KRN Heat Exchanger IPO: Expert Review and Recommendations

KRN Heat Exchanger and Refrigeration Limited IPO Details:

IPO Date: 25th to 27th September, 2024
Total Issue Size: ~1.55 Cr shares
Fresh Issue: ~ Rs. 341.95 Crores 
Price Band: Rs. 209 – Rs. 220 per share
IPO Issue Size: ~ Rs. 341.95 Crores 
Lot Size: 65 shares and multiples thereof

About KRN Heat Exchanger and Refrigeration Ltd Company

KRN Heat Exchanger specializes in the manufacturing of finned tube heat exchangers for the Heating, Ventilation, Air Conditioning, and Refrigeration (HVAC&R) industry. The company's heat exchangers are primarily made from non-ferrous metals, specifically copper and aluminum. KRN's product portfolio includes condenser coils, evaporator units, evaporator coils, header and copper parts, fluid and steam coils, as well as sheet metal components.

Industry Size

The global heat exchanger market is projected to be valued at USD 15.6 billion by 2025, with the industry's annual turnover growing at a compound annual growth rate (CAGR) of 6.2% between 2019 and 2022. This growth is primarily driven by the increasing demand for sustainable, low-energy consumption solutions that are also cost-effective.

In India, the heat exchanger market reached an annual value of USD 625 million in 2022, with the industry's turnover increasing at a CAGR of 10% between 2019 and 2022. The Indian market accounts for approximately 4% of the global market, indicating significant potential for further growth.

Among the various product segments in the Indian heat exchanger industry, shell and tube heat exchangers, followed by finned tube heat exchangers, hold the largest market share. KRN Heat Exchanger predominantly manufactures finned tube heat exchangers for the HVAC industry.

Demand Driver for Domestic HVAC Market:

• Industrial Segment: The chemical manufacturing and oil & gas industries are the two largest consumers of heat exchangers in India, each accounting for nearly one-fifth of the total industry turnover in 2022. KRN primarily serves companies in the pharmaceutical, food & beverage, and chemical sectors. Capital expenditure (Capex) growth in these sectors is a key indicator of the rising demand for HVAC systems emerging from the manufacturing sector.
• Building Segment: Currently, buildings account for approximately 20% of energy usage in India. With the Indian government actively promoting efficient energy usage, the need for installing HVAC systems that optimize energy consumption has become increasingly important. Despite this growing demand, the current penetration of HVAC systems in the Indian building sector is less than 5%. Within this segment, commercial buildings represent the largest share.

According to industry reports, the annual turnover in the finned tube heat exchanger market is expected to increase from USD 133 million in 2022 to nearly USD 277 million by 2029, nearly doubling in size.

Risk

• Raw Material Price: Raw materials account for 80% of the total cost of manufacturing of heat exchangers, making the company highly susceptible to fluctuations in the prices of these materials, including copper, aluminum, steel, and other metals. This exposure presents a significant risk to the company due to the volatile nature of raw material prices.
• Capital-Intensive Business: The heat exchanger industry is both capital and technology-intensive, creating a significant entry barrier for new competitors. Despite these high entry barriers, there is intense pressure on existing players to innovate and expand their product offerings. As traditional manufacturing techniques evolve into newer methods, consumers are increasingly demanding products that deliver tangible improvements. Consequently, manufacturers must invest heavily in research and development (R&D) to enhance their manufacturing capabilities.
• Cyclicality nature of business: The major demand drivers for heat exchangers are the capital expenditure (Capex) growth in the manufacturing sector and commercial building segment. This makes the heat exchanger business inherently cyclical, as demand in the commercial building sector fluctuates with economic cycles. Similarly, Capex in the manufacturing sector is also closely tied to the broader economic environment, further contributing to the cyclical nature of the industry.

Competition

India has numerous companies that offer heat exchangers, with multiple suppliers providing similar products. This gives buyers a wide range of options at competitive prices, resulting in high bargaining power in the market. Consequently, companies face limitations in their ability to pass on price increases. Additionally, the presence of several global players in the Indian market, such as Alfa Laval AB and Kelvion Holdings GmbH, who possess strong balance sheets and extensive expertise in the heat exchanger industry, makes it challenging for local companies to gain market share.

