HM Electro Mech Ltd. IPO: Key Details

H.M. Electro Mech

• H.M. Electro Mech is coming out with an initial public offering (IPO) of 36,99,200 equity shares in a price band Rs 71-75 per equity share.
• The issue will open on January 24, 2025 and will close on January 28, 2025.
• The shares will be listed on SME Platform of BSE.
• The face value of the share is Rs 10 and is priced 7.10 times of its face value on the lower side and 7.50 times on the higher side.
• Book running lead manager to the issue is Beeline Capital Advisors.
• Compliance Officer for the issue is Chetankumar Hiralal Solanki. 

Profile of the company

H.M. Electro Mech is engaged in the field of turnkey projects of supply, installation, testing and commissioning of pumping machineries along with comprehensive operation and maintenance. Initially the core Business of the company was Infra projects related to water supply scheme involving Pumping Machineries and allied accessories for water and waste water. Over the years, the company has diversified in the field of electrification projects with Indian railways, Nationalized Banks and Municipal Corporations. Recently, the company has started EPC (Engineering, Procurement and Construction) field projects which involves laying cross country pipe line and civil work related to water supply projects including construction of water treatment plant (WTP), Civil Work for Pump Houses, Diesel Generating Sets, Panel Room, Instrumentation, PLC-SCADA. For such EPC projects, the company is working in collaboration/joint ventures with other companies also for carrying out the civil work part of the project. The company is also engaged in sale of products which includes Pump, Pipes, Transformer, Motor and Other Electronic Accessories.

The company is ISO 9001:2015 certified and Class ‘AA’ (highest category for EPC Contracts - unlimited bidding capacity subject to fulfilment of other tender conditions) with Irrigation division of Government of Gujarat. The company is an approved electrical contractor with State Government of Rajasthan also under Indira Gandhi Nahar Pariyojana, Bikaner. The company is authorized by Government of Gujarat Energy and Petrochemicals Department to carry out Electrical Installation Works in the Gujarat State.

The key clients of the company include State Governments, Central Government, Municipal corporations, banking sector and educational institutes etc. It has a locational advantage in the state of Gujarat where its registered office is situated with nearly 84% of its total revenue for the year ended March 31, 2024. It has strategically expanded its presence and network to different parts of the country, taking on projects in various regions, including Rajasthan, Maharashtra, Madhya Pradesh, Punjab and Chandigarh etc. This expansion reflects its commitment to delivering its expertise and a service to clients nationwide. The company primarily secures contracts through a competitive tender bidding process.

Proceed is being used for:

• Meeting working capital requirements
• General corporate purposes

Industry Overview

The built environment is a multifaceted composition of social and economic infrastructures, involving key drivers such as engineering and construction service providers and owners, manufacturers, building material providers, and governmental and regulatory entities. It majorly works on EPC (Engineering, Procurement and Construction) contracts by the way of contractual agreement between a project owner and the contractor. This framework allows the owner to transfer the complete risk of design, procurement and construction to the contractor where the contractor is solely responsible for completing the project and handing it over to the owner in a turnkey condition. This is why EPC contracts are sometimes called turnkey construction contracts or simply turnkey contracts. Over the next few years, this industry is expected to shift further toward a productized workflow. This approach can reduce the uniqueness of projects by selecting from catalogues or libraries of designs, stabilize the value chain with recurring business, embrace sustainability and circularity at its core, and take out a lot of on-site construction hours known for notoriously low productivity. 

The Capital Goods sector contributes to 12% of India’s manufacturing output and 1.8% of GDP. Market valuation of the capital goods industry was $43.2 billion in FY22. Imports of Electrical Machinery in India increased to $11.38 billion in FY23. The Indian electrical equipment industry comprises of two broad segments, Generation equipment (boilers, turbines, generators) and Transmission & Distribution (T&D) and allied equipment like transformers, cables, transmission lines, etc. The sector contributes about 8% to the manufacturing sector in terms of value, and 1.5% to overall GDP. Incentives for capacity addition in power generation will further increase the demand for electrical machinery. The Index of Industrial Production (IIP), in absolute terms, is projected to be 141.6 in September 2023 as against 133.8 in September 2022. The electrical equipment market share in India is expected to increase by $33.74 billion from 2021 to 2025 at a CAGR of 9%. The domestic electrical equipment market is expected to grow at an annual rate of 12% to reach $72 billion by 2025.

The Indian engineering sector is of strategic importance to the economy owing to its intense integration with other industry segments. The sector has been de-licensed and enjoys 100% FDI. With the aim to boost the manufacturing sector, the government has relaxed the excise duties on factory gate tax, capital goods, consumer durables and vehicles. The government launched the National Infrastructure Pipeline (NIP) with a forward-looking approach and with a projected infrastructure investment of around Rs 111 lakh crore ($1.3 trillion), during FY20-25 to provide high quality infrastructure across the country. The NIP currently has 8,964 projects with a total investment of more than Rs. 108 lakh crore ($1.3 trillion) under different stages of implementation.

