IPO Size: Rs. 834 cr,
- Entirely Offer for Sale (OFS) by the promoter (100% to drop to 85%)
Price band: Rs. 268- Rs. 282 per share
M cap: Rs. 5,559 cr, implying 15% dilution
IPO Date: Tue 7th Nov to Thu 9th Nov 2023, Listing Mon 20th Nov 2023
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
2W Auto Component Maker
ASK Automotive manufactures powertrain-agnostic auto components for two-wheelers (2W) at its 15 plants across India, with 4% revenue share of electric. 76% of Rs. 2,600 cr annual revenue comes from supplies to auto original equipment manufacturers (OEMs), 10% from aftermarket, 5% from exports, with key products being:
- Advanced Braking System (42% of revenue): ASK is India’s largest 2W brake-shoe manufacturer, commanding 50% volume market share.
- Aluminium Lightweighting Precision (40% of revenue): This segment’s topline grew at 42% CAGR between FY21-23, when company revenue grew at 29% CAGR. Company enjoys 9% volume market share among 2W OEMs in India.
- Other products include wheel assembly (14% of revenue), safety control cables (4%) etc.
Well-Managed Working Capital
FY23 revenue grew 27% YoY to Rs. 2,555 cr, with 9.5% EBITDA margin and 4.8% net margin, leading to an EPS of Rs. 6.2. For Q1FY24, revenue surged 9% YoY, led by exports, to Rs. 657 cr, with EBITDA margin expanding to 10.2% and net margin to 5.3%. Q1 EPS rose to Rs.1.8, from Rs. 1.2 in Q1FY23.
On net worth of Rs. 678 cr, net debt to equity ratio is 0.6:1, comprising Rs. 230 cr long term loan to fund capex. Auto components business is generally working capital intensive, but ASK prudently manages inventory and debtors (at 12-14x turn). Fixed asset turnover ratio of 5x is also healthy, resulting in 19% RoE. However, RoE may slip to ~ 17% going forward, as net worth remains on the books (as explained in buy-back paragraph below).
ASK has commissioned a new 16th plant in Rajasthan in July 2023 and is constructing a 17th plant in Karnataka. As of 31.3.23, net fixed assets were at Rs. 463 cr, with capital work in progress of Rs. 163 cr. Besides new capacity, company’s 49% JV with Brazilian CV brake pad and lining maker FRAS-LE has got product approval from 2 commercial vehicle (CV) OEMs, for which, supplies have commenced. All this indicate improved FY24E performance.
Promoter Rewarded through Buy-back
Company reported Rs. 83 cr PAT for FY22, and Rs. 123 cr for FY23. It undertook two buy-backs worth Rs. 60 cr and Rs. 90 cr in FY22 and FY23 respectively, effective outgo for which, including tax on buy-back, was at Rs.64 cr and Rs. 111 cr, implying most of annual profit being ‘taken out’ by the promoter just before the IPO. Cash equivalents stood at just Rs. 2 cr, on 31.3.22 as well as on 31.3.23, which is unusually low for the size of company. As a result of this, new capacities were funded through debt and RoE appears ‘inflated’ as net worth shrunk. Incidentally, FY22 and FY23 audit report highlighted that working capital loans were used by the company for long term purposes such as purchase of plant and equipment, which is a deviation from sound accounting principles. While all of this is within the legal framework, it just raises unnecessary ‘orange flags, if not red’ to prospective investors, ahead of the IPO.
Fully Priced Issue
On FY24E EBITDA of Rs. 300 cr, shares are being offered at an EV/EBITDA multiple of 20x, on current year basis. Auto ancillary peers Suprajit Engineering, with similar topline and same net margin ratio, is trading at an EV/EBITDA multiple of 17x, while Endurance Technologies, with Rs. 9,000 cr topline, higher net margin of 6% and a cash rich balance sheet, is trading at 21x.
On a PE multiple basis too, share appears fully priced, as most peers in similar topline and margin profile are ruling at PE multiples of 20-34x, while ASK’s FY24E EPS of close to Rs. 7.7 leads to a PE of close to 37x. Thus, the IPO is fully priced, given mid-single digit net margin and 17% expected RoE. Pricing leaves nothing on the table for prospective investors.