Unimech Aerospace IPO Beware : What Could Go Wrong?

Unimech Aerospace Introduction

Unimech Aerospace, a leading high-precision engineering solutions provider, specializes in manufacturing complex products for the aerospace, defense, energy, and semiconductor industries. Discover their innovative engineering solutions, strong financial performance, and commitment to quality.

Brief About Unimech Aerospace

History of Unimech Aerospace

Unimech Aerospace Company was originally incorporated as “Unimech Aerospace and Manufacturing Private Limited” under the provisions of the Companies Act, 2013 pursuant to a certificate of incorporation dated August 12, 2016, issued by the Central Registration Centre, for and on behalf of the Jurisdictional Registrar of Companies, Karnataka at Bangalore (“RoC”). The name of Company was subsequently changed to “Unimech Aerospace and Manufacturing Limited”, upon conversion of our Company from a private limited to a public limited company, pursuant to a board resolution dated February 14, 2024, and a shareholders’ resolution dated March 4, 2024.

Summary of the business of Unimech Aerospace

Unimech Aerospace 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. Unimech Aerospace possess “build to print” capabilities, wherein manufacture products based on client designs, and “build to specifications” capabilities, wherein assist clients in designing the products to be manufactured basis specifications. Unimech Aerospace supply high precision and critical components to major OEMs and their licensees worldwide. Unimech Aerospace export-oriented business has a diverse product portfolio and strong focus on quality and timely delivery.

Business Verticals of Unimech Aerospace

• Aero Engine tooling
• Airframe tooling
• Precision Parts:
• Precision Sub System
• Semiconductor

Customer concentration of Unimech Aerospace

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Supplier concentration of Unimech Aerospace

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Revenue breakup of Unimech Aerospace

Product wise break-up

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Revenue contribution from Geography presence

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Industry Outlook

AEROSPACE INDUSTRY

International tourism has been significantly impacted by the COVID-19 pandemic, with global international tourist arrivals reaching 1.46 billion in 2019, a growth of 3.7% compared to 2018. In April 2023, WTTC has announced that the global Travel & Tourism sector has recovered 95% compared to pre-COVID. The total jobs in this sector globally amounted to 295 million in 2022, with an addition of 21.60 million jobs in 2022. One in 11 jobs globally are related to travel and tourism industry in 2022.

As the world recovers from the pandemic, there is a focus on sustainable practices in the tourism industry, such as using the latest technology to find innovative solutions to challenges like overcrowding in popular tourist destinations. Developing countries, particularly in Asia-Pacific, are becoming more competitive in the tourism market, with many realizing the importance of addressing restrictive visa regimes to boost economic opportunities and job creation.

The industry has been crucial in shaping the future of tourism, with aviation being the most favored means of transport for international tourism. Air travel and international tourism have been intertwined for decades, with air travel providing vital links for the global tourism industry. Over half of international tourists travel by air as per ATAG, making it a crucial sector for the tourism industry’s sustainable growth.

The tourism sector is a significant contributor to the global economy, generating $8.8 trillion in world GDP (10.4% of the global economy) and supporting 319 million jobs in 2019. The Global tourism body has forecasted that the GDP contribution will grow to USD 15.50 Trillion in 2033 and represent to 11.6% of Global economy, which would generate around 430 million jobs.

Increase in overall global market for tourism and travel leading to increase in Aerospace market. Strong order forecast for new passenger & freighter aircrafts globally leading to an increase in demand for new aero-tooling, airframe production and components.

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Growth in the Commercial Aircraft sector

The post COVID air travel passenger volumes has witnessed a rebound and is expected to reach 4.7 billion in 2024E according to IATA. Passenger revenues are expected to reach USD 717 billion in 2024, compared to USD 642 billion in 2023. The airline profits are also expected to reach USD 49.30 billion in 2024, compared to USD 40.7 billion in 2023, according to IATA. These increase in profits are attributed to the increase in passenger numbers, which have in turn been driven by increase in tourism activities, increase in business travel and religious tourism during the last 3 years.

