IPO

Kross manufactures tractor and truck components and trailer axles and suspensions. The wide range of products include high-performance forged and precision-machined safety-critical parts for medium and heavy-duty commercial vehicles (M&HCV) and agricultural equipment.

Customers include major domestic and global OEMs in the M&HCV and tractor segments and their tier 1 suppliers as well as domestic dealers and fabricators in the trailer axle and suspension business. More than 200 customers were served over the past three fiscal years.

Mobile and on-road services include a service associate being dispatched to the location to address customer complaints and resolve issues related to the trailer axle and suspension assembly business.

The five manufacturing plants are at Jamshedpur, Jharkhand. These are equipped with forging presses, a high-pressure foundry, advanced machining tools, an in-house Ced plant, powder coating and spray- painting facilities, and heat treatment and induction hardening equipment. The capacity is to manufacture forged parts of up to 40 kg input. The manufacturing capacity is 60,000 trailer axle and suspension assemblies annually. Around 10,145 trailer axles and suspension assemblies were produced in the three months ended June 30, 2024.

The manufacturing units have been operating over 68% utilization for each of FYs 2024, 2023 and 2022.

Existing facilities are being upgraded to add capacity and add new production lines. This expansion will enable the production of new parts, such as hydraulic covers for tractors and in-house machined hubs and brake drums.

Backward integration capabilities are being enhanced by establishing a new casting facility at Unit V, setting up a high-pressure mold line foundry along with a machine shop.

Trailer axles and suspensions accounted for 43.48% of total revenue, axle shafts 10.70%, coupling flanges 8.37%, anti-roll bar and stabilizer bars 8.23%, bell crank assembly 4.55%, trunion pins 1.43%, differential spiders 1.69%, and tractor parts 8.88% in FY 2024.

The M&HCV segment contributed 88.87% to revenue, farm equipment 9.02%, and other components and services 2.11% In FY2024.

The focus is on the domestic market, with exports contributing less than 1.50% of the revenue in FYs2024, 2023, and 2022. The plan is to expand into international markets. There is a collaboration with Leax Falun AB, a Sweden-based firm, and a Japanese OEM commercial vehicle manufacturer. Purchase orders have been received from Leax Falun AB for six product segments: universal joint crosses, cross tooth flanges, spline journals, tube yokes, and spline sleeves. Bulk supplies of universal joint crosses began in August 2023. The other parts are currently undergoing validation.

Offer and its objects

The IPO consists of a fresh issue of equity shares up to Rs 250 crore and an offer for sale (OFS) up to Rs 250 crore by existing shareholders Sudhir Rai and Anita Rai.

The promoters are Sudhir Rai, Anita Rai, Sumeet Rai, and Kunal Rai. The promoters and promoter group hold an aggregate of 5,40,91,956 equity shares, aggregating 99.99% of the pre-offer issued and paid-up equity share capital. The post-IPO shareholding is expected to be around 67.70%.

The price band for the IPO is Rs 228 to Rs 240 per equity share of face value Rs 5 each.

The objectives for the fresh issue include Rs 70 crore for funding capital expenditure requirements towards purchase of machinery and equipment; Rs 90 crore for repayment or prepayment of certain outstanding borrowings; Rs 30 crore for working capital requirements; and the remaining amount for general corporate purposes.

The issue, through the book-building process, will open on 9 September 2024 and close on 11 September 2024.

Strengths

One of the fastest-growing players in the organized trailer axle manufacturing industry. Net profit soared from Rs 12.17 crore in FY2022 to Rs 44.88 crore in FY2024.

More than 30 years of experience in product development. Transitioned from a manufacturer of precision-machined auto components to a systems manufacturer. One of the few domestic companies with the capability to produce trailer axles and suspension assemblies in-house.

Long-standing relationship with large OEMs, tier one suppliers, domestic dealers and fabricators for its trailer axle and suspension business complemented by a diversified network of dealers.

Backward integrated with design, process engineering, forging, casting and machining capabilities is resulting in greater control over process, timelines, pricing and quality. Forward integration for trailer axles and suspension assemblies provides greater market access.

The M&HCV segment in India is expected to grow in the coming years due to a surge in construction activity, strong replacement demand, and fleet modernization driven by an incentives-based scrappage policy. Placed to meet the rising demand through focus on expanding capacity and product offerings.

Improving operational efficiency and profitability aided by constant cost optimization and growing exports efforts. The OPM increased from 9.93% in FY2022 to 13.02% In FY2024.

Extensive experience of promoters and senior management personnel.

Weaknesses

Faces customer and product concentration risk. The top three customers accounted for approximately 50% of the revenue in FY 2024.

Derived 43.38% of the revenue from trailer axles and suspension products in FY2024. The loss of a major customer or a reduction in demand for its products can adversely affect the business.

Demand for products is heavily dependent on the production and sales of the M&HCV segment in India. The M&HCV segment contributed 88.87% to the revenue in FY 2024. Reduced demand for the M&HCV segment due to regulatory changes, supply chain disruptions and fuel price fluctuations can affect business.

Manufacturing facilities are concentrated in Jamshedpur, Jharkhand.

A change in the availability or cost of steel, the primary raw material, can adversely affect the business and financial condition.

There have been instances of delays in the payment of statutory dues in the past. Such delays could lead to regulatory actions and penalties.

Faces intense competition from domestic as well as international players.

Valuation

Net sales increased 27% to Rs 620.25 crore in FY 2024 as compared with FY2023. The OPM improved 125 bps to 13.02%, resulting in a 40% increase in OP to Rs 80.76 crore. OI grew 67% to Rs 1.21 crore. Interest cost climbed 22% to Rs 14.90 crore. Depreciation cost increased 34% to Rs 5.79 crore. PBT jumped 47% to Rs 61.29 crore. Tax expenses were Rs 16.41 crore as compared with Rs 10.78 crore. Net profit soared 45% to Rs 44.88 crore.

The FY2024 EPS on post-issue equity works out to Rs 6.96. At the upper price band of Rs 240, P/E works out to 34.49.

The total outstanding borrowings excluding vehicle loans amounted to Rs 128.62 crore as of 30 June 2024. The plan is to repay 70% of the debt from the issue proceeds. This will bring down its interest costs substantially and boost the profit. The FY2024 EPS works out to Rs 8.58 if 70% of its interest cost is removed, keeping all other items, including tax rate same. Re-worked P/E, at the upper price band, moderates to 28.

Listed peers such as Ramkrishna Forgings traded at TTM P/E of 52, Jamna Auto at TTM P/E of 24, Automotive Axles at TTM P/E of 19, and GNA Axles at TTM P/E of 20 as on 05 September 2024. The OPM and ROE stood at 13.02% and 30.57%, respectively, in FY 2024 as compared with 21.24% and 12.72% for Ramkrishna Forgings, 13.49% and 22.74% for Jamna Auto, 11.05% and 18.96% for Automotive Axles, and 13.10% and 12.47% for GNA Axles, respectively.

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