IPO: Azad Engineering

Azad Engineering, a precision forged and machined components manufacturer, is launching its IPO (initial public offering) on December 20, 2023. Below is a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision. In a nutshell Quality: The company's three-year average ROE and ROCE are 14.1 and 17 per cent, respectively. Growth: Its revenue grew by 43.2 per cent annually, while profit after tax (PAT) fell by 14.2 per cent between FY21 and FY23. Valuation: The stock is valued at a P/E and P/B of 365.6 and 6.6 times, respectively, compared to its peers' median and average of 62.2 and 9.5 times. Overview: The growth of the energy and defence industries should help the company scale up. In addition, the 'Make in India' initiative should provide new expansion opportunities. However, the highly competitive nature of the industry poses a threat. Also, its business is cyclical and sensitive to macro factors. About Azad Engineering The company manufactures complex and highly engineered precision forged and machined instruments and supplies these components to OEMs (original equipment manufacturers). Some of its key products include 3D rotating airfoil/blade portions of turbine engines, critical components for gas, nuclear and thermal turbines used in industrial applications, energy generation, defence, civil aircraft and spaceships. Over 72 per cent of the company's revenue comes from selling airfoils/blades to the energy sector. At present, Azad Engineering has three revenue verticals: Energy (87 per cent of FY23 revenue) Aerospace and defence (9 per cent) Scap and others (4 per cent) Strengths of Azad Engineering Long-standing client relationships: The top five customers have been associated with the company for over 10 years. Some of its reputed clients include General Electric, Honeywell International, Mitsubishi Heavy Industries, Siemens Energy, Eaton Aerospace and MAN Energy Solutions. High entry barriers: It caters to industries with significant entry barriers due to stringent quality requirements. Weaknesses of Azad Engineering Client concentration: The top five customers accounted for 63.1 per cent of FY23 revenue; the largest customer contributed 32.9 per cent. Lack of bargaining power: It sources most of its raw materials from limited suppliers. It secured 42.6 per cent of its raw materials from a single supplier in the six months ending September 30, 2023. Highly competitive business: The company faces high competition from manufacturers both in India and globally. High finance cost: Its finance cost totalled Rs 52 crore (17.4 per cent of total debt) in FY23, up 284.7 per cent from Rs 14 crore (6.9 per cent of total debt) in FY22. IPO details Total IPO size (Rs cr) 740 Offer for sale (Rs cr) 500 Fresh issue (Rs cr) 240 Price band (Rs) 499-524 Subscription dates December 20-22, 2023 Purpose of issue To fund capital expenditures and repay borrowings Post-IPO M-cap (Rs cr) 3098 Net worth (Rs cr) 471 Promoter holding (%) 65.9 Price/earnings ratio (P/E) 365.6 Price/bo