Forge Auto NSE SME IPO review (Apply)

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Review By Dilip Davda on September 23, 2024

•    The company is into manufacturing complex and safety critical, forged and precision machined components for auto, agri and other sectors.
•    It posted steady growth in its top and bottom lines for the reported periods. 
•    Based on FY24 earnings, the issue appears fully priced. 
•    Investors may park moderate funds for long term. 

ABOUT COMPANY:
Forge Auto International Ltd. (FAIL) is an engineering company engaged into forging and manufacturing of complex and safety critical, forged and precision machined components such as big ring, small ring, big ball stud, gear blank with broach, stub axle assembly, flange yoke 325 HS, catering to different industry sectors like auto industry including automobiles, tractors, railways etc., and non-auto sectors like agriculture parts, hydraulic parts, striking tools etc. It primarily serves customers comprising of domestic and global original equipment manufacturers ("OEMs") engaged into manufacturing for both automotive sector and other nonautomotive sector, used across industries by a diversified base of customers.

The company manufactures precision machined components as per customer specifications and International Standard catering to the requirements of various industry such as tractor, agriculture parts, railways, automobiles, commercial vehicle industry, 5th wheel industry, striking tools, hydraulic parts and castor wheel parts and other related industries. Its continued endeavour to increase value addition through focus on products with higher machining intensity, has enabled it to increase realization and in Fiscal 2024, 2023 and 2022 its EBITDA margin was 7.62%, 6.39% and 5.41% respectively.

FAIL manufactures products such as short fork 325HS, long fork, flange yoke 325 HS used in commercial vehicles, ball stud, small ball stud used in railway bogies, gear blank with broach, gear blank without broach, stub axle assembly used in tractors, agricultural equipment, sledge hammers etc. Its product range can be broadly classified into different categories i.e. Automotive sector (i.e. used in the manufacturing of auto components such as tractors, light vehicles, heavy commercial vehicles etc.) and non- automotive sector (i.e. which are used in manufacturing of agricultural, industrial and striking tools etc.). As of March 31, 2024, it had 366 employees on its payroll, and additional 215 contract workers in various departments.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 2880000 equity shares of Rs. 10 each to mobilize Rs. 31.10 cr. (at the upper cap). It has announced a price band of Rs. 102 - Rs. 108 per share. The issue opens for subscription on September 26, 2024, and will close on September 30, 2024. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.37% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 19.00 cr. for working capital, Rs. 5.00 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes.

The issue is solely lead managed by Hem Securities Ltd., Bigshare Services Pvt, Ltd. Is the registrar to the issue, while HEM group's Hem Finlease Pvt. Ltd. Is the market maker. 

Having issued initial equity shares at par, the company issued/converted further equity shares at a fixed price of Rs. 60.00 per share in December 2023. It has also issued bonus shares in the ratio of 1 for 1 in March 2024. The average cost of acquisition of shares by the promoters is Rs. 15.18, and Rs. 16.54 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 8.04 cr. will stand enhanced to Rs. 10.92 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 117.94 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 134.00 cr. / Rs. 2.64 cr. (FY22), Rs.  177.64 cr. / Rs. 4.96 cr.  (FY23), Rs. 181.57 cr. / Rs. 6.69 cr. (FY24). 

For the last three fiscals, it has reported an average EPS of Rs. 8.31 and an average RoNW of 29.26%. The issue is priced at a P/BV of 4.17 based on its NAV of Rs. 25.88 as of March 31, 2024, and at a P/BV of 2.27 based on its post-IPO NAV of Rs. 47.54 per share (at the upper cap).

If we attribute FY24 super earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 17.62. Based on FY23 earnings, the P/E stands at 23.79. Thus the issue relatively appears fully priced. 

The company reported PAT margins of 1.99% (FY22), 2.81% (FY23), 3.71% (FY24), and RoCE margins of 13.03 %, 18.36%, 17.60% for the referred periods, respectively.

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It has adopted a dividend policy in June 2024, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Balu Forge, MM Forging, Samrat Forging as their listed peers. They are trading at a P/E of 68.9, 20.1, and 61.6 (as of September 20, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 58th mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all listed with a premium ranging from 18.18% to 90% on the date of listing.

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