Uniparts India coming with an IPO to raise upto Rs 835.61 crore

Uniparts India

• Uniparts India is coming out with a 100% book building; initial public offering (IPO) of 1,44,81,942 shares of Rs 10 each in a price band Rs 548-577 per equity share.
  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
  
• The issue will open for subscription on November 30, 2022 and will close on December 2, 2022.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 10 and is priced 54.80 times of its face value on the lower side and 57.70 times on the higher side.
  
• Book running lead managers to the issue are Axis Capital, DAM Capital Advisors and JM Financial.
  
• Compliance Officer for the issue is Jatin Mahajan.
  

Profile of the company

The company is a global manufacturer of engineered systems and solutions and is one of the leading suppliers of systems and components for the off-highway market in the agriculture and construction, forestry and mining (CFM) and aftermarket sectors on account of its presence across over 25 countries. It is a concept-to-supply player for precision products for off-highway vehicles (OHVs) with presence across the value chain. Its product portfolio includes core product verticals of 3-point linkage systems (3PL) and precision machined parts (PMP) as well as adjacent product verticals of power take off (PTO), fabrications and hydraulic cylinders or components thereof. It has a leading presence in the manufacture of 3PL and PMP products globally on account of it serving some of the largest global companies. Most of its products are structural and load bearing parts of the equipment and are subject to strict tolerances, specifications and process controls. A series of precision engineering process steps converge in to manufacturing of these products. It also caters to the aftermarket segment especially for 3PL product range. It provides replacements of 3PL parts to organized aftermarket retailers and distributors in North America, Europe, South Africa and Australia.

The company offer fully integrated engineering solutions from conceptualization, development and validation to implementation and manufacturing of its products. The conceptualization stage involves acquiring market intelligence, assessing customer requirement and formulating customized strategy for individual customers. The development phase includes product designing, material procurement and processing. This is followed by the validation phase, which involves prototyping, testing and feasibility analysis. Its in-house manufacturing and implementation competencies include forging, machining, fabrications, heat treatment, surface finish, logistics, quality and testing, design and validation. By means of servicing its aftermarket segment customers, its products find indirect access to a large set up of retail stores across geographies for aftermarket components. Within the aftermarket category, it is focused on the ‘will-fit’ parts segment, sold to distributors and retail chain stores.

Proceed is being used for:

• Carrying out the Offer for Sale of up to 14,481,942 Equity Shares by the Selling Shareholders.
  
• Achieving the benefits of listing the Equity Shares on the Stock Exchanges.
  

Industry overview

The 3PL industry has surged on the back of a strong growth in overall tractor production and increase in average price of 3PL parts in the market. Between 2021 and 2026, with increasing mechanisation in India’s agriculture sector, supply of tractors is expected to increase at CAGR of around 4.7%, coupled with rise in average price of 3PL parts in the market, due to hike in raw material cost. This will lift demand for 3PL at CAGR of around 7.8%. Precision components are highly precise machinery parts manufactured based on custom specifications of customers, used for industrial and machine-based companies in different applications, like CNC turning. The precision components generally produced with a diversity of materials including metals such as stainless steel, brass, copper, bronze, aluminium, steel, titanium, specialized alloys, etc., to ensure stability and functions of engineering.

India’s tractor market has expanded at a spectacular pace in last few years. For a long time since Independence, the market was dominated by mid-sized tractors with engine capacity of 30-40 HP. But it has diversified in recent years, which is evident in the rising demand for both bigger (over 50 HP) and smaller (below 20 HP) tractors. With growing need for greater precision in farm operations, especially in areas where intensive multi-crop farming is performed, demand for tractors of different sizes and utility values is bound to increase. Average size of tractors in India is 35 HP, which is much smaller than in US and Europe. In last five years, it can see a clear trend of farmers moving towards less than 51 HP segment. As of Fiscal 2022, this segment grew by 75% as compared to Fiscal 2015. 41-50 HP segment share has also been increasing marginally in the past five years. However, 31-40 HP segment’s share has been declining in the past five years.

Construction equipment can be broadly categorised as earthmoving and mining, material handling, road building, concreting, and material processing equipment. In Fiscal 2018, earthmoving and mining equipment (EME) makes up a major share (approximately 70%) of the construction equipment industry. EME, in turn, comprises backhoe loaders, excavators, wheeled loaders, skid steer loaders, and dumpers. Excavators, backhoe loaders, and wheeled loaders account for 85% - 90% of the EME industry’s revenue. In the construction sector, EME is mainly used in infrastructure and industrial construction. These equipment are used in roads, hydropower projects, irrigation, industrial construction, mining, agriculture, waste management, and logging.