Total Global Spend on Air Travel, 2019-2024 (In USD Billion)

Global travel has been resilient after being impacted by the COVID pandemic and – recovered to beyond pre-COVID levels by the end of 2023. Global air travel spends had amounted to USD 876 billion in 2019, which had contracted to less than half by a 54% reduction in 2020 due to COVID pandemic. The market recovered 33% to reach USD 528 billion in 2021and further by 44% to reach USD 763 billion in 2022. The milestone of recovery of air travel spend to pre-pandemic levels of 2019 was reached in 2023 and is further expected to surpass the USD 1 trillion mark in 2024.

Commercial Aircraft Global Fleet Size

The aircraft market is split almost equally between Airbus and Boeing with account for the lion’s share of all aircraft purchases globally. Airbus accounting for 12,500+ aircrafts and Boeing for 10,000 aircraft globally in 2023, Embraer also accounts to a total fleet of around 2,000 aircraft. The most popular aircraft families of Airbus are A320 and for Boeing it is B737. Majority of the historical deliveries were in Americas and Europe, however the next two decades are expected to be dominated by deliveries in Asia Pacific region.

Fleet Size for Commercial Aircraft, 2023, Number of Aircraft

The number of passenger fleet deliveries globally reached a substantial 1,606 units aircrafts in 2018, indicating a period of robust growth and investment in the global transportation sector, driven by strong air passenger demands from Asia. This was an exceptionally buoyant year. 2019 witnessed a huge fall in passenger fleet deliveries, dropping to 1,208, across narrow and wide body aircraft due to COVID. The year 2020 marked a significant disruption for the transportation sector, with passenger fleet deliveries plummeting to 723 aircraft. Cash flow issues with many airlines resulted in airlines either postponing the delivery of the new aircraft or cancelling the orders altogether. 2021 saw a partial recovery in passenger fleet deliveries to 951aircrafts. The momentum of recovery continued into 2022, with passenger fleet deliveries further increasing to 1,138 aircrafts, driven by rebound in air passenger traffic. In 2023, the upward trajectory in passenger fleet deliveries continued, reaching 1,263 units. This underscored the sector’s recovery, supported by ongoing efforts to enhance efficiency, innovate, and meet evolving consumer needs. The aircraft deliveries are expected to reach 1,850 aircraft in 2028 owing to the increase of monthly production rates of narrow body aircraft by Airbus and Boeing.

Commercial Aircraft Regional Fleet Distribution

The regional fleet distribution pattern is skewed towards developed economies, with North America and Europe accounting for 50% of the total active fleet in the world in 2022. APAC, including China and India accounted for around 30% of the global aircraft fleet in 2022. The fleet size of developing economies is expected to grow faster due to the increase in new low-cost carrier airlines entering these markets.

Regional Fleet Distribution, 2022 (Percent)

The Americas maintained a substantial fleet size of 9,060 commercial aircrafts in 2022, reflecting the region’s prominence as a key market for air travel. With its vast expanse and diverse economies, the Americas host a wide array of airlines catering to domestic and international routes. The robust fleet size underscores the region’s demand for air transportation services. In the Americas, 4,545 aircrafts are slated to be added to the fleet, reflecting sustained demand for air travel in the region by 2040.

Eurasia, comprising Europe and parts of Asia, accounted for a fleet size of 5,920 aircrafts in 2022. This region serves as a major hub for air travel, connecting continents and facilitating trade and tourism flows. Eurasia attracts millions of passengers annually, driving demand for commercial aviation services and contributing to the region’s sizable fleet size. Eurasia is set to see the addition of 4,720 aircrafts, driven by economic recovery and increasing passenger volumes by 2040.

Asia-Pacific region is the hub of the world’s fastest-growing economies, with fleet size stood at 3,520 aircrafts in 2022. This dynamic region hosts a multitude of airlines serving a rapidly expanding passenger base. The region’s strategic importance as a global economic powerhouse and tourism destination fuels the demand for air travel, contributing to the growth of its commercial aircraft fleet. The Asian (Asia Pacific +China) region is poised to witness the largest fleet expansion, with 11,925 aircraft slated for addition by 2042 , reflecting the region’s status as a global aviation powerhouse.

