Too many IPOs at a time: Should you invest in Carraro India IPO?

Between FY22 and FY24, the company recorded a Compound Annual Growth Rate (CAGR) of around 10 per cent in revenue and 67 per cent in net profit. 

About the Issue:  

Carraro India Ltd is preparing to launch its Initial Public Offering (IPO) for equity shares. See the issue details below.

Objects of the Issue  

Considering that the issue is exclusively an offer for sale, it is crucial to note that the company will not receive any offer proceeds. Instead, all offer proceeds will flow to the selling shareholders, distributed in accordance with the number of offered shares they sell as part of the offer.

Promoter holding 

Tomaso Carraro, Enrico Carraro, Carraro S.p.A and Carraro International S.E. are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 100 per cent in the company.

Company profile  

The company is a technology-driven, integrated supplier specializing in the development of complex engineering products and solutions for its Original Equipment Manufacturer (OEM) clients.

As an independent Tier I solution provider, the company focuses on axles, transmission systems, and gears catering to the agricultural tractor and construction vehicle industries in India. Additionally, it supplies gears for industrial and automotive markets, spare parts for agricultural tractors and construction vehicles, and non-core components for these vehicles.

The company operates two state-of-the-art driveline manufacturing plants located in Pune, Maharashtra. With extensive expertise in the agricultural tractor and construction vehicle sectors, it has established a robust network of 220 suppliers across eight Indian states and 58 international suppliers.

Financials 

The company has consistently delivered notable growth in both revenue and profits over the past few years. Between FY22 and FY24, the company recorded a Compound Annual Growth Rate (CAGR) of around 10 per cent in revenue and 67 per cent in net profit. 

When annualized, the figures from the H1FY25 indicate a marginal 2 per cent revenue growth and a 59 per cent surge in net profit compared to FY24.

The company has significantly reduced its borrowings from Rs 213 crore to Rs 196 crore as of September 30, 2024, a move that is expected to lower its interest burden.

Valuation & Outlook

*RoE: Based on FY24 data

The issue is priced with a P/BV ratio of 9.54 times, calculated using its Net Asset Value (NAV) of Rs 73.78 as of September 30, 2024.

Considering the company's annualized FY25 earnings and fully diluted equity capital, the price-to-earnings (P/E) ratio stands at 40x. The company delivered a decent return on equity (RoE) of 18 per cent and a return on capital employed (RoCE) of 19 per cent for FY24.

However, with competitors offering decent returns at nearly half the price-to-book (PB) ratio, the company’s competitiveness appears less compelling.

Although the company has experienced consistent growth, its revenue expansion has been more gradual compared to some industry peers. This can be attributed in part to the company’s high revenue concentration, with 85 per cent of its FY24 revenue coming from its top 10 customers. Furthermore, the agricultural tractor segment, which contributes 45 per cent to the company's revenue, is subject to seasonal variations, causing fluctuations in both demand and revenue.

Therefore, we recommend that risk-tolerant investors with surplus funds consider subscribing to the issue with a long-term outlook and a moderate subscription approach.