Aeroflex Industries Business analysis

• Business
  
  Aeroflex industries, started in 1993, produces metallic flexible flow solution products like solar hoses, gas hoses, vacuum hoses, braided hoses,unbraided hoses, braiding, interlock hoses, hose assemblies, lancing hose assemblies, exhaust connectors, exhaust gas re-circulation (EGR) tubes, expansion bellows.
  Aeroflex is mainly export oriented business, exporting to 80 countries. Exports constitute 81% of revenues.
  These products play a critical role in transfer of air, liquid and solid in any industrial applications.

  These products are used in Chemical plants, Oil refineries, Petrochemicals, Steel plants, Power plants, Bulk material handling, Natural Gas transfer, Water treatment plants, HVAC systems.
  
  The Company’s lone manufacturing facility is at Navi Mumbai with a total capacity of 11 million meters/ year.

  Global Stainless Steel flexible hose industry is Rs 2 lakh crore, half of which is corrugated SS flexible hose. Industry is projected to grow at 7.5% CAGR.
  
  Cost of goods sold 170cr which is 63% of revenues. Majority of stainless steel are being procured from international market.
   R&D-related expenses form 0.87 % of revenue.
  
  Sector wise revenue distribution as follows

Annual revenues of Aeroflex industries is 270cr.  PAT 30cr.
Revenue from operations grew at 36% CAGR, EBITDA grew at 55% CAGR, PAT at 124% from F21 to F23.

Profits have become 5X in last 2 years.

EBITDA margins expanded from 15% to 20% in 2 years.
PAT margins have expanded from 4% to 11%
ROCE at healthy 31%, increased .
Capacity utilization is 83% which is good.
There are no listed peers in India with whom its performance can be compared.

Balance sheet

Trade receivables 67 cr ( most amount outstanding less than 6 months) , not high, considering it is a B2B business.
Cash/ cash equivalent is 6cr
Total borrowings 44 cr ( 35cr from IPO will be used to reduce this debt)
Debt equity ratio  0.39
Cashflow from operations (CFO) of F23 is 3.7cr only, but was adequate in previous 2 years.


Points to consider

Though Stainless steel pipes are very much advantageous over rubber /polymer hose, the latter is relatively cheaper which makes cost-conscious customers tilting towards it.

Industry has high entry barrier in terms of requirement of R&D capabilities.
Raw materials are stainless steel ( sourced mainly from outside) which are subject to steel price fluctuations.

Aeroflex purchase raw material under short term contracts, sourced mainly from China. For end products too, they don't have any long term contracts with any customers.
80% of revenues are dependent on exports , though diversified , except for only US (28%).
Dependence on single manufacturing unit is a kind of risk.
Business requires high inventory , contributing 30-40% of revenues. 84cr coming from IPO will suffice for near term.

Aeroflex industries is already operating at high capacity utilization of 83-90% , but not yet disclosed any expansion plans which they will require for growing revenues at high pace. They will need to raise debt for that.

Valuation

Aeroflex industries is valued at P/E of 45 ( possibly being a high growth company)  according to the price band given.


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No high exposure to any single sector - diversified across sectors.
81% of revenues come from exports, 28% of total revenues come from US.
There is not much dependence on single country other that US.


Financials