ASK Automotive coming with IPO to raise upto Rs 833.91 crore

ASK Automotive

• ASK Automotive is coming out with a 100% book building; initial public offering (IPO) of 2,95,71,390 shares of Rs 2 each in a price band Rs 268-282 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 7, 2023 and will close on November 9, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 2 and is priced 134 times of its face value on the lower side and 141 times on the higher side.
• Book running lead managers to the issue are JM Financial, Axis Capital, ICICI Securities and IIFL Securities.
• Compliance Officer for the issue is Rajani Sharma.

Profile of the company

The company is the largest manufacturer of brake-shoe and advanced braking (AB) systems for two-wheelers (2W) in India with a market share of approximately 50% in Fiscal 2023 in terms of production volume for original equipment manufacturers (OEMs) and the branded independent aftermarket (IAM), on a combined basis. It has been supplying safety systems and critical engineering solutions for more than three decades with in-house designing, developing and manufacturing capabilities. Its offerings are powertrain agnostic, catering to electric vehicle (EV) as well as internal combustion engine (ICE) OEMs. Its brand ‘ASK’ is recognised as the leading brand in the 2W IAM in terms of production volume for Fiscal 2023 in India.

The company’s in-house design and engineering capabilities enable it to deliver complex precision components and solutions with a focus on quality and have allowed it to diversify its business in both the automotive and non-automotive sectors. It commenced its operations in 1989 by manufacturing brake shoe products for 2Ws and has since diversified its operations to include offerings such as: (i) AB systems; (ii) aluminium light weighting precision (ALP) solutions, where it is a prominent player for 2W OEMs in India with a market share of 9% in Fiscal 2023 in terms of production volume; (iii) wheel assembly to 2W OEMs; and (iv) safety control cables (SCC) products. It supply its portfolio of AB systems, ALP solutions, wheel assembly, and SCC products to OEMs in (i) the automotive sector for 2Ws, three wheelers (3Ws), passenger vehicles (PVs) and commercial vehicles (CVs), and (ii) the non-automotive sector for all-terrain vehicles (ATVs), power tools and outdoor equipment. 

Proceed is being used for:

• Carrying out the Offer for Sale of up to 29,571,390 Equity Shares by the Promoter. 
• Achieving the benefits of listing the Equity Shares on the Stock Exchanges.   

Industry Overview

The two-wheeler (2W) segment dominates the Indian auto industry (approximately 76% by volumes) and primarily dictates its tone. The industry saw a decline of 4.3% CAGR (between Fiscal 2018 to Fiscal 2023) in total 2W sales along with a marginal CAGR in the PVs and commercial vehicles (CVs) segments. A decline of 5.1% in three-wheelers (3Ws) was observed. Across segments, there was a decline owing to a slowdown in the economy, transition to BS VI norms, and the challenges posed by the COVID-19 pandemic in Fiscal 2022. However, the industry grew in Fiscal 2023 due to healthy pent-up demand created by two years of slump in sales volumes, owing to a pandemic-induced disrupted supply chain. In Fiscal 2023, the 2W industry recorded a growth of 18.7% whereas 3Ws, PVs and CVs grew by 87.8%, 26.8% and 34.5% year-on-year, respectively. Electronic vehicles (EVs) are gaining in India and are growing faster than internal combustion engine (ICE) vehicles across the 2W, 3W and four-wheelers (4W) sectors.

Growing population and urbanization provide for opportunities in the automotive sector, as they call for increasingly fast, safe, and reliable transportation modes. Electrification and other energy and eco-friendly solutions result from growing energy demand that is coupled with growing public awareness of energy efficiency and increasing public policies on energy, such as stricter emission laws. Evs hold a high potential for emissionefficient mobility solutions across the world, including 2Ws, 3Ws and PVs supported by government incentives for setting up EV charging infrastructure and vehicle purchase subsidies which have helped in increasing demand for Evs and reducing battery prices due to increase in production capacities across the world. The automotive industry is subject to seasonality throughout the year, as it has been seen in the past that during festive periods sales generally see an uptick whilst in periods of low economic activity such as during the monsoon season or during plant shutdowns, sales and offtake generally sees a downturn.

India is the largest motorized 2W market in the world, with domestic sales of 16.25 million units in Fiscal 2023. It constitutes approximately 76% of the total market comprising 2Ws, 3Ws, PVs and CVs by volume; and approximately 16% in value terms (approximately Rs 1,056 billion). Furthermore, India is also one of the largest exporters of 2Ws in the world. The Indian 2W production grew at a CAGR of -2.9% between Fiscal 2018 and Fiscal 2023, because of lower output in Fiscal 2020, owing to the transition to BS-VI norms and the COVID-19 pandemic-triggered challenges in Fiscal 2021. However, between Fiscal 2016 and Fiscal 2019, the industry posted 9% CAGR thanks to good monsoon, favorable economic situation, and rising exports. 2W demand in India declined at a meagre 2% CAGR between Fiscal 2016 and Fiscal 2021, after seeing double digit decline of 18% in Fiscal 2020. Domestic 2W sales volume further declined by 13% in Fiscal 2021 due to nationwide and local lockdowns to contain the spread of COVID-19 and the subsequent toll on economic activity actively affected the income of the average 2W buyer. However, exports clocked 5% CAGR over the same period. 