Pros and strengths

Leading market presence in global off-highway vehicle systems and components segment: The company is a global manufacturer of engineered systems and solutions and is one of the leading suppliers of systems and components for the off-highway market in the agriculture and CFM and aftermarket sectors on account of its presence across 25 countries. It has a leading presence in the manufacture of 3PL and PMP products globally on account of it serving some of the largest global companies including Bobcat, TAFE and Yanmar. It has a presence in key markets worldwide, including North and South America, Europe, Australia, Japan and India. The company has been able to leverage its leadership position and customer confidence to expand into the large construction equipment market, with customers such as Kobelco. It also covers the segment of organized aftermarket and large farm retail stores by servicing its customers including Kramp and TSC. Its leading presence in the 3PL and PMP verticals inspires customer confidence in its products, which is expected to fuel its growth going forward.

Engineering driven, vertically integrated precision solutions provider: The company provides comprehensive solutions and manufacture high-quality, critical products and components for OHV industry. Most of its products are critical, structural and load bearing parts of equipment and are subject to strict tolerances and specifications. A series of precision engineering process steps converge to manufacture these products. It is present across various levels of the OHV component value chain, providing concept-to-supply solutions for its customers. Its offerings include 3PL and PMP and also address adjacent products such as PTO, fabrications and hydraulic cylinders. Its significant backward and forward integration reduces its dependence on external supply and support services and enables maintenance of quality controls required to service global OEMs and aftermarket players. Over the years, the company has evolved from a component supplier to a provider of complete assemblies of precision engineered products and end-to-end solutions ranging from product conceptualization, design, prototyping, testing, development and assembly to customized packaging and delivery, becoming an integral part of certain of its customers’ global supply chains.

Global business model optimizing cost-competitiveness and customer supply chain risks: The company’s global business model serves as an effective solution for customers seeking to rationalize their global sourcing and supply chain by providing them multiple choices in the form of Local Deliveries, Direct Exports and Warehouse Sales, while at the same time helping it to manage costs and increase its margins. It has grown its global business model in a scalable manner, optimized to provide premium-priced Local Deliveries manufactured on-shore in smaller lots and with shorter lead times, as well as cost-competitive offshore deliveries from India with longer lead times and inventory cycles. In its experience, its India-led manufacturing and overseas-led warehousing coupled with localized customer service capabilities have been a key driver for the growth of its operations. Its global business model also enables it to diversify its margins based on different delivery models for the same product.

Long-term relationships with key global customers: The company has developed long-term relationships with global customers in the agriculture and CFM sectors, such as TAFE, Claas Tractors and Kramp. Four of its top five customers (based on contribution to its revenue from operations during Fiscal 2021) have been its customers for over 10 years. TAFE and Kramp are some of the customers with whom it has had relationships for over 15 years, while with customers like Yanmar, it has developed relationships for over 10 years. Customers it acquired in 2017 onwards, accounted for 6.97%, 11.13%, 9.73% and 9.46%, respectively, of its revenue from operations in Fiscal 2020, 2021 and 2022 in and the three months ended June 30, 2022, with one such customers being a part of its top five customers by revenue in Fiscal 2022, reflecting its ability to develop and strengthen relationships with customers.

Risks and concerns

Reliance on third parties for certain aspects of business: The company relies on third parties for the supply of raw materials, components, contract labour and power required for the manufacture of its products, as well as for performance of certain processes and services carried out at its manufacturing, warehousing and office premises including waste management and facility management functions. Its ability to identify and build relationships with reliable vendors worldwide contributes to its growth and its successful management of its inventory as well as other aspects of its operations. It has a large vendor base for the supply of raw materials and in the future, it may discontinue its association with any vendor to meet its business requirements. Further, while there have not been any material instances in the past three Fiscals and in the three months ended June 30, 2022 where it has cancelled or has not renewed contracts with third party raw material suppliers, there can be no assurance that such instances of cancellation or non-renewal will not occur in future. Although it has an in-house vendor rating process, it cannot assure that this process entirely eliminates the risk of un-reliable vendors.

