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Aeroflex Industries

• Aeroflex Industries is coming out with a 100% book building; initial public offering (IPO) of 3,33,82,352 shares of Rs 2 each in a price band Rs 102-108 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on August 22, 2023 and will close on August 24, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 2 and is priced 51 times of its face value on the lower side and 54 times on the higher side.
• Book running lead manager to the issue is Pantomath Capital Advisors.
• Compliance Officer for the issue is  Kinjal Kamlesh Shah.

Profile of the company

The company is manufacturers and suppliers of environment friendly metallic flexible flow solution products including braided hoses, unbraided hoses, solar hoses, gas hoses, vacuum hoses, braiding, interlock hoses, hose assemblies, lancing hose assemblies, jacketed hose assemblies, exhaust connectors, exhaust gas recirculation (EGR) tubes, expansion bellows, compensators and related end fittings collectively known as flexible flow solutions catering to global as well as domestic markets. It exports its products to more than 80 countries including Europe, USA and others. It supplies its products to a wide spectrum of industries for controlled flow of all forms of substances including air, liquid and solid. The company’s capabilities to provide customized solutions up to the assemblies level enable it to tap flexible flow solutions value chain. Its product categories include braided hoses, unbraided hoses, solar hoses, gas hoses, vacuum hoses, braiding, interlock hoses, hose assemblies, lancing hose assemblies, jacketed hose assemblies, exhaust connectors, exhaust gas recirculation (EGR) tubes, expansion bellows, compensators and related end fittings. 

The company is into metallic flexible flow solutions made of SS. It has recently developed products made of bronze as well. Its products replace flow solutions made of rubber and polymers. Flexible flow solutions made with stainless steel corrugation are becoming a preferred solution because of their numerous advantages. The technical characteristics of SS is the basic attribute that imparts flexible flow solutions made with stainless steel corrugation with its advantages including resistance to external elements, maintaining the quality of media transferred, resistance to abrasion and corrosion, low probability of catastrophic failure, resistance to temperature, maintenance of full vacuum, compatibility to chemicals, among others. Its flexible flow solutions made with stainless steel corrugation conform to BS 6501 Part 1, ISO 10380 and PED CE and are manufactured as per type A, B, and C flexibility. It offers a range of metallic flexible corrugated hoses with diameters starting from ¼ inch to 14 inches. Its solutions are capable to handle varied environmental and work conditions and are designed to handle temperatures levels from negative 196 degrees celsius to 982 degrees celsius and pressure handling capacity of upto 300 bars. 

Proceed is being used for:

• Full or part repayment and/or prepayment of certain outstanding secured borrowings (including foreclosure charges, if any) availed by the company.
• Funding working capital requirements of the company.
• General corporate purposes and Unidentified Inorganic Acquisitions.

Industry overview

Iron and steel industry play a strategic position in the overall infrastructure industry. Therefore, the government has been taking sustained initiative on yearly basis towards the development of the industry. The Government has de-licensed the manufacturing of steel pipes and tubes, and caps on foreign investment has been removed. This move, as part of the larger industrial sector reforms which was implemented in 1991 and subsequent years, have helped in improving the technology level in the industry, apart from attracting capital. Further, trade restrictions (primarily international trade) were also lifted as India became a signatory to global trade pacts. Currently, 100% FDI under automatic route is allowed in the steel sector.

Traditionally, 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. HVAC applications too were a major consumer, although the scale of business generated by this segment was lower compared to its industrial counterpart. 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. Between FY’18-9M FY23, over 1,840 projects (brownfield and greenfield) were completed in the manufacturing. With Flexible Flow Solutions made with Stainless Steel Corrugation application being universal, this large base is believed to have supported a strong demand for the product. The transition from traditional flexible hoses too has accelerated the demand growth.

