ICICI Direct Research has issued a BUY recommendation for Aeroflex Industries Limited with a target price of ₹230, offering a potential upside of 29% from the current market price of ₹178. Aeroflex, a leading manufacturer of stainless steel flexible flow solutions, has demonstrated impressive growth in both revenues and profitability, driven by strong industry tailwinds and expanding product portfolios. With capacity expansions and a focus on higher-margin products like metal bellows, the company is well-positioned for long-term growth. Investors are encouraged to consider Aeroflex for significant returns over the next 12 months.

Key Financial Performance

- Revenue Growth: Aeroflex has delivered a 30% CAGR in revenue over FY21-24, reaching ₹318 crore in FY24. - EBITDA Growth: The company reported a 40% CAGR in EBITDA, achieving ₹62 crore in FY24. - PAT Growth: Profit after tax (PAT) grew by 91% CAGR during FY21-24, reaching ₹42 crore in FY24. - EBITDA Margin: The EBITDA margin stood at 19.4% in FY24, reflecting operational efficiency.

Target and Valuation

ICICI Securities has valued Aeroflex at 38x P/E on FY26E earnings, setting a target price of ₹230. With the company’s strong focus on capacity expansion and profitability through higher-margin products, the valuation remains compelling for long-term investors.

Investment Rationale

1. Expanding Capacity and Focus on Higher-Margin Products: Aeroflex is expanding its capacity in stainless steel flexible hoses, targeting 16.5 million meters by December 2024, up from the current 15 million meters. The company’s focus on higher-margin products, such as metal bellows, is expected to significantly boost profitability.
Strong Global Presence: With 84% of revenues derived from exports and a presence in 89 countries, Aeroflex is well-positioned to benefit from growing global demand for flexible flow solutions, particularly in industries like oil and gas, steel, and chemicals.

Diversified Product Portfolio: Aeroflex offers over 2,500 Stock Keeping Units (SKUs), catering to a wide range of industries, including new-age sectors like robotics, aerospace, and electric mobility. The company is also venturing into higher-margin segments like composite hoses and assemblies.

Growth Projections

- Revenue CAGR of 25% over FY24-26E, reaching ₹499 crore by FY26. - EBITDA CAGR of 34%, with margins expected to improve to 22.2% by FY26. - PAT CAGR of 37%, projected to reach ₹78 crore by FY26, driven by a favorable product mix and operational efficiencies.

Risk Factors

1. Global Economic Slowdown: Given the company’s high reliance on exports, any downturn in key international markets could adversely impact revenues and profitability.
Dependence on Chinese Suppliers: Aeroflex sources a significant portion of its raw materials from China, exposing it to risks associated with supply chain disruptions or price fluctuations.

Working Capital Requirements: The company’s business model involves high working capital requirements, which could affect liquidity if not managed effectively.

Bottomline

Aeroflex Industries is well-positioned to capitalize on favorable market trends, driven by capacity expansions, a diverse product portfolio, and increasing demand in key sectors. The company's focus on higher-margin products and its strong export footprint make it an attractive investment opportunity. ICICI Securities’ recommendation to buy with a target price of ₹230 reflects confidence in Aeroflex’s growth trajectory over the next 12 months.