EPACK Durable
- EPACK Durable is coming out with a 100% book building; initial public offering (IPO) of 2,87,85,670 shares of Rs 10 each in a price band Rs 218-230 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 January 19, 2024 and will close on January 23, 2024.
- The shares will be listed on BSE as well as NSE.
- The face value of the share is Rs 10 and is priced 21.80 times of its face value on the lower side and 23.00 times on the higher side.
- Book running lead managers to the issue are Axis Capital, DAM Capital Advisors and ICICI Securities.
- Compliance Officer for the issue is Esha Gupta.
Profile of the company
EPACK Durable is the second largest room air conditioner original design manufacturer (ODM) in India in terms of number of units (indoor units + outdoor units) manufactured in Fiscal 2023 through the ODM route. It is a customer-centric business driven by a focus on continuing innovation and operational efficiency. Since 2003, it has been on a journey of evolution, where it initially started as an OEM for RAC brands. Driven by its focus on product development and innovation, it evolved into an ODM partner for RACs for its customers.
The company also identified the opportunity to increase its value addition in its offerings to customers, and accordingly, started manufacturing of various components such as sheet metal, injection moulded, cross flow fans and PCBA components which are actively used in the manufacturing of RACs. In parallel, it capitalised on its existing manufacturing infrastructure to strategically expand its operations in the small domestic appliances (SDA) market, particularly considering the seasonality of the demand for RACs, and currently design and manufacture induction cooktops, mixer-grinders, and water dispensers. This evidences its continued focus on the backward integration of its operations and diversification of its revenue streams. Its product portfolio currently comprises Room air conditioners, Small domestic appliances, Components etc. Its offerings showcase its ability to provide a wide range of product solutions and components across the RAC value chain.
The company has dedicated R&D centres in Greater Noida, Bhiwadi and Dehradun, which are equipped with various equipment such as endurance test labs for RACs and SDAs, induction coil - automatic voltage tester, induction coil - breakdown tester, needle flame tester, customized glow wire tester. Its R&D centre in Dehradun has received its ISO/ IEC 17025:2017 accreditation from NABL for the ‘general requirements for the competence of testing & calibration laboratories’ in the field of testing. The number of employees in its R&D department has grown from 30 employees as of March 31, 2021 to 57 employees as of September 30, 2023. The company’s R&D activities focus on basic research, the development of new products and manufacturing methods, the optimisation of existing products and manufacturing methods and process improvements, as well as environmental protection and energy efficiency. The company’s three vertically integrated manufacturing facilities, enable it to maintain its operational costs and logistics management. It benefits from its single site manufacturing capabilities, where the manufacturing of components and product assembly takes place in one location. It has the highest amount of backward integration for RACs at a single location, that has been grown within the same company organically in India.
Proceed is being used for:
- Funding capital expenditure for the expansion / setting up of manufacturing facilities.
- Repayment and / or prepayment, in part or in full, of certain outstanding loans of the company.
- General corporate purposes.
Industry overview
Over the past five years, the consumer durables market in India has experienced significant growth. In the near future, the market is anticipated to experience growth acceleration fuelled by rising rural consumption, a shorter replacement cycle, increased retail penetration, and the availability of numerous brands and products at various price points. A developing Indian economy, greater consumer spending power, and improved access to high-quality items at reasonable prices have transformed India’s consumer durables market. The overall market size of consumer durables market for FY23 is estimated at Rs 1,303 billion, and the market is expected to grow at an 13.7% CAGR until FY28.
Indian Consumer Durables ODM market has been estimated at approximately INR 300 billion FY23. Television is the largest segment accounted for 49% market share, followed by Room Air Conditioner (19% share), Washing Machines (9% share), Refrigerators (7% share), and small and other Domestic Appliances (16% share). ODM companies supplied 6.1 million units (Window AC + Split IDU + Split ODU Kits + Split ODU) to the RAC brands in FY23. Out of these units, 5.1 million units were manufactured in the country and the rest 1.0 million units were imported as kits and gas charging was done in India. This translates to Rs 58 - 60 billion ODM/OEM market in FY23 - Rs 48 - 50 billion for the domestically manufactured units and Rs 10 billion for the gas charged units. Product wise, ODM companies manufactured 0.6 million window ACs and 5.1 million split AC units (IDU + ODU) in FY23.
