Elin Electronics coming with an IPO to raise upto Rs 501.39 crore

Elin Electronics

• Elin Electronics is coming out with a 100% book building; initial public offering (IPO) of 2,02,99,122 shares of Rs 5 each in a price band Rs 234-247 per equity share.
  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
  
• The issue will open for subscription on December 20, 2022 and will close on December 22, 2022.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 5 and is priced 46.80 times of its face value on the lower side and 49.4 times on the higher side.
  
• Book running lead managers to the issue are Axis Capital and JM Financial.
  
• Compliance Officer for the issue is Lata Rani Pawa.
  

Profile of the company

The company is a leading electronics manufacturing services (EMS) manufacturer of end-to-end product solutions for major brands of lighting, fans, and small/ kitchen appliances in India, and is one of the largest fractional horsepower motors manufacturers in India. Based on its overall market, it is projected to be the largest players in this category, with a market share of 12% in Fiscal 2021. In addition, it is one of the key players in LED lighting and flashlight with EMS market share of approximately 7% in Fiscal 2021, and is also one of the key players in small appliances vertical with EMS market share of 10.7% in Fiscal 2021. The company manufactures and assembles a wide array of products and provides end-to-end product solutions. It serves under both original equipment manufacturers (OEM) and original design manufacturer (ODM) business models. Under the OEM model, it manufactures and supply products basis designs developed by its customers, who then further distribute these products under their own brands. Under the ODM model, in addition to manufacturing, it conceptualizes and designs the products which are then marketed to its customers’ prospective customers under their brands. It has developed ODM capabilities with respect to lighting products and small appliances.

The company’s key diversified product portfolio in EMS includes (i) LED lighting, fans and switches including lighting products, ceiling, fresh air and TPW fans, and modular switches and sockets; (ii) small appliances such as dry and steam irons, toasters, hand blenders, mixer grinders, hair dryer and hair straightener; (iii) fractional horsepower motors, which is used in mixer grinder, hand blender, wet grinder, chimney, air conditioner, heat convector, TPW fans etc.; and (iv) other miscellaneous products such as terminal block for air conditioners, stainless steel blade for mixer grinders, die casting, radio sets. In addition to its EMS offerings, it also manufactures medical diagnostic cartridges for use in diagnostic devices, and plastic moulded and sheet metal parts and components, largely for customers in the auto ancillary and consumer durables sectors. It manufactures and sells fractional horsepower motors in its own brand name “Elin”. The company offer innovative solutions to its customers, which include leading international and national consumer electronics brands. Its comprehensive solution suite includes global sourcing, fabrication of components and parts, captive manufacturing and assembly, quality testing, packaging and logistics support, which enables it to partner with leading consumer electronics and appliances brands in India.

Proceed is being used for:

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

Industry overview

Electronics is one of the fastest growing industries in the country. The total electronics market (which includes domestic electronics production and imports of electronic products) in India is valued at Rs 6,711 Billion ($91 Billion) in FY21, which is expected to grow at a CAGR of 25.5% to reach Rs 20,873 Billion ($ 282 Billion) in FY26. The domestic production of electronics is around 74% of the total electronics market in FY21, which is expected to reach around 96% by FY26, with the help of various government initiatives and development of electronic ecosystem in India. Also, the global landscape of electronic design and manufacturing is changing significantly, and revised cost structures have shifted the attention of multinational companies to India. At present, the Indian government is attempting to enhance manufacturing capabilities across multiple electronics sectors and to establish the missing links in order to make the Indian electronics sector globally competitive. India is positioned not only as a low-cost alternative, but also as a destination for high-quality design work. Many multinational corporations have established or expanded captive centres in India.

Electronics production in India is estimated at Rs 4,975 Billion ($67 Billion) in FY21 and is expected to grow at a CAGR of 32.3% to reach Rs 20,133 Billion ($ 272 Billion) by FY26. India has the potential to be one of the most attractive manufacturing destinations and support the objective of ‘Make in India for the World’. Government and Industry needs to collaborate and drive initiatives to help India move among top 5 countries in electronics production and among top 3 in electronics consumption. To improve the manufacturing capability in the electronics industry, the Government of India has taken several initiatives and developed a series of policies that would be implemented in the short to medium term. The policies must be reviewed at regular intervals in order to determine their efficacy in achieving the intended objective of increasing the manufacturing capability. The success of the PLI scheme for the electronics segment in encouraging large-scale manufacture of electronics products is being viewed with great confidence. Similarly, the National Policy on Electronics (NPE) aims to make India a global hub for electronic system design and manufacturing and has fixed some aspirational targets.

