Elin Electronics

EMS player

Customer base of established players in their segments and a wide product basket to drive growth

Elin Electronics is a leading player in electronics manufacturing services offering end-to-end product solutions for major brands of lighting, fans, and small and kitchen appliances in India. The company is one of the largest fractional horsepower motors manufacturers in India and sells fractional horsepower motors under its own brand name Elin.

The company manufactures and assembles a wide array of products and provides end-to-end product solutions.  EMS product portfolio of the company is diversified and 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; 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 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 commenced manufacturing medical diagnostic cartridges in the calendar year (CY) 2019 in its facility in Goa.

In H1FY2023 about 77.7% of the revenue was from the EMS division, 1.3% from medical diagnostics cartridges, and 17.4% from moulded and sheet metal parts. Of the EMS business, revenue contribution of 77.7% in H1FY2023 was made up of 31.2% from LED, lighting, fans and switches; 24.7% from small appliances; 18.8% from fractional HP motors, and 3% from other EMS products.   

It typically manufactures and supplies products under both the ODM (original design manufacturer where in addition to manufacturing, it also conceptualizes and design the products) and OEM (original equipment manufacturer) business model. The supplies are made under product specific general purchasing agreement, which it enters with its customers. The general purchasing agreements are typically valid for three years and renewed thereafter. Within this period, products are manufactured and sold on a purchase order basis.

Currently it has developed ODM capabilities for lighting products and small appliances. Its revenue from ODM contributed to about 8.13% and 8.21% respectively in FY2022 and H1FY2023, respectively. 

The company partners with leading consumer electronics and appliances brands for LED lighting, fans and switches such as Signify Innovations and Eveready; for small appliances such as Philips, Bosch, Faber, Panasonic and Usha; for fractional horsepower motors such as Havells, Bosch, Faber, Panasonic, Preethi (owned by Philips), Groupe SEB (Maharaja brand) and Usha; as well as for medical diagnostic cartridges such as Molbio Diagnostics and for moulded and sheet metal parts and components such as Denso and IFB.

Based on overall market, Elin Electronics is the largest player in this category, with a market share of 12% in FY 2021. In addition, it is also one of the key players in LED lighting and flashlight, with EMS market share of approximately 7% in FY 2021 and is also one of the key players in small appliances vertical, with EMS market share of 10.7% in FY2021.

Currently, it has three manufacturing facilities which are strategically located in Ghaziabad (Uttar Pradesh), Baddi (Himachal Pradesh) and Verna (Goa).

It has been allotted land measuring approximately 16,200 square meters and 3,600 square meters on 99 years and 90 years leases in Bhiwadi (Rajasthan) and Noida (Uttar Pradesh), respectively. As of Dec 2022, the allotment of these land parcels had yet to be registered as leases.    

The issue, object for offer

The IPOcomprises a fresh issue aggregating up to Rs 175 crore, and an OFS of up to Rs 300 crore by existing shareholders.

The OFS comprises sales of shares aggregating up to Rs 17.18 crore by Kamal Sethia, up to Rs 28.09 crore by Kishore Sethia, up to Rs 25.38crore by Gaurav Sethia, up to Rs 6.66 crore by Sumit Sethia, up to Rs 30.52 crore by Suman Sethia, up to Rs 8.33 crore by Vasudha Sethia, up to Rs 4.96 crore by Vinay Kumar Sethia (the promoter selling shareholders), and up to Rs 178.88crore by other selling shareholders.

Of the net proceeds of the fresh issue, about Rs 88 crore will be used for repayment and prepayment, in full or part, of certain borrowings availed by the company; Rs 37.589 crore will be used for funding capital expenditure to upgrade and expand existing facilities at  Ghaziabad (Rs 28.934 crore) and Goa (Rs 8.655 crore) and general corporate purposes. 

It currently proposes to double its existing production capacity for medical diagnostic cartridges from 35,000 units per day to 70,000 units per day, as well as focus on manufacturing of other medical diagnostic market, such as sterilizer for Philips in a clean room technology setup.

Strength

A diversified product basket, with the largest product vertical accounting just only 30.41% and 31.2% of revenue from operations in FY2022 and H1FY2023. 

Largest player in small electric (FHP) motors, with market share of 12.0%.

The company has established and maintains longstanding relationship with known domestic and multi-national customers across product verticals. Its customers such as Philips, Signify, Crompton are established players in segments such as small appliances, LED lighting and fans, respectively. Out of its top 20 customers as on September 30, 2022, it has served 11 customers for over 10 years and 16 customers for over five years.

High degree of backward integration resulting in higher efficiencies, enhanced quality of products and customer retention capability.

Opportunity to increase wallet share of existing clients through cross-selling of its products and introduction of new products and expand into new adjacent product verticals.   For example, it has been selected as manufacturing partner by Philips for trimmers. Revenue is expected to commence from FY2023.

Strong growth drivers exist for the EMS industry on the back of benefits the EMS model brings to brands, China +1 strategy, governments focus on domestic manufacturing, import substitution and export focus through the Make in Indiainitiative. 

Weaknesses

Shortages of raw materials and components at prices unfavourable to the company or from vendors, from whom it has to procure them  as per contractual arrangement could result in reduced production or delays in production, which may restrict its capacity to fulfill large orders at short notice or prevent from making scheduled shipments to customers.

Operates in an industry which is competitive and may result in substantial price competition.  As OEMs continuously seek to reduce cost, the ability of the company is to be cost efficient is a critical factor in being preferred by its customers. Further, major OEMs typically outsource the same type of products to at least two or three outsourcing partners to diversify their supply risks.

The EMS industry is characterized by rapidly changing technology, evolving industry standards, new services and product introductions, and changing customer demands. Its ability to anticipate changes in technology and to successfully adopt ODM capabilities on a timely basis is a significant factor in its ability to remain competitive.

Demand for the products depends on the end-user demand. So, if the demand is low for its customers’ products, there may be significant changes in the orders from its customers and the company may experience greater pricing pressures.

Total trade receivables (net of provisions for doubtful debts) as of  March 31, 2022, and September 30, 2022, were 16.22% and 35.32% of the revenue from operations for the respective financial periods. The total trade receivables (net of provisions for doubtful debts) as of March 31, 2022, and September 30, 2022, were Rs 177.373 crore and Rs 213.499 crore, respectively, primarily due to higher demand of fractional horsepower motors, where the company typically extends average credit of 60 days to its customers.

Valuation

Sales for FY2022 were up by 27% to Rs 1093.75 crore.  The OPM contracted by 50 bps to 7.2%. Thus, the growth of OP moderated to stand at 19% to Rs 79.02 crore. After accounting for lower other income, higher interest and depreciation, PBT was up 11% to Rs 52.87 crore. Eventually, Pat was up by 12% to Rs 39.15 crore,with taxation standing lower. 

The EPS for FY2022 based on post issue expanded equity on higher price band is Rs 7.9 and the PE works out to 31.3 times.  

In comparison, Dixon Technologies and Amber Enterprises are quoting at a PE of 126.6 and 61.4 times of their consolidated FY2022 EPS.