Penetration of Room Air Conditioners (RACs) in Indian households is around 8% in 2022, implying that there is considerable scope for growth. Indian RAC market is highly fragmented with varied set of players - global, indigenous and importers - selling a wide range of products in the market. Meanwhile, the TV industry has seen dramatic technological advancements over the last decade. TV penetration in India is approximately 65%, which is the highest among the consumer electronics. Television is one of India's fastest growing consumer electronics products. Moreover, penetration of refrigerators in India currently is around 33%, implying sufficient head room for growth. The refrigerator market is expected to grow at a rate of 13.5% between FY23 and FY28. Further, Indian washing machines industry has been witnessing sustained and stable growth. Increasing appreciation for the value that the product delivers, affordable pricing, and innovative products has aided the strong growth of washing machines in India.
Pros and strengths
Long-standing relationships with established customers: The company has over the course of its business operations established long-standing relationships with several well - known Indian and global customers. Some of its customers for its RAC products include Blue Star Limited, Daikin Airconditioning India Private Limited, Carrier Midea India Private Limited, Voltas Limited, Havells India Limited, Haier Appliances (India) Private Limited, Infiniti Retail Limited and Godrej and Boyce Manufacturing Company Limited, and the average length of its relationship with these customers is 8.7 years. Some of its customers for its SDA products include Bajaj Electricals Limited, BSH Household Appliances Manufacturing Private Limited, and Usha International Limited, and the average length of its relationship with these customers is 6.3 years. The company attributes its growth and expansion of its market share to date to its relationships with its customer base and intend to continue to leverage such relationships for its future growth as well.
Among the key manufacturers in the fast-growing RAC and SDA manufacturing industries: The company is second largest RAC ODM manufacturer in India in terms of number of units (indoor units + outdoor units) manufactured in Fiscal 2023 through the ODM route. The Indian RAC industry has grown at a rate of 8.8% in the last five years (Fiscal 2018 to Fiscal 2023) in volume terms and at a rate of 11.2% in value terms, despite the disruption due to the COVID-19 pandemic which impacted two consecutive seasons for the industry. The Indian RAC industry is forecasted to grow at a rate of 12.1% by volume and 15.1% by value from Fiscal 2023 till Fiscal 2028.
Advanced vertically integrated manufacturing operations: The company has the highest amount of backward integration for RACs at a single location, that has been grown within the same company organically in India. The company’s products and corresponding components are manufactured within the same location, which helps eliminate costs typically incurred in transportation of parts between facilities. The company’s manufacturing facilities located at Dehradun, Uttarakhand and Bhiwadi, Rajasthan have an aggregate annual manufacturing capacity as on March 31, 2023 to manufacture up to (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 components thereof. In addition, the annual manufacturing capacity of the Sri City Manufacturing Facility as on December 15, 2023, is (i) 0.66 million IDUs and 0.66 million ODUs, and (ii) 0.65 million induction cooktops, and components thereof. The company has received the ISO 9001:2015, ISO 14001:2015 and ISO 45001:2018 certifications for its Manufacturing Facilities.
Robust product development and design optimisation capabilities: The company relies on its integrated location-focussed manufacturing operations, product development and design capabilities, and its focus on quality and cost-efficient manufacturing processes to achieve customer satisfaction, foster customer loyalty and accordingly, generate repeat business. The evolution of its product portfolio and its ability to provide customised manufacturing solutions to its customers have been driven by its product development and design capabilities. The company has dedicated R&D centres in Greater Noida, Uttar Pradesh, Bhiwadi, Rajasthan and Dehradun, Uttarakhand, which are equipped with modern infrastructure such as its endurance test labs for RACs and SDAs. Its R&D centre in Dehradun has received its ISO/ IEC 17025:2017 accreditation from NABL for the ‘general requirements for the competence of testing & calibration laboratories’ in the field of testing. In addition, the company also utilises various advanced software programs such as CoilDesigner and Siemens NX, which has helped enhance its design capabilities.
Risks and concerns
Significant portion of revenue comes from few clients: The company has developed long standing relationships with certain key customers. Accordingly, it is dependent on its arrangements with such customers and its business depends on the continuity of its relationship with them. A majority of its revenue is derived from its top five customers. The contribution to the revenue from operations of the company by its top five customers are Rs 4,894.86 million (79.62%), Rs 12,720.25 million (82.66%), Rs 7,099.85 million (76.82%) and Rs 5,243.56 million (71.22%) for Six months ended September 30, 2023, FY23, FY22 and FY21, respectively. Maintaining strong relationships with its customers is, therefore, essential to its business strategy and to the growth of its business. Further, while it has not experienced any such reduction in the past, since its business is presently concentrated among a few significant customers, the loss of any one of its key customers or a significant reduction in demand from such customers could have a material adverse effect on its business, financial condition, results of operations and cash flows.
