Ajax Engineering IPO analysis

Ajax Engineering IPO (initial public offering) will open for subscription on February 10, 2025, and close on February 12, 2025. We break down the concrete equipment manufacturer's strengths, weaknesses and growth prospects to help investors make an informed decision.

Ajax Engineering IPO in a nutshell

• Quality : Between FY22 and FY24, the company reported a three-year average ROE and ROCE of nearly 20 and 27 per cent, respectively.
  
• Growth : Between FY22 and FY24, its revenue and profit after tax grew by 51 and almost 132 per cent per annum, respectively.
  
• Valuation : At the upper end of the price band, the stock is valued at a P/E and a P/B ratio of nearly 29.6 and 7.2 times, respectively.
  
• Overview: India's booming infrastructure sector, urban expansion and rising adoption of mechanised construction provide a favourable growth runway for Ajax Engineering. Additionally, government-led infrastructure push, automation trends and export growth offer further opportunities. However, intense competition in the industry makes differentiation critical for sustaining a strong market position.

About Ajax Engineering

Incorporated in 1992, Ajax Engineering is a leading manufacturer and supplier of concreting equipment, specialising in self-loading concrete mixers (SLCMs). With 93.4 per cent of sales from India, Ajax also has a growing presence in South and Southeast Asia, the Middle East and Africa.

SLCMs are the company's core revenue driver, contributing 85 per cent of FY24 revenue and 81.5 per cent for the six months ending September 30, 2024. Ajax commanded a 77 per cent market share in SLCM sales during H1 FY25.

Non-SLCM equipment accounted for 10 per cent of H1 FY25 revenue. Spare parts and services contribute 7.5 per cent and 1 per cent of the revenue, respectively, for the six months ending September 30, 2024.

Strengths of Ajax Engineering

• Extensive dealership network: Ajax operates through 51 dealerships across 23 states in India and 25 international dealers, collectively driving 93 per cent of total sales. This has helped the company grow its customer base by 19 per cent annually during FY22-24 while maintaining its industry leadership in SLCMs.
  
• Focus on R&D: Ajax Engineering's expenditure on research and development (R&D), as a percentage of its revenue from operations, has been consistently around 1 per cent during FY22-24. As of September 30, 2024, it holds two patents related to product design and functionality, along with four trademarks protecting its proprietary intellectual property, primarily in the SLCM segment.

Weaknesses of Ajax Engineering

• Promoter non-compliance: A member of the promoter group, David Hansen, has refused to be included in SEBI-mandated disclosures and has not provided necessary information and confirmations regarding his interests. Additionally, past delays in regulatory filings for bonus issues reflect poorly on the management.
  
• Cyclical industry: Ajax Engineering's growth is closely tied to government and private infrastructure spending, making its revenue volatile and vulnerable to industry cycles.

Risk report

Company and business

• Are earnings before tax of Ajax Engineering more than Rs 50 crore in the last 12 months?
  Yes. The company reported a profit before tax of Rs 328 crore for 12 months ending September 2024.
• Will Ajax Engineering be able to scale up its business?
  Yes. Rising infrastructure spending provides a strong growth runway.
• Does Ajax Engineering have recognisable brands with client stickiness?
  Yes. Operating primarily on a B2B model without long-term contracts, Ajax has still managed to capture the largest market share in self-loading concrete mixers.
• Does the company have a credible moat?
  No. The industry is highly competitive, with several organised players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, its promoter will hold an 82 per cent stake in the company.
• Do the top three managers have more than 15 years of combined leadership at Ajax Engineering?
  Yes. Krishnaswamy Vijay, executive chairman and full-time director, has been associated with the company since its incorporation in July 1992.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  No. The company once delayed filing the required documents related to the bonus issue of shares.
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
• Is Ajax Engineering free of promoter pledging of its shares?
  Yes. No shares have been pledged as of Q2FY25.

Financials

• Did the company generate a current and three-year average return on equity of over 15 per cent and a return on capital employed of over 18 per cent?
  Yes. Its three-year average ROE and ROCE were nearly 20 and 27 per cent, respectively. In FY24, its ROE and ROCE were 28 and 37 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flow during FY22-24.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company has been net debt-free since FY22.
• Is Ajax Engineering free from reliance on huge working capital for day-to-day affairs?
  Yes. Despite being working capital-intensive, the company's FY22-24 average working capital days were 44, and in FY24, the working capital cycle was reduced to only 22 days.
• Can the company run its business without relying on external funding in the next three years?
  Yes. With a history of debt-free operations and positive net cash flow from operations during FY22-24, the company still has enough cash and cash equivalents in its balance sheet, including a current investment of over Rs 350 crore. Hence, Ajax is unlikely to need external funding.
• Is Ajax Engineering free from meaningful contingent liabilities?
  Yes. As of Q2 FY25, contingent liabilities were less than 5 per cent of its total equity.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 4 per cent on its enterprise value.
• Is the stock's price-to-earnings (P/E) less than its peers' median level?
  Yes. The stock is valued at a P/E ratio of 29.6 times compared to its peers' median level of 40.1 times.
• Is the stock's price-to-book (P/B) value less than its peers' average level?
  No. The stock is valued at a P/B ratio of over 7.2 times, compared to its peers' average level of 6.5 times.

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Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

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