Pros and strengths

Comprehensive solutions: The company’s single-window approach streamlines the entire project lifecycle, from conception to ongoing maintenance. This highlights the company’s ability to provide end-to-end solutions for projects, starting from conceptualization all the way through to maintenance. By offering a single point of contact for clients, it streamlines the entire process, by reducing complexities and ensuring a smoother experience from start to finish.

Expedited delivery: Maintaining strong relationships with leading manufacturers and Original Equipment Manufacturers (OEMs) is crucial for several reasons. Firstly, it allows access to competitive pricing, which is advantageous for both the company and its clients. Secondly, expedited delivery through these partnerships helps to meet tight project timelines, giving the company a competitive edge in the market.

Stability and continuity: A high retention ratio indicates that employees are satisfied and committed to staying with the company. Employee retention is often indicative of a positive work environment and organizational culture. A high retention ratio not only signals that employees are satisfied but also ensures continuity in operations. This stability minimizes disruptions caused by turnover, allowing the company to maintain consistency in delivering services and building client relationships over time.

Risks and concerns

Maximum revenue comes from limited customers: The company derived a significant portion of its revenues from limited number clients. The company garnered 75.05%, 82.47% and 76.36% of its total revenue from top 10 clients in FY24, FY23 and FY22 respectively. Significant revenue from a limited number of clients increases the potential volatility of its results and exposure to individual contract risks. It may be required to accept onerous contractual terms in its contracts for projects awarded to it by such clients. The company cannot assure that it can maintain the same levels of business from its ten clients. Furthermore, events such as adverse market conditions, any restructuring or changes in the regulatory regime, could adversely affect its clients and consequently impact its business.

Maximum revenue comes from state of Gujarat and Rajasthan: The company derived 84.44% and 83.46% of its revenue from State of Gujarat and Rajasthan respectively for the period ended September 30, 2024. Such geographical concentration of its business in this region heightens its exposure to adverse developments related to competition, as well as economic and demographic changes in this region which may adversely affect its business prospects, financial conditions and results of operations. It may not be able to leverage its experience in these regions to expand its operations in other parts of India. While it strives to geographically diversify its project portfolio and reduce its concentration risk, it cannot assure that developments in Gujarat and Rajasthan will not impact its business. If the company is unable to mitigate the concentration risk, it may not be able to develop its business effectively and its business, financial condition and results of operation could be adversely affected.

No long-term agreements with suppliers for its raw material: The company’s business depends on the availability of reasonably priced, high quality raw materials in the quantities required by it and it depends on a few suppliers for procurement of raw materials, required for completion of Project. Top ten suppliers of the company for period/year ended September 30, 2024, March 31, 2024, March 31, 2023 and March 31, 2022 contributed for 86.13%, 67.20%, 69.57% and 54.34%, respectively of its purchases. The company has not entered into long term contracts with its suppliers and prices for raw materials are normally based on the quotes it receives from various suppliers. Since it has no formal arrangements with its suppliers, they are not contractually obligated to supply their products to it and may choose to sell their products to its competitors. Non-availability or inadequate quantity of raw material or use of substandard quality of the raw materials in the completion of project, could have a material adverse effect on its business.

Outlook

H.M. Electro Mech is an infrastructure firm specialising in turnkey projects, including supply, installation, testing, and commissioning of pumping machinery and providing comprehensive operation and maintenance services. The company provides end-to-end solutions for projects, starting from conceptualization to maintenance. It has robust relationships with leading manufacturers and OEMs, facilitating competitive pricing and expedited delivery. On the concern side, majority of the company’s Revenue from Operation (RFO) is generated from state of Gujarat and Rajasthan. Any adverse development affecting its operations in this region could have an adverse impact on its business, financial condition and results of operations. Moreover, the company’s business is dependent on the sale of its products and services to certain key customers. The loss of any such customers or a significant reduction in the sales made to such customers, could materially adversely affect its business, results of operations and financial condition.

The company is coming out with a maiden IPO of 36,99,200 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 71-75 per equity share. The aggregate size of the offer is around Rs 26.26 crore to Rs 27.74 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operation has increased from Rs 10,148.70 lakh in FY 2022-23 to Rs 11,703.45 lakh in FY 2023-24 showing an increase of 15.32% from previous year i.e. FY 2022-23. Revenue from operations increased primarily due to increase in Revenue from sale of products. Moreover, the company recorded increase in its profit after tax from Rs 601.15 lakh in the FY 2022-23 to Rs 818.61 lakh in the FY 2023-24. The profit after tax for the FY 2023-24 was 6.98% of the total income as against 5.91% of total income for the FY 2022-23.

The company intends to continue its focus in enhancing project execution capabilities so as to derive twin benefits of client satisfaction and improvements in operating margins. It will constantly endeavour to leverage its operating skills through its equipment and project management tools to increase productivity and maximize asset utilization in its ongoing projects. The company has developed a reputation for undertaking challenging projects and completing such projects in a timely manner. It intends to continue its focus on performance and project execution ability in order to maximize its operating margins. To facilitate efficient and cost-effective decision making, it intends to continue to strengthen its internal systems. The company’s ability to effectively manage projects will be crucial to its continued success.