China, with its huge economy and growing aviation market, accounted for a fleet size of 4,000-4,500 aircraft in 2023, it is expected to add another 5,620 aircrafts. China plays a pivotal role in shaping global aviation trends and driving demand for commercial aircraft and is one of the world’s fastest growing aviation markets.

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In the Africa/Middle East region, fleet size was 3,040 aircrafts in 2022. Despite facing challenges such as infrastructure limitations and geopolitical uncertainties, the region’s strategic location between major continents and growing tourism industry fuel demand for air travel, supporting the expansion of its commercial aircraft fleet. In the Africa/Middle East region, 2,875 aircrafts are set to be added until 2040, signalling confidence in the region’s potential for aviation growth despite challenges.

Commercial Aircraft- Fleet Retirement

It is estimated that 5,000-5,500 aircrafts would retire and be de-fleeted during the forecast period of 2024-2028. In 2028, the aviation industry anticipates a retirement rate of 3.5% for commercial aircraft. Concurrently, the active fleet is projected to comprise 96.5% of all commercial aircraft in operation, representing the vast majority of aircraft continuing to serve airlines and passengers worldwide. This distribution reflects the industry’s ongoing efforts to maintain a modern, efficient, and safe fleet, balancing the retirement of older aircraft with the introduction of newer, more technologically advanced models. Most of the commercial aircraft that are removed from commercial passenger flights are usually converted into freighter to extend their life by another 5 to 10 years, depending on the aircraft. Older aircraft models like the MD80/717, A320ceo, 737NG have a faster declining rate in the narrow body segment and models like B747, A380, B767 and A330 have a faster declining rate in the wide body segment according to Boeing.

Average Age of Fleet- Commercial Aircraft

The average age of commercial aircraft fleets varies significantly across regions, reflecting diverse market dynamics, regulatory frameworks, and operational practices. The advanced economies have a matured aviation market, with a huge base of active fleet. The aircraft from the advanced economies like North America and Europe have a shorter average fleet life of 13.4 years and 11.5 years respectively due to the historical additions of fleet by the airlines in the region. In Latin America and Africa, the lack of investment availability to procure new aircraft has resulted in much higher average life of the fleet of 12.4 years and 16.5 years respectively.

The Asian region is expected to add around 11,925 aircrafts by 2042 due to demand for Low-Cost Carriers (LCC) in this marketlike Indigo, which order aircrafts in bulk. The induction of the new aircraft reduces the average age of the fleet. The age of the fleet of the Asia Pacific airline are much lesser due to the recent fleet additions in the airline industry in these regions.

Overview of different types of Engines used in Commercial Aircrafts

The narrow body aircraft have traditionally been most in demand owing to the increase in air travel for shorter connectivity for flights which last around 3.5 hours (one way). Narrow body aircraft which are the B737 and A320 have accounted for nearly 75% of the deliveries from 2018 to 2023, with a mild drop in 2019 and 2020. The narrow body aircraft are usually used by low- cost carriers, the growth of which has been a significant driver for the narrow body aircraft market.

The demand for widebody aircraft was about 20% in 2018 and have reduced in the Post COVID scenario from 2020. Regional jets and regional turbo props make up smaller segments of about 10% each and have remained stable across the study period.

Market share of Commercial Aircraft Engine in Service, 2023

Narrow body commercial aircraft usually have a two-engine configuration, while very large aircraft like A380 and B747 have a four-engine configuration. The recent launched wide body aircraft like the B787 and the A350 have a two-engine configuration. The use of composites to reduce the weight of the aircraft with focus on environmental sustainability are the key factors which drives this market. The commercial aircraft market is dominated by CFM international which accounts for 43% of the commercial aircraft engines. CFM International is a joint venture between Safran Aircraft Engines and GE Aerospace. The next dominant player is Pratt & Whitney which accounts for 33% of the total market. These engines are typically used on the narrow body aircraft like the B737 and A320 which accounts to about approximately75%-80% of the delivery of Airbus and Boeing.

