This morning (Thursday, August 31), Aeroflex Industries was listed in the secondary market at a premium of Rs 197 per share, 83 per cent above its IPO price ceiling of Rs 108 per share. Although the stock fell 16% from its opening price, it still trades at a 55% premium at Rs 168 per share.
During the IPO period, given the high valuation and the imminent slowdown of the export market, we recommend investors to skip this subscription and look for a better entry point later. However, at the current valuation of 72x FY23 P/E (46x at IPO), we recommend exiting the stock if you do subscribe and have received the rights issue.
The company manufactures flexible stainless steel hose for steel, oil and gas, HVAC and other industrial applications involving the movement of gases, liquids or solids. Aeroflex Industries’ export to domestic market ratio is 80:20.
Exposure to the domestic market, and possible applications for new-age energy storage and battery solutions may have sparked high interest in the stock. The IPO was oversubscribed by a staggering 97 times. But the battery and energy storage end-user industry will have to take off to generate significant demand, and may be pre-emptively focusing on this opportunity.
Key export markets are expected to face increasing headwinds as high interest costs will constrain capital projects in the US, UAE and other target markets, and overall global economic growth is expected to slow, impacting demand.
The company posted revenue of Rs 2.7 crore for FY2023 and an EBITDA/PAT margin of 20/11.2%. This implies flat margin growth and 12% year-over-year revenue growth in FY2023. Aeroflex Industries’ FY23E EBITDA net debt of 0.77 times will fall further as new IPO proceeds are used to liquidate debt (Rs 320 crore) and improve working capital investments (Rs 840 crore), and the company will Find the remaining Rs 4.6 crore for inorganic expansion. Even with 80% capacity utilization in fiscal 2023 and access to IPO proceeds, the company has not earmarked funds for capital projects.
Trading at 72x FY2023 earnings should imply an expected asking price of 20-30% revenue growth over the next 3-4 years. This is not supported by growth over the past year, demand visibility in key export markets, or even capital expansion. We recommend investors to exit the stock at the current high valuation.