Face competition: The company’s domestic and international operations are subject to competitive pressures in all its product lines. It competes directly and indirectly with other manufacturers and suppliers of engineered components to OEMs (including OEMs that produce such components for their own use) and in the aftermarket. It competes on the performance, functionality, customer service and support, availability, price and brand recognition of its products. Increased competition may force it to improve its process, technical, product and service capabilities and / or lower its prices or result in loss of customers, which may adversely affect its profitability and market share, in turn, affecting its business, financial condition, results of operations and prospects. The greater financial, marketing, technological and other resources of certain of its competitors may enable them to commit larger amounts of capital in response to changing market conditions, or to achieve substantially more market penetration in certain segments of those markets in which it operate or to anticipate the course of market developments and trends more effectively than it does and to develop product and process innovations and capabilities that may put it at a disadvantage.

Business impacted by cyclical effects in global and domestic economy: The company’s sales volumes, profitability and liquidity are closely tied to the level of agricultural and CFM activity worldwide, as its customers and end-users operate in the agriculture and CFM sectors and are, therefore, affected by factors that affect the agriculture and CFM sectors, including the levels of investment and production in these specific sectors of the global and domestic economies. The overall contribution of the agriculture and CFM sectors to overall economic growth and stability further underlines the impact caused by the level of activity in the agriculture and CFM sectors. In particular, the agricultural sector is inherently seasonal and is further impacted by factors including agricultural commodity prices, costs of fertilizers and adverse weather conditions. If it is unable to adequately anticipate and respond to changing conditions affecting the agriculture and CFM sectors and the related cyclical effects on its customers, vendors and on its own operations, its business, financial condition, results of operations and prospects may be adversely affected.

Insurance coverage may not adequately protect from all material risks and liabilities: The company’s business, including its manufacturing operations in particular, carry an inherent risk of exposure to substantial liability for product liability, property damage, personal injury or death, environmental pollution or other damage. It maintains insurance coverage in respect of its buildings, plant and machineries, fixtures and fittings, other equipment and inventories, covering losses due to fire (including standard fire and allied perils) and burglary, as well as fidelity guarantee and money insurance policies. As of June 30, 2022, it has 100% or more insurance coverage of book value of its fixed assets and inventories. Further, in Fiscal 2020, 2021 and 2022 and in the three months ended June 30, 2022, it did not incur any loss vis-a-vis its insurance cover. In addition, it covers its employees under group accident and medical insurance programs, except in respect of locations where its workforce is covered under the ESI scheme. It has also obtained a group term life policy for its employees in India.

Outlook

Uniparts is a global manufacturer of engineered systems and solutions and is one of the leading suppliers of systems and components for the off-highway market in the agriculture, construction forestry & mining (CFM) and aftermarket sectors on account of its presence across over 25 countries. It provides comprehensive solutions and manufacture high-quality, critical products and components for Off Highway Vehicles (OHV) industry including complete assemblies of precision engineered products and end-to-end solutions ranging from product conceptualization, design, prototyping, testing, development and assembly to customized packaging and delivery. Its product portfolio includes core product verticals of 3-point linkage systems (3PL) and precision machined parts (PMP) as well as adjacent product verticals of power take off, fabrications and hydraulic cylinders or components thereof. It serves OHV players including OEMs and aftermarket retail store chains, through its global business model based on its dual-shore integrated manufacturing, warehousing and supply chain management systems and solutions. On the concern side, the company’s sales volumes, profitability and liquidity are closely tied to the level of agricultural and CFM activity worldwide, as its customers and end-users operate in the agriculture and CFM sectors and are, therefore, affected by factors that affect the agriculture and CFM sectors, including the levels of investment and production in these specific sectors of the global and domestic economies. 

The issue has been offered in a price band of Rs 548-577 per equity share. The aggregate size of the offer is around Rs 793.61 crore to Rs 835.61 crore based on lower and upper price band respectively. On the performance front, total income increased by 29.90% from Rs 9 47.68 crore in Fiscal 2021 to Rs 1231.03 crore in Fiscal 2022, primarily due to increase in sale of products (finished goods (net of returns, rebate, etc.)) and increase in scrap sales. The company has recorded a profit after tax for the year of Rs 166.88 crore in Fiscal 2022 compared to Rs 93.14 crore in Fiscal 2021. Meanwhile, the company intends to increase its sales and customer penetration by targeting new customer accounts and expanding its existing customer accounts in its principal markets by offering its entire range of products. It intends to offer its customers additional 3PL and PMP products to meet its customers’ requirements and thereby growing its share of customers’ spend per vehicle. It may also seek to expand its international warehousing and distribution operations, based on demand and delivery logistics in various geographies, to fuel its growth going forward.