IPO: EPACK Durable

EPACK Durable, a room air conditioner manufacturer, is coming out with its IPO (initial public offering) on January 19, 2024. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROCE are 15 per cent and 14 per cent, respectively. It reported a negative cash flow from operations in FY22.
  
• Growth: Its revenue grew by 45 per cent annually over the last three years.
  
• Valuation: The stock is valued at a P/E and P/B of 68.9 and 2.5 times, respectively.
  
• Overview: Growth in the electronics manufacturing sector and rising demand for room air conditioners and small home appliances should drive growth. However, high competitive intensity, working capital requirement, and debt are concerning.

About EPACK Durable

EPACK Durable is India's second-largest room air conditioner original design manufacturer (in terms of volume). Simply put, it designs and manufactures air conditioners as per client requirements. It also manufactures small home appliances, such as cooktops, mixer grinders, etc.

Strengths of EPACK Durable

• It is the second-largest room air conditioner manufacturer in terms of the number of units manufactured through the ODM route in FY23.
  
• Backward integration . It manufactures all the required components at the same location, reducing travel costs and improving operating margins.

Weaknesses of EPACK Durable

• Revenue concentration. Its top 5 customers accounted for around 80 per cent of H1 FY24 revenue and about 83 per cent of FY23 revenue.
  
• Lack of long-term contracts. It does not have any long-term agreements with its clients. Combined with the high revenue concentration, it may pose considerable risks.
  
• High working capital requirement. It has a high cash conversion cycle (around 82 days in FY23) and may have to rely on debt for working capital requirements. Short-term debt grew 49 per cent annually between FY19-23.

Risk report

Company and business

• Are earnings before tax of EPACK Durable more than Rs 50 crore in the last 12 months?
  No. Its profit before tax for FY23 was Rs 46 crore after adjusting for exceptional items.
• Will EPACK Durable be able to scale up its business?
  Yes. Rising demand for room air conditioners and small home appliances will help it scale up.
• Do EPACK Durable have recognizable brands with client stickiness?
  Yes, while it has no long-term commitments, it has maintained long-standing relationships with its clients (an average of 8 years).
• Does the company have a credible moat?
  No. It faces significant competition domestically and globally.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post IPO, the promoters' stake will be 48.1 per cent.
• Do the top three managers have more than 15 years of combined leadership at EPACK Durable?
  Yes. Key managerial personnel and senior management have more than 15 years of experience.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is the company free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. Its three-year average ROE and ROCE are 15 and 14 per cent, respectively. In FY23, both ROE and ROCE were 15 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  No. It reported a negative cash from operations of Rs 29 crore in FY22.
• Is the company's net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio, as of September 2023, was 0.9 times.
• Is EPACK Durable free from reliance on huge working capital for day-to-day affairs?
  No. It is a working capital intensive business. Its trade receivables grew 43 per cent annually between FY19-23. During the same period, short-term debt also grew 49 per cent annually.
• Can the company run its business without relying on external funding in the next three years?
  No. It may require external capital to fund its day-to-day operations.
• Is EPACK Durable free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of total equity stood at around 0.3 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers a 2.9 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a P/E of 68.9 times. The peer median is 70 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B of 2.5 times. The peer average is 10 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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