Pritika Engineering Components coming with an IPO to raise Rs 9.42 crore

Pritika Engineering Components

• Pritika Engineering Components is coming out with an initial public offering (IPO) of 32,48,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 29 per equity share.
  
• The issue will open for subscription on November 25, 2022 and will close on November 30, 2022.
  
• The shares will be listed on NSE Emerge Platform.
  
• The share is priced 2.90 times higher to its face value of Rs 10.
  
• Book running lead manager to the issue is GYR Capital Advisors.
  
• Compliance Officer for the issue is Chander Bhan Gupta.
  

Profile of the company

The company caters to the tractor industry in the automotive sector with major dependency on Original Equipment Manufacturers. It Supplies its product directly to OEM and through its promoter company Pritika Auto Industries and group company Pritika Industries. It engaged in the business of manufacturing of precision machined components primarily for automotive industry, especially for tractors, trucks, and other commercial vehicles, etc.

The company manufactures various Tractors & Automobile components like End Cover, Cover Sealed Brake, Differential Case, Cover Hydraulic Lift, Cover Transcase, Front Wheel hub, Fly Wheel Housing, Rear Axle Casings, Hydraulic Lift Covers, Brake Housing & Front Engine Supports etc. With Vision to be First choice among Original Equipment’s Manufactures for Machined Castings & to be One of the Largest Producers of Machined Castings in India; Mission to Produce 35,000 MT of Machined Castings by Year 2025. In FY22, it manufactured 6619 MT with an installed capacity of 12000 MT.

Proceed is being used for:

• Investment in relation to the new unit set up by the company’s wholly owned subsidiary, Meeta Castings (MCL).
  
• General Corporate purposes.
  

Industry overview

The Indian auto-components industry has experienced healthy growth over the last few years. The auto-components industry expanded by a CAGR of 3.28% from FY16 to FY20 to reach $ 45.90 billion in FY21. The industry is expected to reach $ 200 billion by FY26. Due to high development prospects in all segments of the vehicle industry, the auto component sector is expected to rise by double digits in FY22. The auto-components industry accounts for 7.1% of India’s Gross Domestic Product (GDP) and employs as many as 5 million people directly and indirectly. A stable government framework, increased purchasing power, large domestic market, and an ever-increasing development in infrastructure have made India a favourable destination for investment.

The industry can be broadly classified into organised and unorganised sectors. The organised sector caters to original equipment manufacturers (OEMs) and consist of high-value precision instruments while the unorganised sector comprises low-valued products and caters mostly to the aftermarket category. The automobile component industry turnover stood at Rs. 1.96 lakh crore ($ 26.6 billion) between April–September 2021 and is expected to witness revenue growth of 15-17% during the fiscal year. In first half of FY22, exports of auto components grew by 76% to Rs. 68,746 crore ($ 9.3 billion). As per the Automobile Component Manufacturers Association (ACMA) forecast, automobile component exports from India is expected to reach $ 80 billion by 2026. The Indian auto components industry is expected to reach $ 200 billion in revenue by 2026.

Pros and strengths

Quality standards: Quality plays one of the most vital role in the success of any organization. The company is focused on providing quality products. It constantly strived to improve its industrial processes at every step in the production chain. Its focus on quality is evidenced by the quality certifications and accreditations that its facility has obtained from recognized agencies such as IATF 16949:2016 and MSME Sustainable ZED Bronze Certification. Ensuring global standard products will attract domestic and international customers to the company.

Wide product range and product segments: The company manufactures various components of several specifications. The company manufactures customized products for tractors, commercial vehicles & other construction equipments, etc which are supplied to Original Equipment Manufacturers (OEMs) directly/through its group companies. Maintaining a diverse portfolio in its business provides it with an opportunity to cater to diverse needs of its different customer segment.

Strong & experienced R&D team: With the ever changing business scenario, new products are always in development. So to cater to the customized needs of the OEMs, the company’s group companies have a highly experienced R&D team who design various new & complicated parts as requested by its customers in competitive timeline.

