EPACK Durable

ODM player in consumer durables

Manufacturer of RACs and SDA for leading brands at plants in Uttarakhand, Rajasthan and Andhra Pradesh

EPACK Durable manufactures room air conditioners (RAC) and small domestic appliances (SDA), and its components. The product portfolio comprises designing and manufacturing of 1) complete RACs comprising window air conditioners (including window inverter ACs) and split airconditioners [both indoor units (IDUs) and outdoor units (ODUs)] ranging from 0.75-2 tonnes across a range of energy ratings and type of refrigerants; 2) small domestic appliances (including induction cooktops, mixer-grinders, and water dispensers); and 3) components such as heat exchangers, cross flow fans, axial fans, sheet metal press parts, injection moulded components, copper fabricated products, PCBAs, universal motors, and induction coils for both captive consumption as well as customer offerings.

As percentage of revenue from operations RACs and SDAs accounted for 78.34 and 18.40% and 83.23 and 14.15% in H1FY2024 and FY2023, respectively.

Some of the major customers of its RAC products include Blue Star, Daikin Airconditioning India, Carrier Midea India, Voltas, Havells India, Haier Appliances (India), Infiniti Retail, and Godrej & Boyce Manufacturing Company, with the average length of relationship with these customers for the company being 8.7 years.

Some of major customers of the SDA products include Bajaj Electricals, BSH Household Appliances Manufacturing, and Usha International, with the average length of its relationship with these customers being 6.3 years.

The company’s manufacturing operations are concentrated within Dehradun (Unit I, II, III & IV), Uttarakhand;Bhiwadi, Rajasthan; and Sri City, Andhra Pradesh. As on March 31, 2023, the Dehradun and Bhiwadi manufacturing facility had an aggregate installed annual capacity to manufacture (i) 0.90 million IDUs, 0.66 million ODUs, 0.36 million ODU kits; and 0.42 million WACs, and (ii) 0.11 million water dispensers, 1.2 million induction cooktops, and 0.30 million mixer grinders, and their components. The company commenced operations at the Sri City manufacturing facility in December 2023. The annual manufacturing capacity of the Sri City facility as on 15 December 2023 is (i) 0.66 million IDUs and 0.66 million ODUs, and (ii) 0.65 million induction cooktops and their components.

Unlike RACs, the demand for SDAs remaining relatively consistent throughout the year and thus the company looks to expand its SDA product portfolio with products such as hair dryers, induction water heaters and nutriblenders, tower fans, kitchen chimneys, and dual ICTs as well as semi commercial air conditioner products and domestic air coolers.

Issue & object of the offer

The issue comprises fresh issue of equity shares, aggregating to Rs 400 crore, and offer for sale of 10437047 equity shares. Of the offer for sale of 10437047 equity shares, 5175361 equity shares are being sold by promoters and the promoter group and 5261686 equity shares by other selling shareholders, i.e., India Advantage Fund S4I (4630284 shares) and Dynamic India Fund 24US I (631402 equity shares). Post issue share holding of India Advantage Fund and will hold Dynamic India Fund will 10.33% and 0.66%.

Of the net proceeds, the company propose to spend Rs 230 crore towards funding of capital expenditure for expansion and setting up of manufacturing facilities including Rs 110.612 towards setting up a manufacturing plant at Bhiwadi and SriCity;Rs 80 crore towards repayment and prepayment, in full or part, of all or certain borrowings, and balance amount towards general corporate purposes.

Strengths

The company was the second largest original design manufacturer (ODM) of RACs in India in terms of number of units (indoor units + outdoor units) manufactured in FY 2023 through the ODM route.

Integration into the supply chain of the RAC and SDA brands involves a long gestation period, entailing a lengthy approval process, and requires a long-term relationship. Products in the RAC and SDA industries are required to meet certain BEE standards. To meet such requirements, RAC and SDA ODM companies must continually refine their product design. Thus, continuous refinement of design and cost-efficient innovation raise further barriers to new entrants.

The RAC customer base includes four of the top six RAC brands in the Indian market (in terms of RAC sales in FY2023). Relationships with existing customers present cross-selling opportunities.

Advanced vertically integrated manufacturing operations with the product portfolio aimed at capturing the full spectrum of the RAC and SDA value chain.

Indian government banned imports of completely built units of air-conditioners with refrigerants from FY 2021 in a bid to promote domestic manufacturing.

The growth for consumer durablesis driven by new demand given under-penetration as well as replacement and up-gradtion demand.

The manufacturing facilities, in north-west and south, where RAC manufacturing capacity is nil for some of leading RAC players, offer strong opportunity for the company, with its Sricity plant becoming operational.

Weakness

The RAC industry is seasonal as the demand for RACs typically peaks during the first half of the calendar year and reduces in the second half of the calendar year.

The Top 5 customers account for 79.62% and 82.66% of revenue in H1FY2024 and FY2023, respectively, signaling significant customer concentration. The loss of key customers will impact the performance.

The statutory auditors have included a qualification in the auditor’s report in the FY2022 audited financial statements in relation to CCPS (aggregating to Rs 160 crore) as equity instrument in violation of Ind AS 32. Similarly, the statutory auditors have included certain emphasis of matters and observations in their report for FY2023 and FY2021.

The MoU with East India Technologies (East India) prevents the company from entering into manufacture of specified products such as audio equipment, camera equipment, desktop computers, laptops and computer accessories, renewable energy electronics, industrial engineering products, televisions, and lighting equipment.

Restrictions on import of raw materials and components from China may adversely impact the performance as the overall RM imports comprised 39.87% and 39.31% of the total cost of RM purchased in H1FY2024 and FY2023. Of these, 34.05% and 21.02% were from China.

The trademark EPACK is owned by EPACK Polymers, a group company. The company was permitted to use thetrademark under the licensing agreement, dated July 29, 2023, for a term of 25 years for a fee.

Valuation

Consolidated revenue for FY2023 was up 67% to Rs 1538.83 crore. But with the operating profit margin being 6.7% as compared to 7.4% in the corresponding previous period, operating profit was up 49% to Rs 102.53 crore. PBT was up 76% to Rs 46.41 crore. The share of profit from associates was a loss of Rs 0.81 crore as against nil. The EO was an expense of Rs 1.55 crore. Thus, PBT after EO was up 67% to Rs 44.05 crore. Taxation was up 36% to Rs 12.08 crore. Net profit was up 83% to Rs 31.97 crore.

For the half year ended September 30, 2022, sales were Rs 614.80 crore. With the OPM being 6% OP was Rs 36.98 crore. Net profit was Rs 2.65 crore.

On post-issue expanded equity (at the upper price band), EPS was Rs 3.5. The PE works out to 65.7 times.

In comparison, Amber Enterprises, Dixon Technologies, PG Electroplast and Elin Electronics quote at a PE of 81.3 time, 147.4 times, 69 times and 30 times of their FY2023 EPS and a P/BV of 6.8, 29.5, 13.5 and 1.6.