh shares. Among the Investor shareholders; Piramal Structured Credit Opportunities Fund will offer 49.78 lakh shares and DMI Finance Private Ltd will offer 6.52 lakh shares.

• As a result, the total issue size of the IPO of Azad Engineering Ltd will comprise of the issue and sale of 1,41,22,138 shares (141.22 lakh shares approximately), which at the upper price band of ₹524 per share translates into total IPO size of ₹740 crore.

The IPO of Azad Engineering Ltd will be listed on the NSE and the BSE on the IPO mainboard.

Promoter holdings and investor quota allocation quota

The promoters of the company are Paritosh Kumar, Ashish Garg, Megha Garg, Ayush Capital & Financial Services Private Limited, Garg Family Trust, Paritosh Kumar Garg (HUF) and Ashish Garg & Sons (HUF). Currently the promoters hold 88.24% stake in the company, which will get diluted post the IPO to 73.05%. As per the terms of the offer, 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while 35% of the total issue size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the gist of the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee quota, if any. The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the IPO of Azad Engineering Ltd

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of Azad Engineering Ltd, the minimum lot size is 28 shares with upper band indicative value of ₹14,672. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of Azad Engineering Ltd.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Key dates for Azad Engineering Ltd IPO and how to apply?

The issue opens for subscription on 20th December 2023 and closes for subscription on 22nd December 2023 (both days inclusive). The basis of allotment will be finalized on 26th December 2023 and the refunds will be initiated on 27th December 2023. In addition, the demat credits are expected to happen on 27th December 2023 and the stock will list on 28th December 2023 on the NSE and the BSE. Azad Engineering Ltd will test the appetite for market proxies the organization of the forgings sector in India. The credits to the demat account to the extent of shares allotted will happen by the close of 27th December 2023 under ISIN (INE02IJ01035). Let us now turn to the more practical issue of how to apply for the IPO of Azad Engineering Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of Azad Engineering Ltd

The table below captures the key financials of Azad Engineering Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of Azad Engineering Ltd which can be enumerated as under   

a) While sales have shown steady growth in the last 3 years, the profits have fallen in the latest year and that is largely on account of the sharp spike in manpower and employee costs. This is a very competitive sector where the demand for skilled works is far in excess of supply and hence manpower costs will be at a premium.

b) PAT margins and ROE in the latest year may be slightly misleading as there was a sharp fall in the profits due to a spike in manpower costs. However, this is likely to be a temporary phenomenon and unlikely to be a long term challenge.

c) The company has low sweating of assets, but that should happen in the next few quarters as a lot of the investments have to be front-ended. However, the strong ROA would more than make up for that; again, we look at FY22 instead of FY23.

On the weighted average EPS of ₹3.48, the stock is available in the IPO at a P/E of 150 times. However, a more reliable way to look at it would be annualizing the latest half of FY24, which gets us an EPS of ₹10.86 and a corresponding P/E in the IPO at 48.25 times; which looks like a more reasonable estimate of valuation. If you look at the P/E ratio in terms of FY24 or FY25 forwards, then the valuations should look a lot more reasonable. However, other financials like ROE and PAT margins likely to also bounce back in FY24. Now, for some qualitative aspects.   

• The company is a preferred partner in the highly complex engineering solution for the defence, aerospace, and hydrocarbon industry.

• Long standing and deep customer relationships with some of the most marquee original equipment manufacturers (OEMs) in the world.

• High tech manufacturing facilities capable to handle scale and complexity without too much of cost escalation.
Investors must appreciate that the IPO does have a higher valuation but that can be easily justified by the unique positioning and the expected margins of the company in the coming two years. Ideally, this is a long term niche play into a sector that supports the high growth and high focus defence, aerospace, and hydrocarbons sector. Investors can seriously look at this stock as a proxy for the huge latent demand for these product niches, albeit with a longer term perspective of 2-3 years.