Gala Precision Engineering coming with an IPO to raise around Rs 168 crore

Gala Precision Engineering

• Gala Precision Engineering is coming out with a 100% book building; initial public offering (IPO) of 31,74,416 shares of Rs 10 each in a price band Rs 503-529 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 September 02, 2024 and will close on September 04, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 50.30 times of its face value on the lower side and 52.90 times on the higher side.
• Book running lead managers to the issue is PL Capital Markets.
• Compliance Officer for the issue is Pooja Ladha.

Profile of the company

The company is a precision component manufacturer of technical springs like disc & strip springs (DSS) including wedge lock washers; coil & spiral springs (CSS) and special fastening solution (SFS) supplying to original equipment manufacturers (OEMs), Tier 1 and channel partners; used in sectors like renewable energy including wind turbine and hydro power plants, various industrial sectors such as electrical, off highway equipments, infrastructure and general engineering, mobility segments such as automotive and railways. The company’s listed competitors include Harsha Engineers International Limited, SKF India Limited, Sundram Fasteners Limited, Rolex Rings Limited, Sterling Tools Limited and Ratnaveer Precision Engineering Limited. Its technical springs and high tensile fasteners have been supplied to customers in countries such as Germany, Denmark, China, Italy, Brazil, USA, Sweden, Switzerland etc. Accordingly, the company is a key link in the global supply chain for OEMs.

The company’s business primarily comprises of (i) springs technology division, under which it manufactures DSS including wedge lock washers (WLW), CSS and (ii) SFS in which it manufactures anchor bolts, studs and nuts. The company’s DSS products find applications in renewable energy, railways, automobiles, off highway vehicles, heavy machinery, electrical and power equipments. The global DSS & WLW market is valued at $891 million in calendar year 2023 witnessing a CAGR of 6% during calendar year 2020 - 2023 in which it has a global market share of 2% as of calendar year 2023. The company is major disc springs manufacturer in domestic market and have 10% market share in the Indian disc springs market. The company has a significant presence in the DSS market for renewable industry with 70% share in the domestic market and 3% share in the global market.

The company’s disc springs confirm to German DIN 2093 standards, bearing series, and customized specifications featuring variety of raw materials and surface coating options. It manufactures strip springs customised for high fatigue applications. It is mainly competing with Muhr und Bender KG, Schnorr GmbH, Christian Bauer GmbH + Co. KG in the global disc springs market and with International Industrial Springs in disc springs in India. The company’s CSS products are used in commercial vehicles, passenger vehicles, railways and industrial infrastructure. It has positioned itself as a key import substitution for European springs suppliers and multinationals looking at PLI Schemes and other incentives offered by the Government. It has also entered in a new related product category called retractor springs. These springs are a critical component for safety of the passenger. It is mainly competing with Stumpp Schuele & Somappa Springs Private Limited, NHK Springs India Limited, and Muhr und Bender KG in the CSS market. 

Proceed is being used for:

• Setting up a new facility at Vallam-Vadagal, SIPCOT, Sriperumbuddur, Tamil Nadu for manufacturing high tensile fasteners and hex bolts
• Funding capital expenditure requirements towards purchase of equipment, plant and machinery at Wada, Palghar, Maharashtra
• Repayment/ prepayment, in full or part, of certain borrowings availed by the company
• General corporate purposes

Industry overview

DSS & WLW are spring and fastening solutions used for Industrial applications when mechanical devices are required to apply force. Disc springs deliver powerful spring forces in a compact space. Their unique layouts in stacks boost both forces and deflections. Adjusting component geometry allows precise control of the load/deflection curve-a major advantage. WLW are washers with wedge-lock technology, a cutting-edge solution, transform bolted joints by emphasizing tension over friction. They ensure a secure, vibration-resistant joint with exceptional longevity and reliability. These components are used in different industries like renewables, railway infrastructure, automobiles, and others. The application varies as per the requirement from load control & regulation, vibration dampers or to provide a damping effect in vehicle transmission, braking systems of wind turbines, and shock absorption depending on industry. Gala Precision Engineering’s Wedge Lock Washer has been tested successfully in Germany and is in conformity with the requirements of Standard DIN 25201-4 with the clamp force staying constant after almost 2,000 cycles of the junker test.

The global DSS & WLW market is valued at $891M in CY23 witnessing a CAGR of 6% during CY20-23. Gala Precision Engineering has a market share of 2% in the global DSS market as of CY23. In this, WLW is contributing $260M as of CY23. The DSS & WLW market is expected to reach a value of $1,065 million in CY26 witnessing a growth of 6.1% during CY23-26. The end-user industry growth will be the key growth driver for the DSS & WLW market. Renewable energy, automobile & infrastructure are some of the key industries showing good growth potential. DSS & WLW play a crucial role in various internal components of off-highway vehicles, including transaxles, torque limiters, and hydraulic motors. Additionally, DSS & WLW find applications in transmission lines, transformers, and elevators. The projected value of the overall DSS & WLW market for Industrials is anticipated to reach $837 million by the end of CY26. 

