What you must know about EPACK Durable IPO?

EPACK Durable Ltd was incorporated in the year 2019 top operate as an Original Design Manufacturer (ODM) for the manufacture of room air conditioners. EPACK Durable Ltd also manufactures some of the key components like sheet metal parts, injection moulded parts, cross-flow fans, and PCBA components. These are the components that are extensively used in the manufacture of room air conditioners. Apart from its core focus on room air conditioners, EPACK Durable Ltd  has also expanded its business into the small domestic appliance (SDA) market. That is more to offset the seasonal demand for room air conditioners, which tends to peak in and around the summer season. That is the reason, EPACK Durable Ltd  has also diversified into the lateral segments like the manufacture of induction hobs, blenders, and water dispensers.

EPACK Durable Ltd  has a total of 5 manufacturing and operational units. Out of these five units, 4 production facilities are located in Dehradun, the capital city of Uttarakhand. These are enumerated as Dehradun Unit I, Dehradun Unit II, Dehradun Unit III, and Dehradun Unit IV. In addition, the company also has a manufacturing facility at Bhiwadi in the state of Rajasthan. The production capacity as of the close of FY2023 stood at 0.90 million IDUs, 0.66 million ODUs, 0.36 million ODU kits, 0.42 million WACs, and 0.11 million water dispensers. In addition, it also has the capacity to manufacture 1.2 million induction hobs and 0.30 million mixers and their respective components. As of the close of fiscal year FY23, EPACK Durable Ltd had a total of 734 full-time employees on its rolls. Most of them are having a technical background with degrees or diplomas in engineering.

The entire IPO is a combination of a fresh issue and an offer for sale. The fresh issue proceeds of the company will be used by EPACK Durable Ltd to fund capital expenditure to expand the manufacturing capacity. It will also use part of the proceeds for prepayment or repayment of loans taken. The IPO will be lead managed by Axis Capital, DAM Capital (formerly IDFC Securities), and ICICI Securities. KFIN Technologies Ltd will be the registrar to the issue.

Highlights of the EPACK Durable IPO issue

Here are some of the key highlights to the public issue of EPACK Durable IPO.

• EPACK Durable IPO will be open from January 19th, 2024 to January 23rd, 2024; both days inclusive. The stock of EPACK Durable Ltd has a face value of ₹10 per share and the price band for the book building IPO has been set in the range of ₹218 to ₹230 per share. The final price will be discovered within this band through the process of book building, at the price where the demand can be fully met.
   
• The IPO of EPACK Durable Ltd will be a combination of a fresh issue and an offer for sale. As you would be aware, a fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive. On the other hand, OFS is just a transfer of ownership and does not entail dilution of equity or of EPS.
   
• The fresh issue portion of the IPO of EPACK Durable Ltd comprises the issue of 1,73,91,304 shares (173.91 lakh shares approximately), which at the upper price band of ₹230 per share will translate into a fresh issue size of ₹400 crore.
   
• The offer for sale (OFS) portion of the IPO of EPACK Durable Ltd comprises the sale of 1,04,37,047 shares (104.37 lakh shares approximately), which at the upper price band of ₹230 per share will translate into an offer for sale (OFS) size of ₹240.05 crore.
   
• Promoters currently hold 85.49% in the company. Out of the promoters, a total of 4 promoters and 5 members of the promoter group will be offering shares in the OFS. In addition, 2 early investors (India Advantage Fund and Dynamic India Fund) will also be offering shares in the OFS. The promoter stake, post the issue will stand reduced to 65.36%.
   
• The overall IPO of  EPACK Durable Ltd will be a combination of a fresh issue and an offer for sale. The overall issue will, therefore, comprise of the fresh issue and sale of 2,78,28,351 shares (278.28 lakh shares approximately), which at the upper price band of ₹230 per share translates into total IPO size of ₹640.05 crore.

The IPO of EPACK Durable Ltd will be listed on the NSE and the BSE on the IPO mainboard.

Promoter holdings and investor quota allocation quota

The company was promoted by Bajrang Bothra, Laxmi Pat Bothra, Sanjay Singhania, and Ajay DD Singhania. Currently the promoters hold 85.49% stake in the company, which will get diluted post the IPO to 65.36%. As per the terms of the offer, not more than 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while not less than 35% of the net offer size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the gist of the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee quota, as indicated above. There is no employee offer that has been communicated by the company. The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the EPACK Durable IPO

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of EPACK Durable Ltd, the minimum lot size is 65 shares with upper band indicative value of ₹14,950. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of EPACK Durable Ltd.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Key dates for EPACK Durable IPO and how to apply?

The issue opens for subscription on 19th January 2024 and closes for subscription on 23rd January 2024 (both days inclusive). The basis of allotment will be finalized on 24th January 2024 and the refunds will be initiated on 25th January 2024. In addition, the demat credits are expected to also happen on 25th January 2024 and the stock will list on 29th January 2024 on the NSE and the BSE. EPACK Durable Ltd will test the appetite for such ODM stocks in India. The credits to the demat account to the extent of shares allotted will happen by the close of 25th January 2024 under ISIN (INE0G5901015). Let us now turn to the practical issue of how to apply for the IPO of EPACK Durable Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of EPACK Durable Ltd

The table below captures the key financials of EPACK Durable Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of EPACK Durable Ltd which can be enumerated as under

1. In the last 3 years, revenue growth has been robust and steady. However, what stands out about EPACK Durable Ltd is that the net profit margins have been quite low despite the sharp growth in the net profits in the last 3 years.
    
2. The latest year ROE at 10.19%, ROA at 2.18% and the PAT margins at 2.08% are relatively low. However, this is a sort of an outsourcing industry where the margins are normally fixed in advance and the scope to move it up is quite limited. This is more of a volume game and less of a margin game.
    
3. The company has had comfortable sweating of assets over 1X. However, the ROA is still robust and the asset turnover ratio should get better in the coming quarters when the sales pick up momentum and profits keep pace.

Let us turn to the valuations part. On the latest year diluted EPS of ₹4.64, the stock price of Rs230 gets discounted at a P/E ratio of 49.6 times. That is a relatively high P/E ratio if you compare with the similar P/E ratio of the peer group. A lot will predicate on the company being able to maintain the current rate of sales growth and the current net margins, and gradually improving upon the net margins. Higher ROE will be needed to justify the price.

Let us look at some of the qualitative advantages that EPACK Durable Ltd brings to the table.

• The company long standing relationships with the customers and also has the potential to expand the customer base.
   
• The company has vertically integrated manufacturing operations, which allows them better control over costs and inventory movements.
   
• The company has robust product development and design optimization capabilities and that is a great edge in a very dynamic business environment.

It is a high growth business and the potential huge. For a start, the government has an existing standing in the industry, which should hold them in good stead. The pricing may look a little on the higher side, but investors in the IPO can look at this as a proxy play on rapidly growing outsourcing market for manufacturing operations. Investors in the IPO can look at the stock with a longer term perspective with the appreciation that margins will be under pressure in the outsourcing business. Investors with a higher risk appetite and willing to wait for over a year can look at this IPO from a longer term standpoint.