Evaluating Kross Ltd IPO opportunity; Should you invest?

In this analysis, we take a closer look at Kross Ltd and present you with the exclusive IPO details.

About the Issue  

Kross Ltd is preparing to launch its Initial Public Offering (IPO) for equity shares. Below are the issue details.

Objects of the Issue  

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Funding of capital expenditure requirements of the company towards the purchase of machinery and equipment.

2. Repayment or prepayment, in full or in part, of all or a portion of certain outstanding borrowings availed by the company.

3. Funding working capital requirements of the company

4. General corporate purposes.

Promoter holding  

Sudhir Rai, Anita Rai, Sumeet Rai and Kunal Rai are the promoters of the company. The promoters and promoter group currently hold a pre-issue shareholding stake of 99.99 per cent in the company.

Company profile  

The company is a diversified player specializing in the manufacturing and supply of trailer axles, suspension assemblies, and a broad range of forged and precision-machined, high-performance safety-critical components for medium and heavy commercial vehicles, as well as farm equipment.

The company also specializes in the production of safety-critical components, including axle shafts, companion flanges, anti-roll bars, stabilizer bar assemblies, suspension linkages, differential spiders, bevel gears, planet carriers, inter-axle kits, rear-end spindles, pole wheels, and a wide range of tractor components for hydraulic lift systems, power take-off shafts, and front axle spindles.

The company operates from five manufacturing facilities in Jamshedpur, Jharkhand, with the capacity to produce forgings weighing up to 40 kg. It supplies products to a diverse client base, including major original equipment manufacturers (OEMs), tier-one suppliers to OEMs, as well as domestic dealers and fabricators in the trailer axle and suspension business.

Financials  

The company has shown consistent growth in both revenue and net profit over recent years. Between FY22 and FY24, the company recorded a Compound Annual Growth Rate (CAGR) of 44 per cent in revenue and 92 per cent in net profit. In FY24, the company reported an impressive Return on Equity (RoE) of 31 per cent and a Return on Capital Employed (RoCE) of 28 per cent.

Valuation and outlook  

The issue is priced with a P/BV ratio of 8.84 times, calculated using its Net Asset Value (NAV) of Rs 27.14 as of March 31, 2024. At the upper price cap, it is priced at a P/BV ratio of 10.55 times, considering its post-IPO NAV.

When we calculate the PE ratio for the company by considering the FY24 earnings relative to the fully diluted paid-up equity capital, the resulting PE ratio stands at 29.

From a returns standpoint, the company has significantly outperformed its peers. However, from a valuation perspective, the offer appears relatively aggressively priced.

Given the current market uncertainties in recent trading sessions and the likelihood of strong competition among mainboard IPOs, including the highly awaited Bajaj Housing Finance IPO, subscription levels across all IPOs may be impacted. Investors should take into account prevailing market sentiment and subscription trends when making decisions.

Considering the company's strong financial track record, we recommend that risk-tolerant investors with surplus funds consider subscribing to the issue. However, a cautious approach is advisable, with a moderate subscription to the offering, potentially applying for a lower quantity.