Salient features of the IPO:
• Apollo Micro Systems Ltd. (AMSL) is engaged into the design & development of high-performance, custom built ruggedized electronics & electro-mechanical systems for mission and time critical applications meant for aerospace, defense, space, home land security and transportation sectors.
• Majority of the net proceeds from the issue (around Rs. 1,189mn) will be utilized to meet the future working capital requirement.
Key competitive strengths:
• Proven track record in developing new technological systems and order execution
• Recurring orders from existing programs
• Strong R&D capabilities
• Quality control
Risk and concerns:
• Highly working capital intensive business
• Delay or cancellation of the orders
• Technological obsolescence
• Rise in interest rate
Valuation & recommendation:
At the higher price band of Rs. 275 per share, AMSL’s share is valued at a P/E multiple of 32.9x (to its restated FY17 EPS of Rs. 8.4), which is at a premium to the peer average of 28.7x
Below are few key observations of the issue:
• The defense electronics manufacturing sector is expected to create an Rs. 4tn worth market opportunity over the next ten years. The Electronic System Design & Manufacturing (ESDM) sector is one of fastest growing sector in India with estimated market size of USD 100bn for 2017. The global ESDM market has shifted the focus from high cost destinations like USA to low costs geographies like China, Korea, India and Taiwan. Thus, with government support, India is expected to become next global defense electronics manufacturing destination.
• AMSL is well-positioned to take advantage of the growth opportunities arising out of the Digital India, Make-in-India programs and the defense offset policy of the Indian Government. The company is also well positioned to address the growing requirements in defense electronics through indigenous programs in which it has been partner for past several years. 6 th Jan. 2018 © CHOICE INSTITUTIONAL RESEARCH 1 Recommendation Subscribe with Caution Price Band (Rs.) Rs. 270 - 275 per Share Face Value (Rs.) Rs. 10 Shares for Fresh Issue (mn) 5.67 - 5.78mn Shares Shares for OFS (mn) Nil Fresh Issue Size (Rs. mn) Rs. 1,560mn OFS Issue Size (Rs. mn) N/a Total Issue Size (Rs. mn) Rs. 1,560mn Bidding Date 10th Jan. - 12th Jan. 2018 MCAP at Higher Price Band Rs. 5,685mn Enterprise Value at Higher Price Band Rs. 4,848.9mn Book Running Lead Manager Aryaman Financial Services Ltd. Registrar Big Share Services Pvt. Ltd. Sector/Industry Defense Promoters Mr. Karunakar Reddy Baddam Pre and Post - Issue Shareholding Pattern Pre - Issue Post - Issue Promoter and Promoter Group 88.48% 64.20% Public 11.52% 35.80% Total 100.00% 100.00% Retail Application Money at Higher Cut-Off Price per Lot Number of Shares per Lot 50 Application Money Rs. 13,750 per Lot Retail and Employee Discount (Rs.) Rs. 12 per Share Analyst Rajnath Yadav Research Analyst (022 - 6707 9999; Ext: 912) Email: firstname.lastname@example.org
• The company is the leading service provider in board design for the Aerospace, Defense and Space markets. Its in-house R&D center, is CEMILAC certified to develop airworthiness systems and is also a R&D collaborative partner for Bharat Electronics Ltd. in embedded hardware & software design.
• The business model of the company is characterized by high gestation periods and lumpy orders, which is resulting into a higher working capital intensive business. Over the last four years, the average net working cycle was around 180 days. Higher gestation period is mainly due to extensive inspections at each stage of the product development.
• On financial performance front, AMSL reported a 54.2% CAGR increase in total operating revenue over FY13-17. EBITDA increased by 57% CAGR with margin in the range of 14-19% over the period. Adjusted PAT increased by 55.5% CAGR to Rs. 172.9mn in FY17. PAT margin stood in the range of 6-8%.
• As on 25th Nov. 2017, AMSL had an order book of Rs. 975mn, which translated to around 0.5x times the FY17 top-line. For FY18 and FY19, we are forecasting an earning of Rs. 10 and Rs. 16 per share, respectively. Top-line is expected at Rs. 2,806.4mn and Rs. 3,727.8mn, respectively, with average EBITDA margin of 16.7% over the same period. PAT margin is expected to improve from 8.2% in FY17 to 9.1% in FY19. Post issue RoE is anticipated to be at 7.9% and 11.3% in FY18 and FY19, respectively, as compared to 7.1% in FY17.
• On valuation front, AMSL is demanding a P/E valuation of 32.9x as compared to peer average of 28.7x. We are of the view that the business is fairly priced, leaving limited space for further upside. Defense investment theme is long term in nature. Given the strong sector outlook, we believe that the stock would provide returns in medium to long term. However, the key concern linked to the sector is the highly stretched working capital cycle. Thus considering the above observations, we assign a “Subscribe with Caution” rating for the issue
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