Kross IPO review (May apply)

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Review By Dilip Davda on September 6, 2024

•    The company is engaged in the manufacturing and supply of trailer axle and suspension assembly coupled with wide range of forged and precision machined critical parts.
•    It marked steady growth in its top and bottom lines for the reported periods. 
•    It has created a niche place in the segment with long term relationship with renowned clients.
•    Based on FY24 earnings, the issue relatively appears aggressively priced. 
•    Well-informed investors may park funds for the medium to long term. 

ABOUT COMPANY:
Kross Ltd. (Kross) is a diversified player focused on manufacturing and supply of trailer axle and suspension assembly and a wide range of forged and precision machined high performance safety critical parts for medium and heavy commercial vehicles ("M&HCV") and farm equipment segments. It is widely recognized as one of the prominent manufacturers of trailer axles and suspension assembly in India (Source: CRISIL Report). In 2019, it commenced manufacture and sale of trailer axle and suspension assemblies and have witnessed robust growth between Fiscal 2021 and Fiscal 2024 (Source: CRISIL Report). It has become one of the fastest growing player in the organized trailer axle manufacturing industry competing with major trailer axle manufacturers (Source: CRISIL Report). 

With over three decades of experience, it relies on product development capabilities to design and deliver proprietary products such as trailer axle and suspension assembly. It is one of the few players domestically, with the competency to manufacture trailer axles and suspension assembly in-house (Source: CRISIL Report). With a diversified portfolio of high performance and safety critical components for the M&HCV and farm equipment segments, it is a specialist in manufacturing of safety critical components for M&HCV segment which include axle shafts, companion flanges, anti-roll bars and stabilizer bar assembly, suspension linkages, differential spiders, bevel gears, planet carriers, inter-axle kits, rear end spindles, pole wheels and wide variety of tractor components for the hydraulic lift arrangement, power take-off ("PTO") shafts and front axle spindles.

The company supplies products to a diversified client base which includes large original equipment manufacturers ("OEMs") manufacturing M&HCV and tractors, tier one suppliers to the OEMs in the M&HCV segment domestic dealers and fabricators for trailer axle and suspension business. It has established long term relationships with several large domestic and global OEMs, including, Ashok Leyland Limited, a leading Indian automobile OEM and an Indian farm equipment OEM, each of whom it has been associated with for a period of more than 18 years and Tata International DLT Private Limited with whom it has been associated since 2019. Due to its track record and diverse product portfolio, the company has also been able to attract new customers such as Leax Falun AB and a Japan based OEM manufacturing commercial vehicles. 

It has also commenced bulk exports to Leax Falun AB, a Sweden based company manufacturing propeller shafts for commercial vehicle OEMs, in August 2023 with supplies of Universal Joint Crosses and are in stages of validation for other critical parts.

It is backward integrated with design, process engineering, forging, Source: CRISIL Report). For its trailer axle and suspension assembly business, the company operates its service on a mobile and on road basis, where once a complaint is registered by the customer, its service associate is deployed to the location of origin of the compliant to resolve the same. It has a custom service software developed by Sales force which gives it accurate tracking of service complaints as well as service history of the vehicle.

KROSS currently manufactures a large variety of components and has the capacity to manufacture forged parts of up to 40 kg input weight. It enhanced backward integration capabilities by establishing a new casting facility at Unit V, setting up a high-pressure mould line foundry along with a machine shop. It is in the process of expanding capacity and increasing product offerings through the expansion of r existing facilities, through the addition of further production lines, which will allow it to produce a new line of parts such as the hydraulic cover for tractors and in-house machining line of hubs and brake drums. As of June 30, 2024, it had 528 employees on its payroll and other 1661 contractual employees.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden/combo IPO of fresh equity shares issue worth Rs. 250 cr. (approx. 10416667 shares at the upper cap), and an Offer for Sale (OFS) of Rs. 250 cr. (approx. 10416667 shares at the upper cap). The company has announced a price band of Rs. 228 - Rs. 240 per equity shares of Rs. 5 each. The overall size of the issue will be approx. 20833334 shares worth Rs. 500 cr. The issue opens for subscription on September 09, 2024, and will close on September 11, 2024. The minimum application to be made is for 62 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 32.30% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 70.00 cr. for capex on purchase of machinery and equipments, Rs. 90.00 cr. for repayment/prepayment of certain borrowings, Rs. 30.00 cr. for working capital, and the rest for general corporate purposes. 

The sole Book Running Lead Manager (BRLM) to this issue is Equirus Capital Pvt. Ltd., while KFin Technologies Ltd. is the registrar to the issue. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 21.00 - Rs. 25.00 per share (based on Rs. 5 FV), between March 2013. and February 2020. It has also issued bonus shares in the ratio of 1 for 2 in March 1998, 1 for 2 in March 1999, 1 for 1 in August 2016, and 1 for 1 in November 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.58, Rs. 0.95, Rs. 1.69, and Rs. 1.91 per share. 

Post-IPO, its current paid-up equity capital of Rs. 27.05 cr. will stand enhanced to Rs. 32.26 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 1548.23 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 297.88 cr. / Rs. 12.17 cr. (FY22), Rs. 489.36 cr. / Rs. 30.93 cr. (FY23), and Rs. 621.46 cr. / Rs. 44.88 cr. (FY24). It has posted a steady growth in its top and bottom lines for the reported periods. 

For the last three fiscals, the company has posted an average EPS of Rs. 6.43 and an average RoNW of 28.18%. The issue is priced at a P/BV of 8.84 based on its NAV of Rs. 27.14 as of March 31, 2024, and at a P/BV of 10.55 based on its post-IPO NAV of Rs. 22.76 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 34.48. Thus the issue relatively appears aggressively priced. 

The company reported PAT margins of 4.09% (FY22), 6.32% (FY23), 7.22% (FY24), and RoCE margins of 14.97%, 27.51%, 28.15% for the referred periods, respectively. 

DIVIDEND POLICY:
The company has paid a dividend of 10% for FY23. It has already adopted a dividend policy in October 2023, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Ramkrishna Forgings, Jamna Auto, Automotive Axles, GNA Axles, and Talbros Automotive as their listed peers. They are trading at a P/E of 52.1, 24.4, 18.5, 20.3, and 25.4 (as of September 05, 2024). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 15th mandate from Equirus Capital in the last three fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount, 2 at par and the rest with premiums ranging from 1.69% to 88.5% on the date of listing.

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