Pros and strengths

Established market position in key verticals including leadership in fractional horsepower motors: The company is a leading electronics manufacturing services (EMS) manufacturer of end-to-end product solutions for major brands of lighting, fans, and small/ kitchen appliances in India. Set forth below is the summary of its key product segments and market position in India with expected growth of EMS production for the period indicated. With its robust R&D set up, it design, manufacture and sell range of fractional horsepower motors including universal motor, exhaust fan motor, cooler motor, table fan motor, synchronous motor, sub pump and fan blower motor. Customers of its fractional horsepower motors are spread across multiple industries including small kitchen appliances, electric fans and air conditioners. It has substantial backward integration in manufacturing of fractional horsepower motors which includes press machines and moulding machines to manufacture sheet metal and plastics part which are used in fractional horsepower motors. It continues to enhance production of fractional horsepower motors by purchase of machinery and equipment.

Diversified products resulting in a de-risked business model: The company has a diverse product, product vertical and customer base. Further, it caters to its customers across multiple product verticals. Its diverse product portfolio enables it to balance out any impact or risk incurred with respect to any single product, product vertical or customer. It is also able to develop designs which are customised to customer specific requirements through its ODM capabilities.

Entrenched relationships with a marquee customer base: It has established and will continue to focus on strengthening its longstanding relationships with well-known domestic and multi-national customers across its product verticals. Out of its top 20 customers as at September 30, 2022, it has been serving 11 customers for over 10 years, and has been serving 16 customers for over 5 years. Its high customer retention capabilities are due to its one-stop-shop facilities and consistently maintaining high standards of manufacturing quality of products in a timely manner. It views these customers as its partners and seeks to provide them with quality end-to-end product solutions. Its relationships with them have enabled it to continuously develop, diversify and improve its product portfolio, plan its production in anticipation of demand from retail customers and ensure continuous focus on quality and timely delivery of orders.

High degree of backward integration resulting in higher efficiencies: Since inception, the company has placed strong focus on expanding its technological expertise in manufacturing of its products integrating its services, and thereby increasing its efficiencies, becoming an ideal partner for its customers and maintaining an edge over its competitors. Its dedication to manufacturing and its infrastructure ensure customer satisfaction, foster customer loyalty and generate repeat business. It also has captive manufacturing of fractional horsepower motors and other products such sheet metal, plastic moulding parts, tools and dies, sole plates for irons, stainless steel blades for mixer grinder etc. as for usage in its other product verticals such as small appliances. Backward integration provides it the benefit of greater control on the manufacturing process, quality and the corresponding benefits of cost efficiencies thereby improving its margins. Backward integration also enables it to have less dependency on third parties, gain control over the quality of components required for manufacturing its products, have upper edge in designing products, improve operational and functional efficiencies and gain strategic advantages over competitors.

Risks and concerns

Highly competitive industry: The company as well as its customers operate in a competitive industry, with participants in the organized and the unorganized sector. Some of its competitors in the industry may have greater design, engineering, manufacturing, financial capabilities, or superior resources. Its customers evaluate the product suppliers based on, among other things, manufacturing capabilities, speed, quality, engineering services, flexibility, and costs. Therefore, it is exposed to risks of its competitors having better resources than it. Further, OEMs continuously seek to reduce cost. Therefore, its ability to be cost efficient is a critical factor in being preferred by its customers. In addition, major OEMs typically outsource the same type of products to at least two or three outsourcing partners in order to diversify their supply risks. The competitive nature of the industry may result in substantial price competition. The industry could become even more competitive if OEMs fail to significantly increase their overall levels of outsourcing or start manufacturing in-house.