Risks and concerns

Do not have firm commitment long-term supply agreements with customers: The company does not generally have firm commitment long-term supply agreements with its customers and instead rely on purchase orders issued by its customers from time to time that set out the commercial terms, delivery conditions and the indicative volumes to be procured from it. Where it has supply agreements with its customers, these agreements set forth the terms of sales but do not bind customers to any specific products, specifications, purchase volumes or duration and can be terminated by its customers with or without cause, with little or no advance notice and without compensation. In addition, such supply agreements provide flexibility to its customers to place an order for a lesser quantity of products in the schedules given to it despite a higher quantity specified in the contract. Customers may also place an order for products with different specifications from those stated in the contract. There is no commitment on the part of the customer to continue to place orders with it.

Pricing pressure from customers may adversely affect gross margin: The company manufactures and supply complex, high-quality precision forged and machined components for the automotive sectors. It has in the past experienced and may continue to experience pressure from its customers to reduce its prices, which may affect its profit margins going forward. In addition, as any price reduction is the result of negotiations and factors that may be beyond its control, it, like other manufacturers, must be able to reduce operating costs and increase operating efficiencies in order to maintain profitability. As its business is very capital intensive, requiring it to maintain a large, fixed cost base, its profitability is dependent, in part, on its ability to spread fixed costs over higher sales volume. However, it may not be able to spread such fixed costs effectively as its customers generally negotiate for larger discounts in price as the volume of their orders increases. If it is unable to offset customer price reductions in the future through improved operating efficiencies, new manufacturing processes, sourcing alternatives and other cost reduction initiatives, its results of operations and financial condition may be materially adversely affected.

Face competition: The company faces competition in India, which is based on many factors, including product quality and reliability, breadth of product range, product design and innovation, technology, manufacturing capabilities, distribution channels, scope and quality of service, price and brand recognition. It competes with global competitors to retain its existing business as well as to acquire new business. Some of its competitors may have certain advantages, including greater financial, technical and/ or marketing resources, which could enhance their ability to finance acquisitions, fund international growth, respond more quickly to technological changes and/ or operate in more diversified geographies and product portfolios.

Outlook

Pritika Engineering Components is engaged in the business of manufacturing of precision machined components primarily for the automotive industry, especially for tractors, trucks, and other commercial vehicles, etc. The company manufactures various Tractors & Automobile components like End Covers, Cover Sealed Brakes, Differential Cases, Cover Hydraulic Lift, Cover Transcase, Front Wheel hubs, Fly Wheel Housing, Rear Axle Casings, Hydraulic Lift Covers, Brake Housing & Front Engine Supports etc. The company manufactures customized products for tractors, commercial vehicles & other construction equipment, etc which are supplied to Original Equipment Manufacturers (OEMs) directly/through the group companies. Its manufacturing unit is located in Punjab. The company's clients include Ashok Leyland, Eicher, Mahindra, Tafe, and Swaraj, among others. On the concern side, the company’s manufacturing facilities are subject to operating risks, such as the breakdown or failure of equipment, power supply or processes, industrial accident, labour disputes, natural disasters, epidemics or pandemics, such as the COVID-19 pandemic, and the need to comply with the directives of relevant government authorities.  Besides, it relies on third parties for the transportation services for the timely delivery of its products to its customers located in India. Its domestic operations use road transportation. Therefore, it faces a risk that there could be deficiency or interruption in these third-party services.

The company is coming out with an IPO of 32,48,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 29 per equity share to mobilize Rs 9.42 crore. On performance front, the total income of the company for fiscal year 2022 was Rs 5,739.58 lakh against Rs 3,244.36 lakh total income for Fiscal year 2021. An increase of 76.91% in total income. This increase was due to increase in production which was fuelled by increase in utilisation of installed capacity in the previous year thereby increasing sales, and & also other income increased due to increase from sale of share investments. Profit after tax for the Fiscal 2022 was at Rs 546.17 lakh against profit after tax of Rs 38.18 lakh in fiscal 2021, a 1330.51% increase. This was due to increase in other income from increase in sale of share investments. Meanwhile, the company looks to further strengthen its relationship with its existing customers and meet their requirements. Whilst it continues to cater to its existing customers, it is emphasizing a lot on establishing new its relationship with prospective customers so that it can expand its customer base in other areas as well.