Unimech Aerospace and Manufacturing (UAML) is an engineering solutions company specializing in manufacturing and supply of critical parts such as aero tooling, ground support equipment, electro-mechanical sub-assemblies and other precision engineered components for aerospace, defence, energy, and semiconductor industries.

As an engineering solutions provider, it offers a range of capabilities, from product conceptualization to final assembly. Its capabilities include design, engineering, manufacturing, and quality assurance, enabling it to deliver complex and customized solutions to its clients.

To its customers it offers unique dual capability of ‘Build to Print’ and ‘Build to Specification’. In Build to Print, it manufactures tools and components based on specific designs and drawings shared by its clients. In build to specification, it assistsits clients in product designing by adhering to specifications and descriptions of their requirements.

Product portfolio of UAML includes, inter alia, engine lifting and balancing beams, assembly, disassembly and calibration tooling, ground support equipment, airframe assembly platforms, engine transportation stands, mechanical & electro-mechanical turnkey systems, and precision components.

The salient features of its products are complexity and a “high-mix, low volume nature”, characterized by high mix products which are not mass manufactured. The company offer a wide range of products (“SKUs”) but produce relatively small quantities of each based on specific customer requirements.

The company is a key link in the global supply chain for global aerospace, defence, semi-conductor and energy OEMs and their licensees for the supply of critical parts and other precision engineered components. Its key clients include top global airframe and aero-engine OEMs and their approved licensees.Onboarding a customer can take up to three years, during which the company must demonstrate its manufacturing capabilities, production capacity, and product quality. Factors such as on-time delivery and product quality significantly influence its pricing strategy.

Varied product offerings of the company and continuous product development efforts have enabled it to cater to multiple industries and customers, enhancing its ability to attract new customers. Between Fiscals 2022 and the six-month period ended September 30, 2024, it have manufactured 2,999 SKUs in tooling and precision complex sub-assemblies’ category and 760 SKUs in the precision machined parts category, supplying to more than 26 customers across 7 countries.

Diverse capabilities of the company allow it to service the customers globally, which has established UAML as an export-oriented company with customers across USA, Germany and United Kingdom. Of its total revenue from operations for FY24 export of products and services accounted 97.64% [of which USA 92.19%; Germany 5.43%] and it was 95.67% [of which USA 82.55%; Germany 13.09%] in H1FY25. In terms of products about 99.35% of its FY24 revenue came from aero tooling and 0.65% from precision components & others.

Its manufacturing capabilities include machining capabilities such as turning, milling, double column milling, electro discharge machining and grinding. It adheres to stringent quality standards with both of its manufacturing facilities are accredited with AS 9001D, BS EN ISO 9001 and ISO 45001:2018, which are the industry norms for aerospace. Currently it has two manufacturing facilities [Unit I at Peenya and Unit II at Devanahalli SEZ] located in Bangalore spread across an aggregate area of over 1,20,000 sq. ft. The consolidated annual installed capacity increased from 99,810 hours in Fiscal 2022 to 125,100 hours in Fiscal 2023 and further to 222,990 hours in Fiscal 2024.

Innomech Aerospace Toolings (Innomech), a material subsidiary of the company, accounts for 89.35% and 83.46% of the revenue from operation in FY24 and H1FY25.

Recently, in July 2024, the company allotted equity shares by way of preferential issue to ValueQuest SCALE Fund (a scheme of ValueQuest Alternate Investment Trust), Evolvence India Fund IV Ltd and Steadview Capital Mauritius for the purpose of investing in inorganic opportunities. The company entered a strategic partnership with Dheya Engineering Technologies (DETPL) by way of a share subscription and shareholders agreement to subscribe compulsorily convertible preference shares of Dheya amounting to 30% of the issued share capital of Dheya in three tranches. On November 11, 2024, UAML entered into an exclusive manufacturing agreement with DETPL for production of micro gas turbines for a period of 10 years post-commercialisation.

The Issue and Object of the Issue

The issue comprises both offer for sales (OFS) and fresh issue. The OFS comprises sales of equity shares with a value aggregating Rs 250 crore by the promoters and promoter group companies. The fresh issue comprises an issue of shares aggregating upto Rs 250 crore.