List of Commercial Aircraft Programs and their Engine Supplier

DEFENCE INDUSTRY

The total number of defence aircrafts delivered in 2023 were 188 units, which includes fighters, transport and special mission aircraft. Of these, 155 were fighter aircrafts of the F35 program delivered to the USA. The second highest delivered defence aircraft in 2023 were 22 units of the F18. The P-8 from Boeing accounted for 11 deliveries in 2023. The increase of geopolitical conflict coupled with increase in indigenous programs in countries like India and South Korea are expected to be the key drivers in this market. Countries like India are developing their own fighter jets like the HAL Tejas combat aircraft to increase the ‘Make in India’ drive and reduce reliance on imports. Another key trend is the indigenisation of specific components of the imported platforms seen across multiple countries in APAC.

Overview of different types of Engines used in Defence Aircrafts

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70% of the global defence aircraft engine market lies with 7 companies only in 2023 which represents a competitive market. General Electric (GE) Aviation is a significant player in the military aircraft engine market holding a 24% share in 2023. GE engines, such as the F110 and F414, power a variety of military aircraft worldwide, including fighters such as the F-15 and F/A-18. The F110 powers the new, fly-by-wire F-15EX Advanced Eagle, the fifth F-15 variant designed to replace the oldest F-15s in the U.S. Air Force fleet. It is estimated that more than 100 F-15EX multirole fighters will be purchased by the U.S. Airforce.

Pratt & Whitney accounts for 18% of the market share of defence aircraft engines and is the second largest player in the same, producing engines such as the F135, which powers the F-35 Lightning II, one of the world’s most advanced fighter aircraft. Pratt & Whitney also makes engines for other military aircraft, such as the F-22 Raptor and the C-17 Globemaster III. Pratt & Whitney controls 18% of the military air engine market. Pratt & Whitney also secured the sole-source contract for F-35 engine upgrades. The program, known as the Engine Core Upgrade (ECU), is scheduled to begin with engine testing in 2026 and fielding in 2029.

Other significant players in defence aircraft engines are Safran and Rolls Royce with 12% and 10% market share respectively in 2023. Other small players are Honeywell, Europrop International and IGI with market shares between 3-1% in 2023.

List of Defence Aircraft Programs and their Engine Supplier

MAINTENANCE, REPAIR AND OVERHAUL MARKET

The global aircraft maintenance, repair, and overhaul (MRO) market is a vital sector supporting the safety, reliability, and efficiency of commercial aircraft. As the aviation industry continues to expand, driven by increasing air travel demand and fleet modernization initiatives, the aircraft MRO market also experiences significant growth and evolution in tandem.

MRO services encompass a wide range of activities, including scheduled maintenance checks, unscheduled repairs, component replacement, and overhaul services. The key objective of the MRO is to ensure aircraft safety and compliance with stringent regulatory standards set by aviation authorities like the Federal Aviation Administration (FAA) and the European Aviation Safety Agency (EASA).

Key Trends and Business Models

There are three key business models in the commercial aircraft MRO market, they are:

• In- House MRO: This refers to the strategies adopted by airlines to manage and maintain their aircraft fleets in-house, rather than outsourcing the work to third-party MRO providers. This approach can be beneficial for commercial air carriers that have the resources and capabilities to invest in their own infrastructure, as it allows them to control the entire maintenance process and ensure that their aircraft are maintained to the highest standards.
• Third Party MRO Service Providers: This refers to MRO providers who can be either airline affiliated companies which provide their additional resources to other airlines, or it could be an independent MRO provider that is providing its services to an airline. Third-party MRO business models have emerged as vital components in industries reliant on complex machinery and equipment. These models offer specialized services to maintain, repair, and overhaul assets, enabling organizations to focus on core operations while outsourcing technical expertise.
• OEM MRO Service Providers: In OEM MRO service provider model the maintenance services are provided by the OEMs. The OEMs are predominantly present in Engine maintenance segment of the MRO.

