Updated – December 25, 2024 at 03:20 PM.
While valuations seem to be on the higher side, customer stickiness and robust capex is expected to drive solid growth
The IPO of Unimech Aerospace and Manufacturing, a capital goods company catering to aerospace, energy, defence and semiconductor segments is open for subscription until December 26. The IPO is a mix of fresh issue and offer for sale of ₹250 crore each, totaling to ₹500 crore.
Of the IPO proceeds, ₹70 crore is allocated towards working capital requirements, ₹80 crore towards capital expenditure, ₹40 crore towards repayment/ prepayment of borrowings and the remaining, for general corporate purposes.
Incorporated in 2016, Unimech is into manufacturing aerospace toolings, assemblies and precision engineered components. The company operates in a high-mix, low-volume production environment characterized by a large number of SKUs, small order quantities and complex products.
Starting from a low base, sustained investments in expansion of manufacturing capabilities helped revenue / EBITDA / PAT grow at a solid CAGR of 140 / 220 / 314 per cent over FY22-24. With more capex underway, growth is expected to be sustained, but the pace will be a key monitorable, considering the base effect. Long approval cycles to onboard customers for components manufactured in this space, while acting as an entry barrier and promoting customer stickiness, also results in slower customer acquisitions.
Valuation is demanding at 69 times price to FY24 earnings. However, PE based on H1 FY25 earnings annualized is lower 52 times considering decent growth in current FY. There are no direct peers. Though they cater to different segments of the market, Azad Engineering, Paras Defense and Space Technologies, and MTAR Technologies have reasonable exposure to defense, energy and aerospace. These players are trading at a TTM PE of 178 times, 90 times and 132 times, respectively.
This space has been among the investor favorites since FY22 which explains the rich valuations across the board. Though backed by fundamentals to a reasonable extent, there has been some exuberance too.
Unimech IPO is a close call between a buy – niche business with good growth prospects and high margins, and avoid – very expensive valuation at an absolute level (although relatively cheaper than peers) which leaves IPO investors with lower margin of safety. Overall, the long term growth prospects tilt it in favour of a buy, but only for those with a very high risk appetite.Â
The business
Unimech is an engineering solutions company, involving machining, fabrication and assembly, with build-to-print (manufacturing of products based on client designs) and build-to-specifications (assisting clients in designing the products and then manufacturing it) capabilities.
Aerospace tooling segment is where Unimech manufactures tools for manufacture, repair and overhaul (MRO) of airframe and aero engine segments. It works with airplane manufacturers, airline operators, aero engine manufacturers and their licensees worldwide. This segment contributes to around 98 per cent of its topline, currently, while the remaining comes from the precision engineering segment.
Diversification into precision engineering, according to the management, was to lend some revenue visibility and gain access to more sunrise sectors such as defense, energy and semiconductors, apart from aerospace. Also, it requires broadly similar complex manufacturing processes and capabilities. However, it is a small component of the topline currently, and how it gets scaled up is a key monitorable.
Unimech is export-oriented and derives around 95 per cent of its revenue from exports. In FY24, sales to US added upto 92 per cent of the total revenue, while sales to Germany was at 5.4 per cent. From FY22, US and Germany, on an average, jointly contributed to around 95 per cent of the topline, while domestic sales accounted only for around 5 per cent.
According to the management, the replacement cycle of the products sold is roughly between 2 and 4 years.
Operating metrics
Revenue, EBITDA and PAT more than doubled year-on-year in FY24 to ₹209 crore, ₹79 crore and ₹58 crore respectively. Revenue growth was helped by the company expanding its wallet share with the existing customers, with increasing SKUs. EBITDA and PAT growth were on the back of significant improvement in both EBITDA margins and PAT margins (see table), owing to operating leverage. However, capacity expansions and contribution from lower margin precision engineering segment can dent the profit margins a bit going forward.
Working capital cycle has improved from 275 days in FY23 to 117 days in FY24 to 81 days in H1 FY25. But the management noted that the OEMs have the bargaining power to stretch the credit period, resulting in a possible elongated receivables turnover cycle.
Net debt to equity is comfortable at around 0.2 times as of H1 FY25.
What works
The exponential growth in revenue and profitability was on the back of doubling of manufacturing capacity from FY22 to FY24. From the base of FY24, Unimech is planning on expanding its manufacturing facilities by 2.5 times, by FY26, meaning a 6X growth since FY22. Also, manufacturing facilities running at around 95 per cent utilization since FY22 and fixed asset turnover ratio of 5 times in FY24, despite the expansions, indicate strong demand alongside company’s ability to scale up at a rapid pace.
The top 5 customers contributed 93 per cent of the topline, on an average, in the last 3 FYs. It was 96.8 per cent in FY24 and a similar trend is observed in H1 FY25 too. Though the company caters to a small group of customers – 16 currently, entry barriers in the form of long approval cycles and customer stickiness work in favour. Deeper collaboration with the existing customers will open up a good runway of growth for the company, as it has in the past, and with every new SKU, the company could benefit from being pre-qualified for new projects. However, the ability of the company to retain the customers and to get repeat orders, while expanding their wallet share will be key monitorables going forward.
Unimech has made a strategic investment (30 per cent stake) in Dheya Engineering Technologies Private Limited (DETPL), a deep-tech company working on building India’s first indigenously built micro gas turbine engines. The arrangement allows Unimech to be an exclusive manufacturer of micro gas turbines for a period of 10 years post-commercialisation. Gas turbine engines find applications in cruise missiles, drones, unmanned aerial vehicles within the defense space. It also finds a place in energy generation. While it is still in the prototype stage, rewards might not be reaped in the short-term, but it bodes well for the long-term. The company raised ₹250 crores in July 2024 to capitalise on inorganic growth opportunities which preceded this investment. But information as to the balance funds after this acquisition was not made available.
Points to note
The company is also looking at expanding in the US by setting up tooling inventory and warehousing, and a manufacturing presence either through acquisition or organic growth. This could mitigate the volatility risk on account of geopolitical tensions, as a significant chunk of revenue comes in from the US. But still external factors remain a key monitorable in this regard.
In the absence of long-term contracts and company’s procurements being order-based, there are inherent risks of margin volatility and lack of revenue visibility. Also, there are chances of increased costs due to underutilization of assets during lower order intakes and sub-contracting/ outsourcing during higher order intakes. Subcontractors are assigned non-critical machining tasks, and they on average since FY22, accounted for around 30 per cent of the cost of goods sold.
