ELIN Electronics: Looks ideal for medium-term returns

ELIN Electronics Limited is tapping the capital markets with its fresh issue for Rs175 crore and an offer for sale of Rs300 crore. The issue opens on Tuesday (December 20) and closes on Thursday (December 22).. The price band of the issue is Rs234-247.

The company is an electronics manufacturing services company of end-to-end product solutions for major brands of lighting, fans and small kitchen appliances in India. It is also the largest fractional horsepower motor manufacturer in India. It is also a key player in the LED lighting and flashlight manufacturing business. It has marquee clients with whom the relationship is over many years,running into decades.

The company has three manufacturing units located in Ghaziabad (UP), Baddi (HP) and Verna (Goa). The company operates in four broad verticals. A salient feature of the company is the backward integration it has done. This reduces the dependence on third party vendors, better inventory management and also higher efficiencies and some improvement in margins. To this end, the company manufactures its own moulds required for plastic components. It does inhouse sheet metal fabrication, press components, plastic moulding and has its own SMT lines for electronic components

In terms of products manufactured, it makes LED lighting, fans and switches for Signify Innovations (Philips) and Eveready. It makes small appliances for Philips, Bosch, Faber, Panasonic and Usha. It makes fractional horsepower motors for Havells, Bosch, Faber, Panasonic, Preethi (owned by Philips), Groupe SEB (Maharaja brand) and Usha. It makes medical diagnostic cartridges for Molbio Diagnostics Pvt Limited. It supplies moulded and sheet metal parts and components to Denso and IFB. This range of customers and products ensures that though there is customer concentration with the top ten customers being a significant portion of revenue, it is spread out in terms of products and customers. Though products manufactured are cyclical in nature, the revenue is more or less matched across two halves.

The company operates in a high volume, low margin business. Hence, its EBITDA and net margins are low. This company should not be compared with the people who make products like air conditioners or more expensive products like washing machines or other white goods. There the margins ate better. Also, companies like recently listed Syrma SGS and Kaynes Technologies have significantly higher margins. Therefore, this company should be compared with people in their category like say a Dixon, which is also into high volume and lower margins business.

The objects of the fresh issue of Rs75 crore includes debt repayment and capacity expansion. The debt repayment would bring a saving of interest, while the capex would bring higher turnover. Hence, higher profits. The company has an average capacity utilisation of between 75-85 percent.

The company reported revenues of Rs1,093.75 crore for the year ended March 22, which had grown from Rs862.37 crore in the previous year. The profit after tax was Rs39.14 crore in March 22 against Rs34.85 crore. In the six months ended September 22, revenues have grown to Rs577.16 crore and profit after tax to Rs20.66 crore. The EPS for March 22 is Rs9.59. At this price, the PE band is 24.40-25.76. The band looks attractive.

There is one catch, however, this business has lower EBITDA and Net margins because of the nature of the business. It's a high volume and low margins business and has its own set of entry barriers. This company averages net margins of between 3.5-3.75%. Going forward, there could be some improvement depending on the amount of business that they do on ODM (own design manufacture).

There is plenty of activity in the grey market in this share which gives ample opportunity for gains on listing. It should be kept in mind that the industry in which the company operates is different in nature to many of the other ESDM players. This business is characterised by high volume and low margins and the improvement in margins can only be small. The company operates on a cost-plus basis where the cost of material is shared with the client at every point. The share looks attractively priced for the medium term as well and the icing on the cake could be listing gains.

(The author is the founder of

Kejriwal Research and Investment Services, an advisory firm)