Elin Electronics IPO: Detailed Analysis

Elin Electronics Limited (EEL) IPO Details:

• Elin Electronics Limited IPO Date: 20 December - 22 December 2022
• Elin Electronics Limited IPO Price band: Rs 234 - Rs 247
• Elin Electronics IPO Issue Size: Rs 475.00 crore (Fresh Issue of Rs 175 crore and Rs 300 crore OFS)
• Reservation: QIB 50%, Retail 35%, NII 15%
• Minimum Investment: Rs 14,820
• Post Issue Implied Market Cap: Rs 1,171 crore – Rs 1,227 crore
• Bid lot: 60 shares, and in multiples of 60 shares

Elin Electronics Limited IPO: Issue objective

Elin Electronics proposes to utilize the Net Proceeds of the fresh issue towards funding the following objects:

• Repayment/ prepayment, in full or part, of certain borrowings availed by the company.
• Funding capital expenditure towards upgrading and expanding existing facilities at Ghaziabad, Uttar Pradesh, and Verna, Goa.
• General corporate purposes.

Elin Electronics Limited IPO: About Elin Electronics

• Elin has decades (incorporated in 1982) of experience in electronics manufacturing services (EMS).
• They are the leading EMS manufacturer of end-to-end product solutions for major brands of lighting, fans, and small/kitchen appliances.
• Also, they are one of the largest fractional horsepower motors manufacturers in India.
• The company manufactures and assembles a wide array of products and provides end-to-end product solutions.
• The key business verticals include LED lighting, small appliances, fractional horsepower motors, fans and switches, medical diagnostic cartridges, and molded and sheet metal parts and components.
• Elin also manufactures medical diagnostic cartridges for use in diagnostic devices and plastic molded and sheet metal parts and components, largely for customers in the auto ancillary and consumer durables sectors.

Elin Electronics Limited IPO: Business Models

The company has two business models - OEM and ODM. The details are as below:

1. Original Equipment Manufacturer (OEM): Under this model, they manufacture and supply products basis designs developed by their customers, who further distribute these products under their brands.
2. Original Design Manufacturer (ODM): They conceptualize and design the products, which are marketed to their customers’ prospective customers under their brands. They have developed ODM capabilities concerning small appliances and lighting products.

Elin Electronics Limited IPO: Industry Overview

• The global electronics industry has evolved tremendously over the last 60 years. The global electronics industry has been valued at $2,288 billion in 2020. As per Frost & Sullivan analysis, the industry is expected to grow at a CAGR of 5.2 % to reach $2,955 billion by 2025.
• The global EMS market witnessed a period of steady growth till 2018, riding on the wave of increased outsourcing activities from brand manufacturers and increasing electronics content. However, in 2019, the opportunities started stagnating due to many factors.
• The industry is moving from Original Equipment Manufacturing (OEM) to Original Design Manufacturing (ODM). The share of the ODM business is likely to increase from 10% in 2020 to 13% in 2025.

Elin Electronics Limited IPO: Listed Peers

EEL operates in a competitive space with participants in both organized and unorganized sectors. Many segments within the electronic manufacturing space have low entry and exit barriers leading to a market with a very high degree of fragmentation. 

Companies have to compete with domestic and international manufacturers engaged in the manufacture and supply of lighting products, small appliances, and fractional horsepower motors and from players in the unorganized sector. 

The listed peers include Dixon Technologies (India) Ltd and Amber Enterprises India Ltd. The comparison is as below for FY22:

• In terms of revenue, Elin is the smallest player among the three, Dixon Technologies lead the table with a revenue of rs 10,697.08 crore. Elin has revenue one-tenth that of Dixon.
• The EBITDA margin for Amber is highest at 7.34%, slightly higher than Elin's with margins of 7.31%.
• ROE and ROCE are highest for Dixon, next is Elin and Amber has the lowest numbers.
• All the companies have debt. They have a debt-to-equity ratio of 0.28 (Dixon), 0.32 (Elin), and 0.41 (Amber Enterprises).

