Kross IPO - Issue Details, Financials, Strengths, Risks, Investment Rationale And More: DRChoksey

Deven Choksey Research Report

Kross Ltd.'s will launch its initial public offering today and closes on Sept. 11. The Jharkhand-based company is a leading manufacturer specializing in the production of forged, machined, and assembled components for the commercial vehicle and agricultural tractor segments. The company has set the price band in the range of Rs 228-240 per share.

The Rs 500 crore IPO comprises of equity shares worth Rs 250 crore and an offer for sale of equity shares to the tune of Rs 250 crore.

Object of the offer

1. Funding of capital expenditure requirements.

2. Repayment or prepayment of outstanding borrowings.

3. Funding working capital requirements.

4. General corporate purposes.

Strengths:

• Established relationships with major OEMs and tier 1 suppliers, supported by a broad network of trailer axle and suspension dealers.

• A leading Indian manufacturer of trailer axles and suspension assemblies with in-house production capability

• Diversified product portfolio with a focus on continuous value addition.

• Integrated manufacturing operations coupled with in-house product and process design capabilities which offer scale, flexibility and comprehensive solutions.

• Track record of sustained growth and robust financial performance in the last three financial years.

Strategies:

• Expand capacities at existing manufacturing facilities to increase production scale for current products and facilitate the development of new products.

• Create manufacturing capabilities in axle beam extrusion and backward integration capabilities into the seamless tube.

• Expand geographical reach through growing exports.

• Continuing focus on reduce operating costs and improving operational efficiency.

Risks:

• The top five customers contribute over 66% of the company’s revenues annually. A loss or reduction in demand from any major customer could significantly impact the company's financial performance.

• Revenue from trailer axle and suspension assemblies for medium and heavy commercial vehicles accounts for over 40% in FY2024, more than 30% in FY2023, and over 20% in FY2022. A drop in demand for these products would materially impact the company’s financials.

• The company relies heavily on sales of trailer axle and suspension assemblies and high-performance parts for M&HCVs and farm equipment. Changes in demand for these components could adversely affect financial performance.

• Product demand is tied to vehicle sales trends. A downturn in vehicle sales could reduce demand for the company’s products, adversely affecting the company.

Outlook & Valuation:

Kross is strategically positioned for sustained growth through its diverse range of manufacturing capabilities in trailer axles, suspension assemblies, and precision components for medium and heavy commercial vehicles (M&HCV) and farm equipment.

The company is expanding its operational footprint with significant investments in advanced manufacturing technologies and new product lines, such as axle beam extrusion and seamless tube production.

On the financial front, Kross Limited has demonstrated robust performance with a remarkable 44% CAGR in revenue and a 92% increase in PAT from FY 2022 to FY 2024, along with a return on capital employed and return on equity of 28% and 31% respectively during FY24. The company’s diverse client base, including major OEMs and tier-I suppliers, contributes significantly to its revenue, with a strong focus on the M&HCV segment.

With a strong track record of financial performance and a commitment to innovation, Kross stands to benefit from the ongoing demand for high-quality, safety-critical components. The company is expected to trade at an adjusted PE multiple of 34 times at the upper price band.

Given the impressive growth metrics and competitive positioning, coupled with high return ratios compared to its peers, we assign a ‘Subscribe’ rating for Kross' IPO.

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