Pros and strengths

Well established manufacturer of safety systems and critical engineering solutions for some of India’s largest OEMs: The company supplies its products to 2W OEMs in India, the largest motorized 2W market in the world, with domestic sales of 16.25 million units in Fiscal 2023. It supplied its products to all of the top six 2W OEMs (in terms of production volume and value) in India during Fiscal 2023. It is the largest manufacturer of brake-shoe and AB systems for 2Ws in India with a market share of approximately 50% in Fiscal 2023 in terms of production volume for OEMs and the branded IAM, on a combined basis. Furthermore, it was among the prominent players in the SCC products and ALP solutions for 2W OEMs in India, based on production volume in Fiscal 2023. Its market share in ALP solutions was 9% by production volume for 2W OEMs in India in Fiscal 2023. It has also been focused on increasing its presence in the 3W, PV and CV sectors. It currently supplies products to a PV manufacturer in the small car segment in India, among other OEMs in the automotive sector.

Robust production model driven by R&D: The company has R&D, engineering and technological capabilities to offer future-ready solutions and customized solutions to cater to its customers’ needs. It has undertaken several R&D driven initiatives, including engaging closely with its customers to develop products manufactured for its AB systems, as well as light weighting solutions for products under its ALP solutions, enabling its customers to capitalize on market growth trends. Its R&D capabilities for AB systems include developing proprietary formulations using advanced material engineering, and customizing the manufacturing process to meet various parameters as specified by its customers. It develops proprietary formulations through its advanced material engineering and its in-house R&D, design and manufacturing capability. The precision engineering capabilities of its design and R&D teams have enabled it to develop and deploy light weighting and thermal management solutions across automotive and nonautomotive sectors, which help provide it with a competitive advantage in terms of quality, cost and delivery (QCD) parameters.

Technology and innovation-driven manufacturing process: Technology and innovation play a critical role in the development of its safety systems and critical engineering solutions. It engages in ongoing R&D and design activities to develop and offer innovative and customized systems and solutions that meet its customers’ requirements in both the EV and ICE sectors. Its technology and innovation focus also complements its manufacturing capabilities. It has introduced automation in its manufacturing processes that allows it to combine operations, eliminate multiple operators, retain control over its proprietary formulations and increase efficiency, while controlling costs and maintaining consistent product quality. Furthermore, its production line configurations are fungible, allowing it to interchange capacity and product mix between product categories within and across automotive and nonautomotive sectors, based on customer and operational requirements. Its fungible production line configurations, coupled with its recent shift in operations from ASK-6 (Manesar, Haryana) to ASK-12 (Manesar, Haryana) (which is a larger facility), have enabled it to optimize its machine productivity and operational efficiency.

Long-standing customer relationships with both Indian and global OEM players: The company’s experience in developing complex critical safety systems and solutions has led to established relationships with several customers. Globally, its customers include players such as Stanley Black & Decker, Polaris, and MTD Products. In India, its customers include the top six 2W OEMs (in terms of production volume and value for Fiscal 2023). It has been serving each of the top six 2W OEMs in India for more than 16 years as of June 30, 2023, and some of them since 1994. It has been successful in developing customer relationships and supply to EV based 2W OEMs in India such as TVS, Ather, Hero MotoCorp, Greaves, Bajaj and Revolt. Given the safety and precision engineering aspect of its products, it is involved at the early stage of development of vehicle models by its customers. Furthermore, apart from QCD and other parameters, its design and R&D capabilities have contributed towards the building of these long-standing relationships.

Risks and concerns

Depend on third parties for supply of raw materials: The company does not generally have firm commitments for the supply of raw materials and rely on purchase orders and delivery schedules for the procurement of raw materials. It procure its raw materials by way of entering into general purchase agreements, which set out the general terms and are supplemented by purchase orders wherein the pricing, scheduling and delivery details are set out. It depends on third-party suppliers for its raw materials that it procures under contractual arrangements with them which are typically valid until terminated by either party by giving prior notice. It may be unable to source such commodities from alternative suppliers on similar commercial terms and within a reasonable timeframe. Furthermore, as it is subject to applicable laws in relation to its operations including labelling, environmental laws and manufacturing, and strict quality requirements specified in contractual arrangements with customers, its supplier base is limited, which exacerbates the risk of being unable to make alternative arrangements. While its suppliers have not terminated their arrangements with it at short notice in the last three Fiscals and in the three months ended June 30, 2023, it may be unable to find suitable alternatives in the event its suppliers terminate their engagements with it in the future.

