Azad Engineering IPO - 5 Key Risks to Consider Before Investing

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  • 21 Dec 2023
Azad Engineering IPO - 5 Key Risks to Consider Before Investing

Risks to Factor In

  • Business Dependent on the Sale of Products to Key Customers

Azad Engineering's business is highly dependent on selling its products to its key customers; the loss of any one can adversely affect the company's revenue. The company enjoys long-term relationships with its clients like General Electric and Mitsubishi Heavy Industries Ltd.

That said, there's no guarantee that the company will retain these customers or maintain the current business level with them. Too much dependence on certain key customers for revenue is not desirable, and the company may face difficulty in securing a comparable level of business from other customers to offset the loss of revenue from losing key customers.

  • Too Much Dependency on Hyderabad Facilities for Revenue

Azad Engineering is highly dependent on its Hyderabad facility for its revenue. The company derives the entire portion of its revenue from the facilities it has in Hyderabad. In case there is any disruption or breakdown of its facility in Hyderabad, the company's business may be adversely affected. In such a scenario, its operations, cash flow, and future prospects may get adversely affected.

Though it has not happened in the past, the company's operations are susceptible to various regional and local factors.

  • Highly Competitive Global Industry

Azad Engineering operates in a highly competitive global industry and faces stiff competition against other high-precision and mission-critical components manufacturers. A failure to compete effectively can adversely affect its business and financial conditions. That's not all. If a recession hits the industry it operates in, customers can become more price-sensitive. In such a scenario, the company may find itself at a disadvantage with respect to its price as against manufacturers who operate on low-cost structures.

The company's success depends a lot on its ability to provide technologically advanced and superior products, maintain quality standards, deliver products on time, and respond quickly to customer's design and schedule changes.

  • Contracts/Purchase Orders May Not Indicate Future Growth

The company's contracts/purchase orders may not indicate its future growth or the new orders it may receive in the future. The amount of revenue it receives from its customers, including future contracts, is subject to several risks and uncertainties, including cancellation of current purchase orders and postponement of orders in subsequent quarters.

While the company has long-term agreements with certain customers for a period ranging from 3 to 10 years, it may not have any recourse in case of cancellation or unexpected delays of such agreements.

  • Exposure to Numerous Risks Due to the Global Nature of Operations

Azad Engineering sells its products to customers in India and abroad, including the USA, Europe, Japan, the UK, and Middle East. This exposes the company to various legal and regulatory requirements in the jurisdiction of these economies, such as possible changes in the USD exchange rate, import and export regulations, changes in labor conditions, and unstable political situations.

In Conclusion

Knowing the associated risks will help you gauge your risk appetite and make more informed decisions. Go through the company's draft red herring prospectus (DHRP) to get a detailed overview of these risks before investing.

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