The highly diversified Indian chemical industry covers nearly 80,000 commercial products and is broadly classified into bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers, and fertilizers. Indian chemical industry is capable of manufacturing chemicals of varying complexity, from basic bulk chemical to specialty chemicals like dyes, surfactants, and construction chemicals. Annual production of basic chemicals – organic, inorganic, alkali chemicals, dyes & pigments, and pesticides – is estimated to have reached 11.6 million tons in FY 2022 (up to February 2022), recording an increase of 14.09% yo-y. This massive expansion plan is on account of expected strong demand for chemicals from a fast-growing economy. Given the wide range of applications of chemicals, a growth in overall industrial activity would trigger higher demand. Although Indian chemical industry has built up a massive production capacity, given the strong economic growth expected in the coming years this capacity needs to be spruced up.

Pros and strengths

Global flexible flow solutions provider operating in addressable market: The company is a global flexible flow solutions company developing and manufacturing metallic flexible corrugated hoses, assemblies and fittings for diverse range of industrial sectors, which are used on an ongoing basis for efficient flow of varied types of materials and substances including liquid, air and solid from one point to another. This makes these solutions critical to the substance, process and the entire eco-system. Its manufacturing facility and certified processes, its global footprint and exposure in over 80 countries, its track record of commercializing and scaling up new products and its research and development capabilities, position it advantageously to capture requirements of diverse end user industrial sectors.

Primary Manufacturer of flexible flow solutions: The company is the manufacturer of metallic flexible flow solutions in the country (Make-in-India, Make-For-World) with an installed capacity of 11 million meters per annum. Its manufacturing facility, located at Taloja, Navi Mumbai, Maharashtra, is spread across 3,59,528 square feet of area and is equipped with mechanical and hydraulic corrugation machines, interlocking machines, braiding machines, bobbin machines and assemblies equipment capable to manufacture range of customized hoses, braiding, assemblies and fittings. It has 34 mechanical corrugation machines, 20 hydraulic corrugation machines, 4 interlocking machines and 28 braiding machines. Its manufacturing facility also has an in-house Design and R&D laboratory, product testing department, dedicated finished product storage area, storage area for raw materials, spares and consumables. From employee safety and well-being point of view, its manufacturing facility has 105 fire extinguishers and a dedicated medical clinic. As on March 31, 2023, 383 people were employed at its manufacturing facility as permanent workers.

High entry and exit barriers: Given the critical nature of the applications, its solutions are subject to, and measured against quality standards (at both customer level as well as at the regulatory authority level governing the end user industry) and rigorous product approval systems with stringent design, engineering and use specifications, which act as significant entry barriers for new players. Also, where it supplies its products to OEMs, the end products of those OEMs are 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 OEMs, which acts an exit barrier and disincentives any such changes for them also. 

Export oriented business model: For Fiscals 2023, 2022 and 2021 the company’s exports were Rs 2,171.80 million, Rs 2,035.59 million and Rs 1,171.15 million which constituted 80.60%, 84.53%, and 80.90% of its revenue from operations respectively. For the Fiscal March 31, 2023, it exported its products to 51 countries. Over the period, it has been able to establish significant presence in the exports markets through providing specified SS flexible flow solutions across industries. From Fiscal 2021 to fiscal 2023, it has added 8 new countries in the exports markets. For the Fiscal 2023, it served 217 customers in 51 countries. Its capabilities to manufacture diverse range of products along-with quality consistency have been key in establishing global markets.  

Risks and concerns

Business dependent on single manufacturing facility: The company has a single Manufacturing Facility situated in Taloja, Navi Mumbai in the state of Maharashtra spread across 3,59,528 square feet of area. The capacity utilisation of its Manufacturing Unit was 9.15 million meters p.a., 9.95 million meters p.a. and 7.81 million meters p.a. constituting 83%, 90% and 71% of the total installed capacity i.e., 11.00 million meters p.a. for the Fiscal March 31, 2023, March 31, 2022 and March 31, 2021 respectively. Its Manufacturing Facility is equipped with advanced equipment, modern technology and semi-automated systems and its business is dependent upon its ability to manage Manufacturing Facility which are subject to various operating risks, including those beyond its control, such as the breakdown, failure of equipment or industrial accidents, severe weather conditions, fire, power interruption and natural disasters.