Rely on external logistic contractors: The company relies on external logistic contractors for supply of raw materials and deliveries of its products. For its operations in India, it engage third party logistics providers to ship finished goods to its customers by road, and typically enter into agreements with them for a period of one year. For its overseas customers, it engage third party logistics providers to export its finished goods through sea shipments and, in exceptional circumstances, by air to ensure that customer production lines are able to operate without interruption, based on purchase orders that set out the terms of transportation. For aftermarket support, it typically relies on the same third-party logistics providers for support on its transportation requirements. These third-party service providers are responsible for ensuring its transportation rates are competitive and that its transportation carriers are performing as required.

Dependent on contract labour: The company’s workforce includes personnel that it engages through independent contractors in accordance with the provisions of the Contract Labour (Regulation and Abolition) Act, 1970 for carrying out ancillary and supporting tasks such as segregation, inspection, loading and unloading, housekeeping and scrap handling. Although it does not engage these labourers directly, it may be held responsible for any wage payments to these labourers in the event of default by its independent contractors. While the amount paid in such an event can be recovered from the independent contractor, any significant requirement to fund the wage requirements of the engaged labourers or delay in recovering such amounts from the contractors may have an adverse effect on its cash flows and results of operations. In addition, it may be required to absorb a number of such contract labourers as permanent employees pursuant to an order from a regulatory body or court which would increase its costs and decrease its flexibility to increase or decrease its workforce in response to changes in demand for its products. Furthermore, any upward revision of wages that may be required by the state government to be paid to such contract labourers would increase its costs and may adversely affect the business and results of its operations.

Substantial working capital requirements: The company’s business is capital intensive as it requires significant capital to operate and expand its manufacturing facilities. Its historical capital expenditure has been and is expected to be primarily used towards the additions to buildings, plant and equipment. Historically, it has funded its capital expenditure requirements through a combination of internal accruals and term loans. The actual amount and timing of its future capital requirements may differ from estimates as a result of, among other factors, unforeseen delays or cost overruns, unanticipated expenses, regulatory changes, delay in obtaining regulatory approvals, economic conditions, engineering design changes, weather related delays, technological changes and additional market developments and new opportunities in the automotive components industry. In addition, as its customers may, from time to time, relocate their manufacturing activities/ capacities, it may be required to shift its capacities to a different facility or transport products from its existing facility to the customers’ new location, both of which involve capital expenditure to be incurred by it.

Outlook

ASK Automotive is a manufacturer of Advance Braking Systems that include products such as brake panel assembly, brake shoes, disc brake pads, brake lining, and mission case catering to multiple automotive vehicle segments including motorcycles, scooters, passenger vehicles, and commercial vehicles in both the internal combustion (IC) and electric vehicle segment. ASK Automotive also manufacturers Aluminum Lightweighting Precision Solutions that include segments covering engine parts, body and chassis parts, transmission parts, electrical and electronic and electric vehicle-specific components, catering to the motorcycle, scooter, passenger vehicle and commercial vehicle segments for both internal combustion engine and electric vehicles for automotive and non-automotive applications. Being a safety product manufacturerit manufactures Safety Control Cables that include the choke, brake, clutch, throttle, speedometer, fuel, and seat lock cables. On the concern side, the company’s business involves many risks and hazards which may adversely affect its profitability, including breakdowns, failure or substandard performance of equipment, third-party liability claims, labour disturbances, employee fraud and infrastructure failure. While the company’s principal revenue is in the Indian Rupee, it is exposed to exchange rate fluctuations, particularly in USD and Euro owing to its import of critical raw materials involved in manufacturing of its AB products and revenue earned in foreign currency on account of export sales. 

The company is coming out with an IPO of 2,95,71,390 equity shares of face value of Rs 2 each. The issue has been offered in a price band of Rs 268-282 per equity share. The aggregate size of the offer is around Rs 792.51 crore to Rs 833.91 crore based on lower and upper price band respectively. On the financial front, the company’s total income increased by 26.78% to Rs 25,662.79 million in Fiscal 2023 from Rs 20,242.60 million in Fiscal 2022. The company’s profit after tax for the year increased by 48.75% to Rs 1,229.53 million in Fiscal 2023, from a net profit of Rs 826.59 million in Fiscal 2022. Meanwhile, the company intends to leverage its established and long-standing customer relationships and explore opportunities to grow along the value chain by expanding the suite of its existing offerings across sectors, products and processes. As part of its strategy, it has already expanded its business from providing safety systems and critical engineering solutions for 2W OEMs to providing critical engineering solutions to PV OEMs. It intends to develop and manufacture additional safety systems and critical engineering solutions for CV and PV OEMs, where it can leverage its engineering capabilities.