Carraro India IPO review (May apply)

•    The company enjoys preferred partner status for Tier 11 solutions provider for critical components required by agriculture/construction and off-highway vehicles.
•    The company posted steady growth in its top lines with commensurate rise in its bottom lines for the reported periods, 
•    Based on recent earnings, the issue appears aggressively priced.
•    Considering company’s niche play in the segment, well-informed investors may park moderate funds for long term.

PREFACE:
Despite humble urge from the regulator for non-clubbing/bunching of more than 2 IPOs a day for opening for subscription, we are set to mark bunching of five mainboard IPOs that are opening on December 19, 2024, and here again very short time was spared for analysts to understand the pros and cons for the IPOs. Well, this is the first IPO from the set of 5 IPOs that are scheduled to mark opening on December 19, 2024, others to follow are TransRail Lighting, DAM Capital, Sanathan Textiles, Concord Enviro. We have one more set of 3 mainboard IPOs lined up for opening on December 20, 2024, and they are Ventive Hospitality, Senores Pharma, and Carraro India. No doubt, this provided an ample choice of selection for investment, it also makes it difficult to manage funding. Let us hope that the regulator is definably turns strict on this matter and brings some amicable solution.

ABOUT COMPANY:
Carraro India Ltd. (CIL) is a technology driven integrated supplier that develops complex engineering products and solutions for original equipment manufacturer (“OEM”) customers. It is an independent tier 11 solution provider of axles, transmission systems and gears for the agricultural tractor and construction vehicle industries in India. The company supports the full value chain of services as a solution provider for axles, transmission systems, gears and other related components with in-house product design manufacturing capabilities.

Its Promoter, Carraro S.p.A., is the parent company of the Carraro Group which designs, manufactures and sells transmission systems (axles, transmissions and drives) mainly for agricultural and construction equipment for off highway vehicles, in addition to marketing a wide range of gears for diverse sectors, from automotive to trucks to agricultural and construction vehicles. The Carraro brand is owned by Carraro S.p.A. and licensed to CIL pursuant to a licensing agreement with Carraro S.p.A. According to the Markets and Markets Report, the Company was among the pioneers to enter the agricultural tractor and construction vehicle component market with its dedicated R&D team and center as the Carraro Group entered India in 1997 and established its manufacturing facility in Pune and R&D center in 2006. It has been present in India for 27 years and have developed an extensive network with local and international customers and suppliers based in India. 

As an early-mover, it had more time than its competitors to understand the market, identify customer needs and develop lasting customer relationships. As a result of customized products, customers are subject to high switching costs in case of a change of manufacturer. It primarily manufacture axles and transmission systems for agricultural tractors and construction vehicles such as backhoe loaders, soil compactors, cranes, self-loading concrete mixers and small motor graders. CIL’s products are mission critical for customers, as its products constitute important components of customers’ final products. It provides a diverse range of products including axles and transmission systems of different HP ranges for off-highway vehicles in the agricultural tractor and construction vehicle sectors, as well as gears, shafts and ring gears for industrial and automotive vehicles.

As of September 30, 2024, CIL and CTIPL had a total of 1600 employees, consisting of 965 full-time employees and 635 contractual temporary employees. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route secondary IPO worth Rs. 1250 cr. (approx. 17755682 equity shares at the upper cap). The company has announced a price band of Rs. 668 – Rs. 704 per equity shares of Rs. 10 each. The issue opens for subscription on December 20, 2024, and will close on December 24, 2024. The minimum application to be made is for 21 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 31.23% of the post-IPO paid-up equity capital. This being a pure secondary issue, no funds are going to the company.

The joint Book Running Lead Managers (BRLMs) to this issue are Axis Capital Ltd., BNP Paribas, and Nuvama Wealth Management Ltd., while Link Intime India Pvt. Ltd., is the registrar to the issue. Nuvama Wealth Management Ltd., is the syndicate member.

Having issued initial equity shares at par value, the company issued further equity shares at a fixed price of Rs. 23 in November 2008. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 15.18, Rs. 34.75, Rs. 39.09, and Rs. 311.63 per share. 

Post-IPO, its current paid-up equity capital of Rs. 56.85 cr. will remain same as this is an OFS. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 4002.35 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 1520.05 cr. / Rs. 22.43 cr. (FY22), Rs. 1733.30 cr. / Rs. 48.46 cr. (FY23), and Rs. 1806.55 cr. / Rs. 62.56 cr. (FY24). For H1 of FY25 ended on September 30 2024, it earned a net profit of Rs. 49.73 cr. on a total income of Rs. 922.74 cr. 

For the last three fiscals, the company has posted an average EPS of Rs. 9.00 and an average RoNW of 14.52 %. The issue is priced at a P/BV of 9.54 based on its NAV of Rs. 73.78 as of September 30, 2024, as well as on its post-IPO NAV per share (at the upper cap).

If we attribute FY25 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 40.23, and based on FY24 earnings, the P/E stands at 63.94. The issue appears aggressively priced on the basis of its recent earnings. 

For the reported periods, the company has posted PAT margins of 1.50% (FY22), 2.83% (FY23), 3.50% (FY24), 5.44% (H1-FY25), and the RoCE margins of 10.00%, 16.30%, 19.35%, 13.13% for the referred periods respectively. 

DIVIDEND POLICY:
The company paid a dividend of 8.79% for FY23, and 54.53% for FY24. It will adopt a prudent dividend policy, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Escorts Kubota, Schaeffler India, Sona BLW, Ramkrishna Forgings, Happy Forgings, and Action Constructions, as their listed peers. They are trading at a P/E of 31.6, 55.0, 65.9, 44.7, 37.4, and 49.4 (as of December 18, 2024). However, they are not truly comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
The three BRLMs associated with the offer have handled 61 pubic issues in the past three fiscals, out of which 16 issues closed below the offer price on the listing date.