Types of Commercial Aircraft MRO

Commercial Aircraft MRO activities can be categorized into four main types: engine, airframe, line maintenance, and component maintenance, it is also referred as Check A, C and D.

• Engine maintenance: This involves the inspection, repair, and overhaul of aircraft engines. Engine maintenance is crucial for maintaining the performance and safety of the aircraft. It includes the replacement of worn or damaged parts, testing, and calibration of engine systems. They typical time frame for Engine Maintenance is around 6-8 years.
• Airframe maintenance: This type of maintenance focuses on the aircraft’s structure, including the fuselage, wings, and control surfaces. Airframe maintenance involves the inspection, repair, and replacement of structural components

to ensure the airworthiness of the aircraft. The airframe maintenance is usually scheduled between 18 months to 2 years.

• Line maintenance: This type of maintenance is performed on the aircraft during scheduled stops, such as at airports or during flights. Line maintenance checks all operational fluid levels and minor maintenance are undertaken at the parking bay.
• Component maintenance: This involves the inspection, repair, and replacement of aircraft components, such as landing gear, hydraulic systems, and electrical systems. Component maintenance ensures that these critical systems function correctly and safely.

Management and  Share Holding pattern of Unimech Aerospace

Promoters & Board of Directors of Unimech Aerospace

• Promoters are Anil Kumar P, Ramakrishna Kamojhala, Mani P, Rajanikanth Balaraman and Preetham S V.

Board of directors of Unimech Aerospace

Share Holding pattern of Unimech Aerospace

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Unimech Aerospace IPO details

Object of the issue

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Financial of Unimech Aerospace

Key Performance Indicators of Unimech Aerospace

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Assets & Liabilities of Unimech Aerospace

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Profit & Loss of Unimech Aerospace

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Cash Flow of Unimech Aerospace

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Capital structure of Unimech Aerospace

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SWOT ANALYSIS of Unimech Aerospace

Strengths

• High-Precision Engineering: Unimech Aerospace specializes in manufacturing complex products for the aerospace, defense, energy, and semiconductor industries, ensuring high-quality and precision engineering.
• Strong Financial Performance: The company has shown consistent financial growth, with improving Return on Capital Employed (RoCE), Return on Equity (ROE), and Return on Assets (ROA).
• Experienced Management Team: The company is led by a team with extensive experience in the industry, contributing to its success and stability.
• Strategic Partnerships: Long-term marketing arrangements and alliances with distributors and hospitals enhance market penetration.

Weaknesses

• High Operational Costs: Managing extensive services and maintaining high standards can lead to high operational costs.
• Dependence on Key Markets: A significant portion of revenue comes from specific markets, making the company vulnerable to regional economic fluctuations.

Opportunities

• Expansion into New Markets: There is potential for expanding services to new geographical areas and industries.
• Technological Advancements: Investing in new technologies can enhance service offerings and improve operational efficiency.
• Inorganic Growth: Acquisitions and strategic initiatives can enhance market share and revenue streams.

Threats

• Intense Competition: The manufacturing sector is highly competitive, with many players offering similar services.
• Economic Instability: Economic downturns can affect client spending on manufacturing and construction equipment.
• Regulatory Changes: Changes in government policies and regulations can impact operations and increase compliance costs.

Peer Comparison with Unimech Aerospace

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Risks in Unimech Aerospace

• A significant portion of total revenue from operations i.e. 98.25%, 99.35%, 94.70% and 95.84% in the six months period ended September 30, 2024, Fiscal 2024, Fiscal 2023 and Fiscal 2022, respectively is attributable to the aerospace sector wherein manufacture products pertaining to aero engine tooling and airframe tooling. Any adverse changes in the aerospace sector could adversely impact business, results of operations and financial condition.
• Unimech Aerospace is dependent on top five customers who contribute to 94.62%, 96.80%, 93.88% and 88.97% of total revenue from operations in the six months period ended September 30, 2024, Fiscal 2024, Fiscal 2023 and Fiscal 2022, respectively and the loss of any of these customers or a significant reduction in purchases by any of them could adversely affect business, results of operations and financial condition.

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