Requires significant amounts of working capital: The company’s business requires significant working capital, such as to finance the purchase of raw materials, consumables, stores & spares and payments for operating expenses before it receives payment from its customers. In addition, the actual amount of its future capital requirements may differ from estimates as a result of, among other factors, cost overruns, unanticipated expenses, regulatory changes, economic conditions, additional market developments and new opportunities in the industry. It has to maintain adequate inventories of raw materials, stores, spares & consumables, work-in-progress and finished goods to meet its day to day requirements and avoid situations like stock-outs. The result of its operations depend upon its ability to manage its inventories. 

Depend on third parties for supply of raw material: The company is dependent on third party suppliers for the raw materials used in the manufacture of its products. It purchase most of the raw materials used in its manufacturing process from a limited number of third-party suppliers. There is no assurance that if it experiences a disruption of supplies, it will be able to source such commodities from alternative suppliers on similar commercial terms and within a reasonable timeframe. It is dependent upon the ability of its suppliers to meet performance and quality specifications and delivery schedules. The inability of a supplier to meet these requirements, the loss of a significant supplier, or any labour issues or work stoppages at a significant supplier could disrupt the supply of raw materials to its units, preventing the company from delivering to its customers, or cause returns of products under warranty or product recalls. 

Depends upon capability to provide customized Flexible Flow Solutions: Considering the complex nature of the use of the company’s products it always endeavours to maintain high quality metrics for the usage of its products. Its customers have certain complex expectations for product quality, its application and certain structural as well other requirements. It tries to ensure that its products entirely conform to the specific requirements of its customers. It regularly conduct quality tests of its products prior to the delivering them to its customers however, it does not have a dedicated quality assurance team which conducts critical inspections. Further, though the company has a significantly experienced R&D team, it may not be able to guarantee entire conformity with the complex requirements and specifications of its customers leading to a loss of customers or loss of repeat orders. Considering the above, there may be defects in its products which might result in product recalls and repairs over its customers.

Outlook

Aeroflex Industries manufactures and supplies environment-friendly metallic flexible flow solution products. The company's product list includes braided hoses, unbraided hoses, solar hoses, gas hoses, vacuum hoses, braiding, interlock hoses, hose assemblies, lancing hose assemblies, jacketed hose assemblies, exhaust connectors, exhaust gas recirculation (EGR) tubes, expansion bellows, compensators, and related end fittings. The company’s manufacturing facility is located at Taloja, Navi Mumbai, Maharashtra, and is spread across 3,59,528 square feet of area. The company's clientele includes distributors, fabricators, Maintenance Repair and Operations Companies (MROs), Original Equipment Manufacturers (OEMs), and companies operating in a wide range of industries. On the concern side, the markets in which the company and its customers operate is characterized by changing technology, evolving industry standards and demands for features, and continual product innovation. These conditions may also result in significant competition. If the end-user demand is low for its customers’ products, there may be significant changes in the orders from its customers and it may experience greater pricing pressures. 

The company is coming out with an IPO of 3,33,82,352 equity shares of face value of Rs 2 each. The issue has been offered in a price band of Rs 102-108 per equity share. The aggregate size of the offer is around Rs 340.50 crore to Rs 360.53 crore based on lower and upper price band respectively. On the financial front, the company’s total income in Fiscal 2023 increased by 11.82% to Rs 2694.78 million from Rs 2409.92 million in Fiscal 2022. The company’s profit after tax for the year increased by 9.62% to Rs 301.52 million in Fiscal 2023 from Rs 275.06 million in Fiscal 2022. Meanwhile, the company intends to further scale up its Design and R&D efforts and add resources and technically competent manpower to undertake complex research, development and innovations on other high end materials, new product applications and design complex products in-house for varied applications across industrial segments. The company intends to leverage its diversified and global delivery model by continuing to focus on tailor-made flexible flow solutions designed to suit its customers’ preferences.