Elin Electronics Limited IPO: Financials

• The company has reported revenue of operations of Rs 785.58 crore, Rs 862.38 crore, and Rs 1,093.75 crore for FY20, FY21, and FY22, respectively. The revenue has grown at a good rate - a CAGR of 18.05%.
• For FY20, FY21, and FY22, the company reported an EBITDA of Rs 56.24 crore, Rs 69.00 crore, and Rs 79.93 crore, respectively.
• The EBITDA margin for the same period was 7.16%, 8.00%, and 7.31, respectively. There has been no significant growth in the margins.
• The net profit reported by the company for FY20, FY21, and FY22 was Rs 27.49 crore, Rs 34.86 crore, and Rs 39.15 crore, respectively.
• For the last three financial years, the average EPS and RoNW were 8.28 and 12.76%, respectively.
• The ROE for the same period was 12.88%, 14.23%, and 13.85% - there has been no significant change in ROE.
• RoCE has remained the same during the discussed period - 15.44%, 14.90%, and 15.82%, respectively.
• The debt-to-equity ratio was 0.27 in FY20, and it increased slightly to 0.32 in FY22.

Elin Electronics Limited IPO: Unique Selling Propositions

Established market position: They are a leading EMS manufacturer of end-to-end products for major brands. Elin believes that their market penetration together with expansion plans for manufacturing facilities and backward integration into manufacturing, enable them to be well-positioned to capture the growing demand.

Diversified products: Elin has a diverse product, product vertical, and customer base and caters to its customers across multiple product verticals. It enables them to balance out any impact or risk incurred concerning any single product, product vertical, or customer. 

Strong relationships with a marquee customer base: Out of their top 20 customers, they have been serving 11 customers for over ten years, and have been serving 16 customers for over five years. Their high customer retention capabilities are due to their one-stop-shop facilities and consistently maintaining high standards of the manufacturing quality of products promptly.

High degree of backward integration: Elin has placed a strong focus on expanding its technological expertise in manufacturing products and integrating services, thereby increasing efficiencies, becoming an ideal partner for customers, and maintaining an edge over competitors.

Elin Electronics Limited IPO: Growth Potential

Enhance customer base through cross-selling: They intend to increase cross-selling of their product to increase their customer base in various product verticals and expand into new or adjacent product verticals with existing customers. 

Expand ODM share of the business: The company believes that customers are increasingly looking for ODM capabilities in their manufacturing partners. Therefore, Elin plans to capitalize on its existing OEM experience and increase its customer base and product portfolio through ODM projects with strong R&D setups and capabilities.

Expanding operations in medical diagnostics cartridge: Contribution from the rapid point-of-care diagnostics devices is expected to grow at a CAGR of 18.5% from an estimated production value of Rs 18 billion in FY21 to reach Rs 42 billion in FY26. They have planned capital expenditure for the construction of the building and the purchase of machinery, which will assist in the expansion of the medical diagnostics cartridges assembly line.

Elin Electronics Limited IPO: Risks

Large revenue from certain key customers: Their top 5 customers accounted, cumulatively for 69.03%, 62.93%, and 63.20% of their revenue from operations in Fiscals 2020, 2021, and 2022, respectively. They are highly dependent on certain key customers for a substantial portion of their revenues. Loss of relationship with any of these customers may have a material effect on their profitability.

Inability to manage expansion: Elin's inability to manage the expansion of product range, customer base, and manufacturing capacities and execute growth strategy promptly or within budget estimates could hurt their business, results of operations, and financial condition.

Capital expenditure: They may incur significant capital expenditure in the coming future in the ordinary course of business, which is typical to the industry. They may also require additional financing to expand and upgrade existing manufacturing facilities and to construct new facilities. However, there is no assurance that their operations will be able to generate cash flows sufficient to cover such costs.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.