Of the net proceeds from fresh issue, Rs 36.366 crore will be used towards capital expenditure for capacity expansion, Rs 25.285 crore for working capital requirements, Rs 128.606 crore towards funding investment in its material subsidiary [of which Rs 43.891 crore for funding capex, Rs 44.715 crore for Working Capital, Rs 40 crore for repayment/prepayment of debt] and balance is for general corporate expenses.

Strengths

Specializing in manufacturing of complex high precision engineering products with “build to print” and “build to specifications” offering.

Established player with unique capabilities in a sector with high barriers to entry considering complex production process, and lengthy approval process from clients making it difficult for a new entrant.

Export-oriented business with a global deliver service model backed by diverse product portfolio and strong focuses on quality and timely delivery.

Deploy a range of digital manufacturing systems which integrates the complete process from order origination to order delivery.

Ability to efficiently manufacture even single units of a particular SKU provides it with the flexibility to optimize pricing and maintain high profit margins.

Orders in hand as on September 30, 2024, were Rs 80.752 crore, with a delivery timeline ranging between 4 to 16 weeks.

Robust vendor ecosystem and strong sub-contractor management with proven execution capabilities

Weakness

Heavy reliance on aerospace sector and thus any adverse changes in fortune of the aerospace sector or reduced frequency of repeated purchase by aviation companies could adversely impact its business operation. In H1FY25 & FY24 about 98.25% and 99.35% of the revenue from operation come from aerospace sector.

Top 1/3/5/10 customers accounted for 59.82%/94.09%/96.80%/99.45% of revenue from operation in FY24 and thus loss of any of these customers or a significant reduction in purchases by any of them could adversely affect its business.

The business model of the company is characterized by a lengthy order-to-cash cycle of about 7-28 weeks depending on product complexity thereby affecting its working capital requirement.

Dependent on exports especially to USA and thus any change in tariff/regulatory changes will impact the business operation.

Adequate availability of imported/domestic components/standard tools/raw material at fair cost is crucial and any disruption to that impact the business operation & profitability.

Have experienced negative cash flows from investing and financing activities in previous periods.

In the past, there have been certain instances of delays in payment of statutory dues and over-dues in repayment of loans by the company and Material Subsidiary.

Has the practice of absorbing minor cost fluctuations without adjusting product prices exposes it to the risk of margin erosion.

Operates in a high-mix, low-volume production environment characterized by many SKUs, often with small order quantities, and complex product configurations.

Engages sub-contractors for a substantial portion of its manufacturing processes and thus any delay on the part of sub-contracts impacts the operations

Has been engaged in various related party transactions with promoters/promoter family members including payment of consultancy charges, guarantee commission for loan etc. In the past, it has registered transfer of the equity shares to promoters without obtaining an independent valuation report.

Statutory Auditors have included certain emphasis of matters in their auditor’s report for the Financial Years ended March 31, 2022, and March 31, 2023.

Valuation

Revenues of the company for the fiscal ended March 2024 were up by 122% to Rs 208.78 croreprimarily due to increase in the total annualized capacity (including capacity of the Material Subsidiary), purchase orders and business volumes from existing and new customers. But with operating profit margin stand expand by 120 bps to 37.9%, the growth at operating profit was 129% to Rs 79.19 crore. Finally, PAT was up by 155% to Rs 58.13 crore.

For the half year ended Sep 2024, the net profit was Rs 38.68 crore on sales of Rs 120.66 crore.

The EPS for FY2024 on expanded equity (on the upper price band) was Rs 11.4. The PE on upper price band works out to 68.9 times of its FY24 EPS and 51.6 on annualised H1FY25 EPS. The P/BV stood at 6.2 times.

The company has no comparable peers with exact product/business profile. But MTAR Technologies, Data Patterns, Paras Defence, Dynamatic Technologies, Azad Engineering, Sika Interplant and Avantel that cater to aerospace and defence sector quotes at 124.4 times, 76.4 times, 91 times, 120.1 times, 143.6 times, 51.2 times and 69.7 times respectively of their EPS for the TTM period ended Sep 2024.