May incur significant capital expenditure in the coming future: The company may incur significant capital expenditure in the coming future in the ordinary course of business, which is typical to its industry. While there has been no instance of delay and overrun in Fiscals 2020, 2021 and 2022, and six-month period ended September 30, 2022 in relation to capital expenditure, its capital expenditure plans are subject to a number of variables, including possible cost overruns; accidents; construction and development delays or defects; construction being affected by adverse weather conditions; satisfactory and timely performance by construction contractors; receipt of any governmental or regulatory approvals and permits; political risk; availability of financing on acceptable terms; and changes in management’s views of the desirability of current plans, among others. It may also require additional financing in order to expand and upgrade its existing manufacturing facilities as well as to construct new facilities. However, it cannot assure that its operations will be able to generate cash flows sufficient to cover such costs. Further, financing required for such investments may not be available to it on acceptable terms, or at all, and it may be restricted by the terms and conditions of its existing or future financing agreements.

Do not obtain firm and long-term volume purchase commitments from customers: The company typically enters into a general purchasing agreement for specific products with its customers which is valid for three years and renewed thereafter. Within this period, products are manufactured and sold on a purchase order basis. Its general purchasing arrangements with its key customers typically include terms, among others, relating to product specifications, project book, delivery schedule, warranties, supply of spare parts, supply chain security and pricing policy. Its key customers also provide it with annual operating plan and enter into scheduling agreements only for the purposes of providing non-binding information for production and manufacturing planning and such orders and agreements do not constitute purchase orders or commitment. Based on these arrangements, its customers provide it with purchase orders which typically include precise terms for lead time for delivery of products, delivery schedule in terms of quantities for certain months.

Depends to an extent on research and development capabilities:  The company’s success is dependent on its ability to maintain quality specifications of its customers and continue to work on and improve production capabilities in both OEM and ODM models. Through its focus on R&D and developing products with its customers, it strive to continually innovate and refresh its products in line with the demands of its customers as well as end-user preferences for better comfort, quality, performance and aesthetics in their products. With its R&D centre, it is able to focus on all aspects of OEM and ODM including concept sketching, design refinement, generating optional features and testing. It cannot assure that its quality maintenance, product research and development initiatives will be successful or be completed within the anticipated time frame or budget, or that its products will achieve wide market acceptance from its customers or end-users of its products.

Outlook

Incorporated in 1969, Elin Electronics is a leading electronics manufacturing services (EMS) provider. The company is a manufacturer of end-to-end product solutions for major brands of lighting, fans, and small/ kitchen appliances in India, and is one of the largest fractional horsepower motors manufacturers in India. It manufactures and assembles a wide array of products and provides end-to-end product solutions. The company serves under both original equipment manufacturer (OEM) and original design manufacturer (ODM) business models. The company's diversified product portfolio in EMS includes (i) LED lighting, fans and switches including lighting products, ceiling, fresh air and TPW fans, and modular switches and sockets, (ii) small appliances such as dry and steam irons, toasters, hand blenders, mixer grinders, hair dryer and hair straightener; (iii) fractional horsepower motors, which is used in mixer grinder, hand blender, wet grinder, chimney, air conditioner, heat convector, TPW fans etc.; and (iv) other miscellaneous products. The company’s presence in product segments with growing demand, marquee customer base and continuous focus on efficiency and productivity have enabled it to deliver consistent and strong financial performance. On the concern side, the company’s business requires it to obtain and renew from time to time, certain approvals, licenses, registrations and permits, some of which have expired and for which it has either made or are in the process of making an application for obtaining the approval or its renewal.

The issue has been offered in a price band of Rs 234-247 per equity share. The aggregate size of the offer is around Rs 475.00 crore to Rs 501.39 crore based on lower and upper price band respectively. On the performance front, total income increased by 26.57% from Rs 864.90 crore in Fiscal 2021 to Rs 1094.66 crore in Fiscal 2022 primarily on account of growth in LED lighting, fans and switches segment, small appliances segment and fractional horsepower motors segment. The company’s profit for the year increased by 12.31% from Rs 34.85 crore in Fiscal 2021 to Rs 39.14 crore in Fiscal 2022. Meanwhile, the company intends to capitalise on its existing OEM experience and increase its customer base and product portfolio through ODM projects with strong R&D setup and capabilities. Through its focus on R&D and developing products with its customers, it will be able to continually innovate and refresh its products in line with the demands of its customers as well as end-user preferences for better comfort, quality, performance and aesthetics in their products.