IPO Size: Rs. 836 cr - entirely Offer For Sale (OFS)
- 65% of OFS by 2 investors fully exiting 21% holding of past 13-15 years
- 30% by the Promoters (75.5% stake to drop to 66.6%)
- 5% by individual shareholders
Price band: Rs. 548-577 per share
Mcap: Rs. 2,575 cr, implying 32% dilution
IPO Date: Wed 30th Nov to Fri 2nd Dec 2022, Listing Mon 12th Dec 2022
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
Auto Component Maker for Off-Highway Segment
Manufactures 3-point linkage systems (3PL) and precision machined parts (PMP) used in tractors and construction equipment (CE), enjoying 17% and 6% global market share respectively. On an installed capacity 67,000 MTPA (5 plants in India, 1 plant of 5,100 MTPA capacity in US), company currently operates at ~80% utilization. It has invested Rs. 50 cr to add 12,000 MTPA, which will add Rs. 300 cr incremental revenue FY24E onwards (6x asset turnover ratio).
Export Led Business
47% of FY22 revenue of Rs. 1,227 cr was generated from US, 25% from Europe, 13% from India. Geographic cost-arbitrage, stronger USD and high US inflation are beneficial for the company, although weak EUR is a negative. As European economies stagnate, global slowdown is company’s biggest challenge in the short term. But, medium to long term outlook is seen positive as (i) USD 1 trillion infrastructure spends in US to boost CE demand (ii) China + One strategy for global OEMs (iii) New products (3% of revenue plan to rise to double digit) to help company grow faster than expected industry growth of 6-7%.
With material cost at 35-40% of revenue, it enjoys healthy EBITDA margin of ~22% in FY22. On rising food prices, in past 18 months have been very healthy for agriculture demand strengthening company’s financials, with Q1FY23 EPS increasing to Rs.11.2 from Rs. 37 in FY22, as Q1 revenue jumped to Rs. 347 cr, on 22% EBITDA margin.
While inventory holding period of 4.5 months (2.5 months in warehouse, 2 months transport at sea) requires high working capital, company is well funded, with debt equity ratio of only 0.1:1.
Pricing has ‘Left Money on the Table’
The PE multiple works out to 15x and 13x, based on FY22 and Q1FY23 annualised earnings. This is seen quite attractive for double digit net margin, 20%+ RoE, and in relation to peers. Ramkrishna and MM Forgings, with similar margins and debt equity ratio upwards of 0.5:1, are ruling at current year PE multiple of 15x, while Craftsman at a PE of 25x. Export focused off-road tyre maker Balkrishna Industries, with nearly double Uniparts’ margin, is trading at a PE multiple of nearly 27x.
Thus, IPO pricing is has adequately discounted risk factors like global slowdown, 35% revenue from single customer and cyclical nature of auto industry.