Business is dependent on three manufacturing facilities: The company conducts its operations through its manufacturing facilities situated at Dehradun, Uttarakhand, Bhiwadi, Rajasthan and Sri City, Andhra Pradesh. The company’s business is dependent upon its ability to manage its manufacturing facilities and run them at certain utilization levels, which are subject to various operating risks, including those beyond its control, such as the breakdown and failure of equipment, industrial accidents, labour disputes or shortage of labour, severe weather conditions and natural disasters. While there have been no instances of any significant malfunction or breakdown of its machinery, its equipment, its automation systems or any other part of its manufacturing processes or systems (together, its “Manufacturing Assets”) in the last three Fiscals, any such instances in the future may entail significant repair and maintenance costs and cause delays in its operations.
Depend on third parties for the supply of raw materials: The company is dependent on third party suppliers for its raw materials. As on September 30, 2023, its supplier network comprised 342 suppliers. The raw materials used by the company include copper tubes, steel, aluminium sheets, plastic granules, compressors, controllers and RAC motors. Discontinuation of production by its suppliers or a failure of these suppliers to adhere to the delivery schedule or the required quality could hamper its manufacturing schedule and therefore affect its business and results of operations. This dependence may also adversely affect the availability of key materials at reasonable prices thus affecting its margins and may have an adverse effect on its business, results of operations and financial condition. There can be no assurance that strong demand, capacity limitations or other problems experienced by its suppliers will not result in occasional shortages or delays in their supply of raw materials
RAC business is subject to seasonal variations: The demand for RACs typically peak during the first half of the calendar year and reduce in the second half of the calendar year. Erratic weather conditions impacting the warm weather during the peak sales season of summer, may adversely affect its sales volumes, and could therefore have a disproportionate impact on its results of operations and financial condition in the relevant year. Such fluctuations have in the past, and may in the future, result in its customers modifying or reducing the orders for RACs placed with the company. As a result of the fluctuations, the company’s sales and results of operations may vary by fiscal quarter, and the sales and results of operations of any given fiscal quarter may not be relied upon as indicators of the sales or results of operations of other fiscal quarters or of its future performance.
Outlook
EPACK Durable is an Original Design Manufacturer (ODM) of room air conditioners. The company also manufactures components such as sheet metal parts, injection moulded parts, cross-flow fans, and PCBA components that are actively used in the production of RACs. The company has expanded its business into the small domestic appliance (SDA) market, particularly given the seasonal demand for RACs, and is currently developing and producing induction hobs, blenders, and water dispensers. On the concern side, a significant portion of its revenue is generated from certain key customers, and accordingly is concentrated with a few customers and the loss of one or more such customers, the deterioration of their financial condition or prospects, or a reduction in their requirement for its products could adversely affect its business, results of operations, financial condition and cash flows. Moreover, the company’s business is dependent on its three manufacturing facilities, and it is subject to certain risks in its manufacturing process. Any slowdown or shutdown in its manufacturing operations could have an adverse effect on its business, financial condition and results of operations.
The company is coming out with an IPO of 2,87,85,670 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 218-230 per equity share. The aggregate size of the offer is around Rs 627.53 crore to Rs 662.07 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 66.09% from Rs 9,273.41 million in Fiscal 2022 to Rs 15,402.53 million in Fiscal 2023. Moreover, the company’s restated profit for the year increased by 83.39% from Rs 174.34 million in Fiscal 2022 to Rs 319.72 million in Fiscal 2023.
The company, since its inception, sought to diversify its portfolio of products. Accordingly, while it seeks to continue to strengthen its existing RAC product portfolio, it intends to further diversify its SDA product portfolio with products with a focus on increased growth and profitability. For instance, it intends to expand its product portfolio beyond room air conditioner products to semi commercial air conditioner products and domestic air coolers. In addition, it intends to expand its SDA product portfolio with products such as hair dryers, induction water heaters and nutriblenders, tower fans, kitchen chimneys and dual ICTs. This is intended to also help the company to diversify its business and reduce its dependence on its RAC products, the demand of which is seasonal unlike SDAs, the demand of which remains relatively consistent through the year.
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