KRN Heat Exchangers IPO review (Apply)

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Review By Dilip Davda on September 20, 2024

•    The company is an emerging player in the manufacturing of fin and tube type heat exchangers which are widely used.
•    The company has achieved this status in just 7 years of operations with quality tailor made products.
•    It marked growth in its top and bottom lines for the reported periods. 
•    Based on FY24 earnings, the issue appears fully priced.
•    Investors may lap it up for medium to long term. 

ABOUT COMPANY:
KRN Heat Exchanger & Refrigeration Ltd.  (KHERL) manufactures fin and tube type heat exchangers for the Heat Ventilation Air Conditioning and Refrigeration Industry ("HVAC&R"). Heat exchangers manufactured by it are made of non-ferrous metals primarily Copper and Aluminium. Its product range includes condenser coils, evaporator units, evaporator coils, header/copper parts, fluid and steam coils and sheet metal parts. The company manufactures heat exchangers of various shapes and sizes as per the requirements of the customers and/or demand in the market. The diameter of heat exchanger tubes it produces ranges from 5MM to 15.88 MM. KHERL's products are well suited for wide range of air conditioning, heating and ventilation, refrigeration, and process cooling applications.

To enhance the longevity and corrosion resistance of heat exchangers and their components, various types of coatings such as nano coating, and powder coating are applied to the surfaces of copper tubes, brazing joints, and fin sheets. By applying these advanced coatings to heat exchangers and their components, its products ensure that the heat exchanger operates efficiently over an extended period, reducing maintenance costs and enhancing overall performance. The protective barrier provided by these coatings ensures that the heat exchanger withstands harsh conditions and maintains its optimal functionality.

Its products are vital for the performance of cooling appliances and have undergone stringent quality and checks. The company adheres to some of the industry's best-quality product accreditations. To expand the business of and to reap the benefits of forward integration, the Company has incorporated a wholly owned subsidiary, namely KRN HVAC Products Private Limited to increase value-added products in existing portfolio. KRN HVAC Products Private Limited will focus on manufacturing certain types of heat exchangers that are currently not manufactured by the Company.

Through this forward integration, it is planning to venture into the distribution and sells channels which allow it to control the marketing and distribution of complete product range of heat exchangers. This enables the company to capture a greater share of the value chain and establish direct connections with end customers. By incorporating KRN HVAC Products Private Limited, it can have greater control over the supply of HVAC industry products, enhancing customer reach and brand visibility.

Its prestigious customers, including Daikin Air-conditioning India Private Limited, Schnieder Electric IT Business India Private Limited, Kirloskar Chillers Private Limited, Blue Star Limited, Climaventa Climate Technologies Private Limited and Frigel Intelligent Cooling Systems India Private Limited among others. Over the last 3 Financial Years, KHERL's revenue from operations has increased at a CAGR of 25.46% out of which export sales have increased at a CAGR of 44.71%. As of July 31, 2024, it had 553 employees on its payroll including 383 contract workers.

The new plant will be commissioned by April 2025, and with its contribution, the company expected to increase its business volume by 7X in coming few years. In fact, it is the first mover in this segment to get listed within a span of just around seven years with gradual progress in its product ranges and the volume.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 15543000 fresh equity shares of Rs. 10 each worth Rs. 341.95 cr. (at the upper cap). The company has announced a price band of Rs. 209 - Rs. 220 per share. The issue opens for subscription on September 25, 2024, and will close on September 27, 2024. The minimum application to be made is for 65 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The IPO constitutes 25.01% of the post-IPO paid-up equity capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 242.46 cr. for investment in its wholly owned subsidiary KRN HVAC Products Pvt. Ltd. For setting up a new manufacturing facility at Neemrana, Alwar, Rajasthan, and the rest for general corporate purposes. 

The sole Book Running Lead Manager (BRLM) to this issue is Holani Consultants Pvt. Ltd., while Bigshare Services Pvt. Ltd. Is the registrar to the issue. 

Having issued initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 152 - Rs. 200 between October 2023, and August 2024. It has also issued bonus shares in the ratio of 9 for 1 in February 2023. The average cost of acquisition of shares by the promoters is Rs. 1.047, Rs. 1.109, and Rs. 100 per share. 

Post IPO, company's current paid-up equity capital of Rs. 46.61 cr. will stand enhanced to Rs. 62.16 cr. (Based on the upper cap of IPO pricing, the company is looking for a market cap of Rs. 1367.45 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 158.23 cr. / Rs. 10.59 cr. (FY22), Rs. 249.89 cr. / Rs. 32.31 cr. (FY23), and Rs. 313.54 cr. / Rs. 39.07 cr. (FY24). 

For the last three fiscals, the company has reported an average EPS of Rs. 7.19, and an average RoNW of 39.83%. The issue is priced at a P/BV of 7.71 based on its NAV of Rs. 28.53 as of March 31, 2024, and at a P/BV of 2.83 based on its post-IPO NAV of Rs. 77.68 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 34.98. and based on FY23 earnings, the P/E stands at 42.31. The issue relatively appears fully priced.

The company reported PAT margins of 6.78% (FY22), 13.06% (FY23), 12.67% (FY24), and RoCE margins of 34.65%, 50.46%, 31.21% for the referred periods, respectively. 

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

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
The BRLM associated with this issue has handled 9 issues in the past three fiscals (including the ongoing one), out of which no issue closed below the offer price on the listing date.

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