DSS & WLW serve as spring and fastening solutions employed in Industrials settings where mechanical devices are needed to exert force. These elements find application across diverse industries such as renewables, infrastructure, automobiles, and more. Their usage spans a range of applications, including pressure controls and regulators, vehicle braking systems, valves, and shock absorbers, tailored to the specific needs of each industry. The Indian DSS & WLW market is valued at $115 million in FY24 witnessing a CAGR of 6% during FY21-24. Gala Precision Engineering is a major DSS manufacturer & has 10% market share in the Indian disc spring market as of FY24. The Indian DSS & WLW market is expected to reach a value of $138 million in FY27 witnessing a growth of 6% during FY24-27. The end-user industry growth will be the key growth driver for the DSS & WLW market. Renewable energy, automobile & infrastructure are some of the key industries showing good growth potential.

Pros and strengths

Well established manufacturer of precision engineering components: The company has experience in designing, manufacturing and application engineering of high-performance standardised and customised disc springs and strip springs. Its products include disc and strip springs, wedge lock washers, coil and spirals springs, fastening solutions like anchor bolts, nuts and studs, etc. The company’s precision components and high tensile fasteners are used in sectors like renewable energy (including wind turbine and hydro plants), in various industrial sector such as electrical, off highway equipment, infrastructure and general engineering, in mobility segments such as automotive and railways. The company’s disc springs are of high quality meeting German DIN 2093 standards. It cooperates with global research institutes in Germany and India for new product testing and new process validations. The company’s wedge lock washers which market under GALLOCK brand, have been tested by the German Institute and meet the requirements of standard DIN 25201-4 for mechanical and technological testing. Further, the railways coaches and locomotive and wind turbine manufacturers have also tested and approved its wedge lock washers.

Wide range of products: The company’s wide range of products and their varied applications have helped it to develop a broad customer base across geographies and across industries. It has the ability to develop various products and solutions to meet design and specifications of its customers, as well as to cross sell multiple products to them and thereby increase its wallet share. In order to add new products in its fastener division, it is currently setting up a manufacturing facility in VallamVadagal, SIPCOT, Sriperumbuddur, Tamil Nadu for developing various high tensile fasteners and new products like bolts. Having a wide range of products not only enables it to meet the trends and ever changing demands of its customers but also gives the company an edge to effectively compete with its competitors. With a global clientele exceeding 175 customers, it exports to over 25 countries, encompassing major markets such as Germany, Denmark, China, Italy, Brazil, USA, Sweden, Switzerland, contributing to 37.53% to total sales as of March 31, 2024. It is adding new customers for springs and fasteners in high value markets such as Europe and USA.

Well-equipped manufacturing facilities along with in-house design: The company operates in two manufacturing facilities at Wada District Palghar, Maharashtra, which are equipped with capabilities to design, develop, and manufacture diverse product portfolio. Further, it is setting up new manufacturing facility in Vallam-Vadagal, SIPCOT, Sriperumbuddur, Tamil Nadu for developing various high tensile fasteners in order to add to its existing product portfolio and new products like bolts. The company’s in-house process includes tool design and development, blanking and forming, coiling, heat treatment, shot peening, surface finishing, springs grinding and chamfering, scragging, load testing along with inspection, quality control and surface treatments and coatings. This helps the company to provide comprehensive solutions to its customers and manufacture high precision components with control over the processes. The company’s manufacturing facilities being in India, it holds a significant cost advantage in comparison to its European competitors. It is focused on undertaking dedicated design and development activity in its existing products and development of new products and designs in areas where there is significant growth potential and would cater to needs of its customers.

Long-standing customer relationships with both Indian and global OEM and Tier 1 player: Over three decades of operations, the company has established long standing relationships with its customers. Its business originally commenced in the year 1989 and subsequently taken over by the company through a BTA in the year 2009. Its diverse product portfolio helps to cater to a broad range of customers and it has served over 175 customers in 25 countries. Its long-standing relationships with its customers indicate its commitment to high quality products and comprehensive solutions. Key factors leading to strong customer relationships are high quality products, reliability in supplies, development collaboration and meeting international standards. It engages with its clients through the different stages of product development, from the design and validation stages, until testing, final manufacturing, and delivery. It also provides customised packaging and kitting solutions to its customers. This helps it to identify their requirements better and results in increased customer satisfaction.