Objects of the Issue

The net proceeds from the fresh issue is to be utilized for the following;

• Invest in the wholly owned subsidiary, KRN HVAC Products Pvt Ltd for setting up a new manufacturing facility at Neemrana, Alwar, Rajasthan, and
• General corporate purposes.

Financial

Over the past three years, the company has increased its revenue from Rs 76 Cr to Rs 247 crore, achieving a compound annual growth rate (CAGR) of 48%. During the same period, the company improved its gross margin from 20% to 29%, primarily due to fluctuations in raw material prices, including copper, aluminum, and stainless steel. This improvement in margins has also positively impacted other key financial metrics. 

Management

Santosh Kumar Yadhav is one of the Promoters, as well as the Chairman and Managing Director of the company. He holds a Diploma in Business Management from the Institute of Management Technology, Ghaziabad, and a Diploma in Mechanical Engineering from the Board of Technical Education, Rajasthan. He has gathered great experience by working as the head of the operations department with LLOYD Electric and Engineering Limited. He has more than 19 years of experience in the business of manufacturing heat exchangers and refrigeration units. 

Anju Devi: She is one of the Promoters and the Whole Time Director of the company. She has cleared the secondary examination conducted by the Board of Secondary Education, Rajasthan. She provided consultancy services in Lloyd Electric and Engineering Limited for two years from April 2012 to March 2014.

Manohar Lal is the Non-Executive Director of the company. He passed his Secondary examination, administered by the Board of Secondary Education, Rajasthan in 1995. He has served in the Indian Army for more than 21 years.

MoneyWorks4me Opinion

Currently, KRN Heat Exchanger operates at a capacity utilization rate of 74%, up from 49% two years ago. The company has nearly doubled its capacity for evaporator coils and condenser coils, increasing from 389,718 units to 566,551 units. This growth reflects a strong demand trend in recent years. Higher commodity prices have further accelerated revenue growth. However, sustaining such revenue and margin levels may prove challenging going forward. To maintain growth, the company will need to expand its production capacity, which will be capital-intensive. At an upper band of Rs. 220 KRN demands a market capitalization of Rs.~1,320 Cr which translates to a PE of 34x which look expensive.

We recommend that long-term investors to Avoid. Aggressive Investors can apply for short term listing gains.

KRN Heat Exchanger and Refrigeration Limited IPO Tentative Timetable:

Retail Individual Investor IPO Lot Size:

KRN Heat Exchanger and Refrigeration Limited IPO FAQs:

When will the KRN Heat Exchanger and Refrigeration Ltd IPO open?

KRN Heat Exchanger and Refrigeration Ltd IPO will open for subscription on Wednesday, 25th September 2024, and closes on Friday, 27th September 2024. 

What is the price band of KRN Heat Exchanger and Refrigeration Ltd IPO?

The price band for KRN Heat Exchanger and Refrigeration Ltd IPO is Rs. 209-220/share. 

What is the lot size for the KRN Heat Exchanger and Refrigeration Ltd IPO? 

Retail investors can subscribe to the IPO minimum lot size is 65 shares, up to a maximum of 13 lots i.e. Rs. 1,85,900/-.

What is the issue size of KRN Heat Exchanger and Refrigeration Ltd IPO?

The total issue size is ~ Rs. 341.95 Cr. 

When will the basis of allotment be out?

Allotment will be finalized on September 30th and refunds will be initiated by October 1st. Shares allotment will be credited in Demat accounts by October 1st. 

What is the listing date of KRN Heat Exchanger and Refrigeration Ltd’s IPO? 

The tentative listing date of the KRN Heat Exchanger and Refrigeration Ltd IPO is October 3rd, 2024.

What if I do not get the allotment?

If you do not get an allotment of this IPO we recommend you to check out our MoneyWorks4me Core Superstars which helps you build a strong portfolio right away. It offers a Model Portfolio of high-quality stocks Buy/Sell alerts on Quality stocks at a reasonable price and SIP recommendations on stocks. With the help of MoneyWorks4me Core Superstars, you would have picked winners like Asian Paints, Divis Labs, Titan, Pidilite, Cipla, Bharti Airtel, and ICICI Bank.