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Unimech Aerospace and Manufacturing: Should you subscribe to the IPO?
- Unimech Aerospace and Manufacturing, a high-mix, low-volume manufacturing company, is considering a ₹491 crore initial public offering (IPO) with shares at ₹340 to they ₹345. The company manufactures aerospace tooling, assemblies, and precision-engineered components, works with airplane and aero engine manufacturers, and derives almost all of its revenue from exports. Revenue and profitability have more than doubled year-on-year. However, their valuation is steep, at 69 times price to FY24 earnings, with no direct peers.
- Unimech Aerospace intends to allocate ₹70 crore for working capital, ₹80 crore for capital expenditures, and ₹40 crore for debt repayment/ prepayment with the remainder for general corporate purposes. The company's primary business is aerospace tooling production, and it derives 98% of its revenue from it, with precision engineering accounting for the rest.
- For the last three years, the top five customers contributed 93% of the topline. Still, company stickiness and long approval cycles encourage growth. Besides, deeper collaborations with existing customers can open good opportunities, as it has in the past, with the company benefiting from being prequalified to work on new projects with every new SKU. However, the company’s capacity to retain customers and secure repeat orders while progressively growing their wallet share will be critical.
- Unimech's initial public offering is on the verge, carrying a dense valuation of 69 times price to earnings for FY24, with no direct peers. Long approval cycles to onboard customers for components and the firm’s dependence on few customers poses key monitorables for future growth. Though richly valued, the craft manufacturer has significant growth prospects and high margins for the company. Nonetheless, the IPO leaves investors with a low-rated safety margin.
- Despite being relatively small, precision engineering offers Unimech some revenue predictability and provides access to the defence, energy, and semiconductor industries in addition to aerospace. The company has ambitious capacity expansion plans, with manufacturing facilities running at around 95 per cent utilisation since FY22. However, the expense of expanding manufacturing facilities and increasing participation in the technology ecosystem might limit company profit margins somewhat.
- As of H1 FY25, Unimech has a comfortable net debt-to-equity ratio of around 0.2 times. The company is export-oriented, with around 95% of its revenue coming from exports. Regarding debt, the depreciating rupee in India against the US dollar might impact management's efforts to reduce debt after gaining a favorable debt equity ratio of 0.2 times as of H1 FY25.
- Unimech Aerospace has made a 30% strategic investment in Dheya Engineering Technologies Private Limited, allowing them to be the exclusive manufacturer of micro-gas turbine engines for a decade after commercialization. Unimech is also looking to expand into the US through either acquisition or organic growth, establishing tooling inventory and warehousing to mitigate geopolitical risk.
- Revenue grew at a CAGR of 140% between FY22 and FY24. Revenue, EBITDA, and PAT grew by more than 100% YoY in FY24, with growth driven by wallet share expansion with current customers and increasing SKU numbers. Margin volatility and low revenue predictability risk might impact The company's ability to fulfil earning expectations in the future.
- PE based on H1 FY25 earnings annualized is lower at 52 times, indicating decent growth. The pace of growth will be a key monitorable since just 16 existing customers place a large portion of their orders. However, these long approval cycles limit competition, making customer stickiness a key strength. The company's long-term growth potential argues for ‘buy,' but investors with a high-risk appetite should consider this initial public offering.
- The aerospace tooling segment is Unimech Aerospace's primary business, managing the manufacturing, repair, and overhaul of Airframe and Aero Engine segments with airplane manufacturers, airline operators, and a related licensee worldwide. The company caters to a small group of customers, relying on long approval cycles to improve customer stickiness, a bar to enter the industry; it promotes stability.
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