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Review By Dilip Davda on August 30, 2024

•    The company is in the business of manufacturing precision components with specialization in technical springs.
•    The company marked growth it its top and bottom lines for the reported periods. 
•    It earned higher net for FY23 following some exception items.
•    Based on FY24 earnings, the issue appears fully priced. 
•    Investors may park funds for the medium to long term.

ABOUT COMPANY:
Gala Precision Engineering Ltd. (GPEL) is a precision component manufacturer of technical springs like disc & strip springs ("DSS") including wedge lock washers; coil & spiral springs ("CSS") and special fastening solution ("SFS") supplying to original equipment manufacturers ("OEMs"), Tier 1 and channel partners; used in sectors like renewable energy including wind turbine and hydro power plants, various industrial sectors such as electrical, off highway equipments, infrastructure and general engineering, mobility segments such as automotive and railways (Source: 1Lattice Report). 

Its technical springs and high tensile fasteners has been supplied to customers in countries such as Germany, Denmark, China, Italy, Brazil, USA, Sweden, Switzerland etc. Accordingly, it is a key link in the global supply chain for OEMs. GPEL's business primarily comprises of (i) springs technology division, under which it manufactures DSS including wedge lock washers ("WLW"), CSS and (ii) SFS in which it manufactures anchor bolts, studs and nuts.

Its DSS products find applications in renewable energy, railways, automobiles, off highway vehicles, heavy machinery, electrical and power equipments. GPEL is major disc springs manufacturer in domestic market and have ~10% market share in the Indian disc springs market. It has a significant presence in the DSS market for renewable industry with ~70% share in the domestic market and ~3% share in the global market. (Source: 1Lattice Report)

Its disc springs confirm to German DIN 2093 standards, bearing series, and customized specifications featuring variety of raw materials and surface coating options. The company manufactures strip springs customized for high fatigue applications. It is mainly competing with Muhr und Bender KG, Schnorr GmbH, Christian Bauer GmbH + Co. KG in the global disc springs market and with International Industrial Springs in disc springs in India. (Source: 1Lattice Report). As of June 30, 2024, it had 294 employees on its payroll and 390 persons were employed on contractual basis. It also had 77 engineers on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden/combo IPO of fresh equity shares issue worth Rs. 135.34 cr. (approx. 2558416 shares at the upper cap), and an Offer for Sale (OFS) of 616000 equity shares (worth Rs. 32.59 cr. at the upper cap). The company has announced a price band of Rs. 503 - Rs. 529 per equity shares of Rs. 10 each. The overall size of the issue will be approx. 3174416 shares worth Rs. 167.93 cr. The issue opens for subscription on September 02, 2024, and will close on September 04, 2024. The minimum application to be made is for 28 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.05% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 37.00 cr. for setting up a new facility at Sriperumbuddur, Tamil Nadu, for manufacturing high tensile fasteners and hex bolts, Rs. 11.07 cr. for capex on Palghar unit, Rs. 45.43 cr. for repayment/prepayment of certain borrowings., and the rest for general corporate purposes. 

The sole Book Running Lead Managers (BRLMs) to this issue is PL Capital Markets Pvt. Ltd., while Link Intime India Pvt. Ltd. is the registrar to the issue. 

The company has reserved only 5796 shares for its eligible employees and from the rest it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 68 - Rs. 330 per share between November 2009 and April 2019. It has also issued bonus shares in the ratio of 3 for 1 in September 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 5.17, Rs. 9.47, Rs. 13.36, Rs. 17.00, Rs/ 18.88, Rs. 27.47, and Rs. 80.36 per share. 

Post-IPO, its current paid-up equity capital of Rs. 10.11 cr. will stand enhanced to Rs. 12.67 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 670.24 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 147.96 cr. / Rs. 6.63 cr. (FY22), Rs. 167.08 cr. / Rs. 24.21 cr. (FY23), and Rs. 204.38 cr. / Rs. 22.33 cr. (FY24). According to the management, higher net for FY23 is attributed to their exception items for that year following discontinuation/discarding some of its plant and machinery.

For the last three fiscals, the company has posted an average EPS of Rs. 20.13 and an average RoNW of 22.20%. The issue is priced at a P/BV of 5.12 based on its NAV of Rs. 103.30 as of March 31, 2024, and at a P/BV of 2.80 based on its post-IPO NAV of Rs. 189.26 per share (at the upper cap). 

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 30.01. Based on FY23 earnings, the P/E stands at 27.68. Thus the issue is relatively fully priced. 

The company reported PAT margins of 4.48% (FY22), 8.65% (FY23), 11.89% (FY24), and RoCE margins of 13.85%, 22.93%, 19.91% for the referred periods, respectively. (on the basis of after exception items)

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document.  It has already adopted a dividend policy in November 2023, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Harsha Engineers, SKF India, Sundram Fasteners, Rolex Rings, Sterling Tools, and Ratnaveer Precision as their listed peers. They are trading at a P/E of 35.9, 46.7, 53.0, 38.2, 30.4 and 23.6 (as of August 30, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 1st mandate from PL Capital in the current fiscal and there are no track records for the past mandates.

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