Risks and concerns

Maximum revenue comes from few customer: The company generates a significant portion of its revenue from, and are therefore dependent on, certain key customers for a substantial portion of its business. The company has generated 47.48%, 41.86% and 45.48% of revenue from operation in FY24, FY23 and FY22 respectively. It is difficult to forecast the success or sustainability of any strategies undertaken by any of its key customers in response to the current economic or industry environment. Unfavourable industry conditions can also result in an increase in commercial disputes and other risks of supply disruption. A sustained decline in the demand for products produced by its OEM customers could prompt them to cut their production volumes, directly affecting the demand from OEM customers for its products.

Maximum revenue dependent on springs technology segment: A large portion of the company’s topline was derived from its spring technology segment. The company has derived 80.11%, 83.92% and 78.01% of revenue from springs technology segment during FY24, FY23 and FY22, respectively. Any downturn or lack of demand for its spring technology products could have an adverse impact on its revenue, its business, results of operations, cash flow and financial condition.

High working capital requirement: The company’s business operations are subject to high working capital requirements. Currently, the company meets its working capital requirements through a mix of internal accruals and working capital facilities from scheduled commercial banks. The company’s working capital requirements (i.e., sum of trade receivables and inventory, as reduced by trade payables) as on March 31, 2024, March 31, 2023 and March 31, 2022 was Rs 909.49 million, Rs 776.12 million and Rs 613.81 million, respectively. Its net working capital turnover ratio as on March 31, 2024, March 31, 2023, and March 31, 2022 was 2.23, 2.13 and 2.37. As on March 31, 2024, the company had sanctioned working capital facilities aggregating to Rs 450.00 million. The company’s inability to meet its present working capital requirements or its enhanced working capital requirements will have an adverse impact on its results of operation, business and financial condition.

Incurred significant capital expenditures: The company has already incurred significant capital expenditure in the past few years, including setting up an entire range of facilities such as circular saw machine, press, CNC machines and thread rolling machines, etc. for production of various types of anchor bolt, stud and springs for different applications for its customers, allowing it to offer a diverse product suite, reduce operating costs and drive its productivity. For the Fiscals 2024, 2023 and 2022, its capital expenditure was Rs 127.15 million, Rs 152.08 million and Rs 62.86 million, respectively. The total estimated expenditure for setting up a new facility at Vallam-Vadagal, SIPCOT, Sriperumbuddur, Tamil Nadu for manufacturing high tensile fasteners and hex bolts is Rs 483.32 million. The company’s failure to manage its growth effectively may have an adverse effect on its business, results of operations and financial condition. Further, expansion and acquisitions may require it to incur or assume new debt, expose it to future funding obligations or integration risks and it cannot assure that such expansion or acquisition will contribute to its profitability.

Outlook

Gala Precision Engineering Limited is a manufacturer of precision components such as DSS, CSS, and special fastening solutions SFS. The company supplies these products to OEMs. The company's products are used in sectors such as electrical, off-highway equipment, infrastructure, and general engineering, as well as in mobility segments such as automotive and railway. The company has supplied its technical springs and high tensile fasteners to customers in several countries including Germany, Denmark, China, Italy, Brazil, USA, Sweden, and Switzerland, making it a crucial link in the global supply chain for OEMs. On the concern side, the company’s business and revenue from operations of the company is dependent on demand of customer’s products. Any loss of, or a significant reduction in purchases by such customers due to the reduction in demand of its customer products could adversely affect its business. Moreover, the company’s revenue is dependent on the springs technology segment of its business. Any downturn in the spring technology segment can adversely impact its business, results of operations, cash flow and financial condition of the company.

The company is coming out with a maiden IPO of 31,74,416 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 503-529 per equity share. The aggregate size of the offer is around Rs 159.67 crore to Rs 167.93 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by 22.41%, reaching to Rs 2025.45 million in Fiscal 2024 from Rs 1654.65 million in Fiscal 2023. This growth was driven incremental sales of DSS due to the addition of new customers and increased demand from renewable energy, railways and industrial sectors; as well as incremental sales of CSS, owing to increased demand from the automobile industry and the commencement of supplies to the railways. Moreover, the profit after tax after exceptional item decreased by 7.76% from Rs 242.12 million to Rs 223.32 million. There was an exceptional income of Rs 97.59 million in Fiscal 2023, whereas in Fiscal 2024 there was an exceptional loss of Rs 23.09 million. The company’s operations were commenced in the year 1989 by manufacturing disc and strip springs and have since diversified to include coil and spiral springs in 2015 and special fastening solution in 2018. The company is a precision component manufacturer of technical springs and high tensile fasteners supplying to OEMs, Tier 1 and channel partners. Its experience and manufacturing capabilities will help it to address customers from niche markets to large addressable markets. Going forward, to strengthen its technological capabilities, the company plans to set up a new manufacturing facility in Vallam-Vadagal, SIPCOT, Sriperumbuddur, Tamil Nadu for developing various high tensile fasteners in order to add to its existing product portfolio and new products like bolts. It also plans to expand its talent pool to support new design capabilities to keep up with emerging market trends.