Quadrant Future IPO review (Avoid)

•    The company is engaged in developing research based new generation train control and signaling systems under “Kavach”.
•    After posting average performance for FY22, it marked almost static top lines for FY23 and FY24, with boosted profits.
•    Surprisingly, it marked loss for H1-FY25 leading to a negative P/E for its IPO price.
•    Based on FY24 earnings, the issue appears exorbitantly priced. 
•    There is no harm in skipping this pricey bet, that carries “High Risk/Low Return” tag.

ABOUT COMPANY:
Quadrant Future Tek Ltd. (QFTL) is a research oriented company, engaged in developing new generation Train Control and Signaling Systems under KAVACH project of the Indian Railways that offers the highest level of safety and reliability to rail passengers and also possess a Speciality cable manufacturing facility with Electron Beam Irradiation Centre. The speciality cables manufactured by the Company is used in Railways rolling stock and Naval (Defence) industry. Its facility also possesses end to end infrastructure capabilities for production of Solar & EV Cables. The Company has one facility for manufacturing, testing, researching, and developing specialty cables and also to manufacture the hardware required for Train Control & Signaling Division, which is situated at Village Basma Tehsil Banur, Dist Mohali.

The Company offers Speciality Cables for the industrial usage and other applications where fire and safety, light weight and long term performance are of utmost importance. The in-house formulated low smoke fire resistant polymers for insulation / sheath of the cables are treated with Electron Beam radiations that enable the crosslinking of the molecules to achieve much superior mechanical and thermal properties. The higher temperature bearing capacity enables the industry users to specify lower cross-section conductor / cable sizes that enables significant weight reduction. Thus, these Speciality cables are the ultimate choice for rail vehicles, trains, naval ship vessels & submarines, electric vehicles and fuel cell electric vehicles where weight & fire Safety are the most significant criterion for component / material selection. 

The Speciality cables also has major application in Solar & Wind installations where thermal resistance, long term durability & extended warranties are the key factors. It has installed a 2.5 MeV Electron Beam Industrial Accelerator for cable manufacturing plant which helps it to offer Speciality cables with improved mechanical properties, abrasion and thermal resistance, flame propagation resistance and deformation resistance properties without producing heat and an increased life as compared to chemically cross linked cables. The Company is accredited with various national and international certifications namely, NQA Certification Limited and ROHS Certification Private Limited for its speciality cables division. It has a wide product portfolio which includes railways rolling stock cables, naval defence, marine cables, solar PV cables, automotive cables, and connectors & junction boxes. 

The growing Indian landscape for railways serves as a key opportunity for the Company. With a huge emphasis on the modernization of Railways in India and thrust on Make in India, accompanied by ambition for high speeds trains, the requirement of Automated Train Safety and signaling systems is inevitable. The Indian Railways plays a crucial role in ensuring the smooth and secure operation of trains across the rail network. For enhancing the safety standards and faster movement, Indian Railways is developing and creating technology in areas such as signalling and telecommunication with installation of 'Kavach', the domestically developed Train Collision Avoidance System, on the Indian Railway network. It is a combination of hardware equipment and software that monitor train locations and movements. Once implemented by Indian Railways, KAVACH will be the world's most economical automatic train collision protection system that ensures safety of human life and the rail infrastructure. As of October 31, 2024, it had 295 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of fresh equity shares issue worth Rs. 290.00 cr. (approx. 10000000 shares at the upper cap). The company has announced a price band of Rs. 275 – Rs. 290 per equity shares of Rs. 10 each. The issue opens for subscription on January 07, 2025, and will close on January 09, 2025. The minimum application to be made is for 50 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 149.72 cr. for working capital, Rs. 24.38 cr. for capex on development for electronic interlocking system, Rs. 23.62 cr. for prepayment/repayment of term loans., and the rest for general corporate purposes. 

The company has allocated not less than 75% for QIBs, not more than 15% for HNIs and not more than 10% for Retail investors.

The sole Book Running Lead Manager (BRLM) to this issue is Sundae Capital Advisors Pvt. Ltd., while Link Intime India Pvt. Ltd. is the registrar to the issue. Arete Securities Ltd. is the syndicate member.

The company has issued/converted entire equity shares at par value so far. It has also issued bonus shares in the ratio of 2 for 1 in April 2024. The average cost of acquisition of shares by the promoters is Rs. NIL, Rs. 1.53, Rs. 2.13, Rs. 2.33, Rs. 2.52, Rs. 2.68, Rs. 2.86, Rs. 2.96, Rs. 3.14, and Rs. 3.33 per share. 

Post-IPO, its current paid-up equity capital of Rs. 30.00 cr. will stand enhanced to Rs. 40.00 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 1160.00 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit/ - (loss) of Rs. 104.29 cr. / Rs. 0.19 cr. (FY22), Rs. 152.95 cr. / Rs. 13.90 cr. (FY23), and Rs. 151.82cr. / Rs. 14.71 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it posted a loss of Rs. – (12.11) cr. on a total income of Rs. 65.14 cr. 

For the last three fiscals, the company has posted an average EPS of Rs. 4.09 and an average RoNW of 34.41%. The issue is priced at a P/BV of 25.46 based on its NAV of Rs. 11.39 as of September 30, 2024, but the IPO ad is missing its post-IPO NAV data.

If we attribute FY25 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a negative P/E. Based on FY24 earnings, the P/E stands at 78.80. Thus the issue is exorbitantly priced. 

The company reported PAT margins of 1.82% (FY22), 9.04% (FY23), 9.68% (FY24), - (18.50) % (H1-FY25), and RoCE margins of 8.43%, 27.20%, 26.12%, - (10.34) % for the referred periods, respectively. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. It has already adopted a dividend policy in March 2024, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Kernex Micro, HBL Power, Apar Ind., and Polycab India, as their listed peers. They are trading at a P/E of NA, 50.0 51.8, and 60.4 (as of January 03, 2025). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER’S TRACK RECORD:
The BRLM associated with the offer have handled 1 pubic issues (SME) in the past three fiscals, out of the only listing that took place so far, no issue had closed below the issue price on listing date.