ET Intelligence Group: Apollo Micro Systems, a defence hardware supplier, will raise funds from the primary market to provide for working capital requirements. The company operates in a high growth sector, given the government's thrust on indigenous procurement for defence.
However, it has greater dependence on working capital and its demanded valuation is similar to Bharat Electronics (BEL), a much larger company that caters to the defence sector. These factors make the issue less attractive at the current valuation. Investors may want to consider the stock if it is available at cheaper valuation after the listing.
Apollo Micro Systems is an electronic system and design manufacturing (EDSM) company and supplies hardware used in defence avionics systems, aerospace, missiles, naval systems, satellite space systems and homeland security. India's EDSM industry is around $100 billion and is expected to reach $228 billion by 2020.
The company's revenue grew by 54 per cent annually in the past five fiscals to reach Rs 211 crore in FY17. Net profit grew 59 per cent annually to Rs 18.6 crore during the period. In the first half of the current fiscal, it reported revenue of Rs 109 crore and Rs 7.1 crore in net profit. Historically, the company earns over 60per cent of total revenue in the second half of the fiscal. The operating margin (EBITDA) was 16-18per cent in the past three years. The average margin of its comparable peers has been 18.6per cent during the period. It had an order book of Rs 97.50 crore in November 2017.
The company has a proven track record in developing new technologies and order execution. This has translated into recurring orders. The company invests around 6 per cent of the revenue in research and development.
The business is very working capital intensive as payments are received only after clearing several layers of inspection and clearance. The shortterm liabilities account for more than two-thirds of its debt and interest cost is equal to 5per cent of the total revenues. The company paid on average interest rate of 13per cent in the past three years.
Considering the capital after the IPO, the company demands FY17 price-earnings (P/E) multiple of 30. Bharat Electronics, which is nearly 40 times larger in revenue terms than Apollo Micro, commands a similar P/E. Other peers such as Astra Microwave and Centum Electronics were underperformers in the past year compared with the benchmark Nifty 50. These factors makes Apollo Micro's IPO look expensive. Investors may wait for its listing.