Kross coming with an IPO to raise Rs 526.32 crore

Kross

• Kross is coming out with a 100% book building; initial public offering (IPO) of 2,19,29,824 shares of Rs 5 each in a price band Rs 228-240 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 09, 2024 and will close on September 11, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 5 and is priced 45.60 times of its face value on the lower side and 48.00 times on the higher side.
• Book running lead manager to the issue is Equirus Capital.
• Compliance Officer for the issue is Debolina Karmakar.

Profile of the company

Kross is a diversified player focused on manufacturing and supply of trailer axle and suspension assembly and a wide range of forged and precision machined high performance safety critical parts for medium and heavy commercial vehicles (M&HCV) and farm equipment segments. The company is widely recognized as one of the prominent manufacturers of trailer axles and suspension assembly in India. In 2019, it commenced manufacture and sale of trailer axle and suspension assemblies and has witnessed robust growth between Fiscal 2021 and Fiscal 2024. It has become one of the fastest growing players in the organised trailer axle manufacturing industry competing with major trailer axle manufacturers. With over three decades of experience, the company relies on its product development capabilities to design and deliver proprietary products such as trailer axle and suspension assembly. It is one of the few players domestically, with the competency to manufacture trailer axles and suspension assembly in-house.

With a diversified portfolio of high performance and safety critical components for the M&HCV and farm equipment segments, the company is a specialist in manufacturing of safety critical components for M&HCV segment which include axle shafts, companion flanges, anti-roll bars and stabilizer bar assembly, suspension linkages, differential spiders, bevel gears, planet carriers, inter-axle kits, rear end spindles, pole wheels and wide variety of tractor components for the hydraulic lift arrangement, power take-off (PTO) shafts and front axle spindles.

The company supplies its products to a diversified client base which includes large original equipment manufacturers (OEMs) manufacturing M&HCV and tractors, tier one suppliers to the OEMs in the M&HCV segment domestic dealers and fabricators for its trailer axle and suspension business. In the past, the company has been recognized by customers for the high-quality of the products supplied by it, which is one of the factors that has helped it establish long term relationships with several large domestic and global OEMs, including, Ashok Leyland Limited, a leading Indian automobile OEM and a Indian farm equipment OEM, each of whom it has been associated with for a period of more than 18 years and Tata International DLT Private Limited with whom it has been associated since 2019. Due to its track record and diverse product portfolio, it has also been able to attract new customers such as Leax Falun AB and a Japan based OEM manufacturing commercial vehicles. The company has also commenced its bulk exports to Leax Falun AB, a Sweden based company manufacturing propeller shafts for commercial vehicle OEMs, in August 2023 with supplies of Universal Joint Crosses and are in stages of validation for other critical parts. 

Proceed is being used for:

• Funding of capital expenditure requirements of the company towards purchase of machinery and equipment
• Repayment or prepayment, in full or in part, of all or a portion of certain outstanding borrowings availed by the company, from banks and financial institutions
• Funding working capital requirements of the company
• General corporate purposes

Industry overview

Indian auto components industry is an important sector driving macroeconomic growth and employment. The industry comprises players of all sizes, from large corporations to micro entities, spread across clusters throughout the country. The Automobile components industry in India is composed of organized and unorganized sector. The organized sector refers to original equipment manufacturers (OEMs) and is engaged in the manufacture of high-value precision instruments. Whereas, the unorganized sectors comprise of low-valued products catering to after-market services. Various sub-sectors of the Automobile components industry in India are engine parts, drive transmission & steering parts, body and chassis, suspension and braking parts, equipment, electrical parts and others such as fan belts, die-casting and sheet metal parts. This industry generated direct employment opportunities for around 1.5 Million individuals.  The Automotive Mission Plan (2016-26) projects to provide direct incremental employment to around 3.2 million by 2026. 

The trailer axle is a component of a trailer that supports the weight of the trailer and its cargo. It also connects the trailer wheels to the trailer frame. Trailer axles are typically made from high-strength steel to withstand the heavy loads and harsh conditions that they are subjected to. The design, technology used for development, backward integration and after-sale service provided are crucial aspects for trailer axle manufacturers. Trailer axles are used in all types of trailers, from small utility trailers to large semi-trailers. They are also used in a variety of other vehicles, such as buses, RVs, and construction equipment. A major aggregate in the trailer axle is the beam with spindle ends. In India, this is currently being manufactured by welding two C-Section to form a square and the end spindles are then welded on to the beam. However, in other jurisdictions, a different process is followed where ends of the seamless tube of the required thickness are heated, and the spindles are extruded at both ends simultaneously.

Outlook for Indian auto components industry is looking positive in coming future owing to rising domestic demand for automobile. The industry has strong tailwinds behind it to drive future growth. This includes India’s economy is likely to perform well in current fiscal year and continued strong domestic vehicle demand. Domestic OEM demand constitutes almost 50 percent of sales for the Indian auto components industry. This is likely to remain healthy in current fiscal. The replacement demand is seen rise in FY24 supported by the increase in mobility, economic activity and healthy freight movement. Besides, the industry is also expected to benefit from rising demand for electric vehicles. EV components such as batteries, drivetrains, electronics and others present an opportunity for auto component makers to diversify their revenue base beyond ICE vehicles. However, the growth of export orders is likely to be muted in current fiscal, on account of economic gloom in U.S. and Europe, geopolitical tensions and supply-chain issues.

Pros and strengths

Long standing relationship with large OEMs and their tier one supplier: In over three decades of its operations, the company has established long-standing relationships with several well established Indian and global customers like OEMs Ashok Leyland, Tata International DLT, a leading Indian automobile OEM, a leading Indian farm equipment OEM, and global Tier I supplier for auto components. The company’s diversified product portfolio helps it to cater the requirements of a broad spectrum of customers which includes marquee domestic and global OEMs for the M&HCV segment and their Tier 1 suppliers, domestic dealers and fabricators for its trailer axle and suspension business and in the last three fiscals, it has served over 200 customers.

Widely recognized as one of the prominent manufacturers of trailer axles: The company has evolved from being a manufacturer of precision machined auto components to being a systems manufacturer by entering into manufacture of trailer axles and suspension assemblies in 2019. It has witnessed robust growth between Fiscal 2021 and Fiscal 2024, enabling it to compete with major trailer axle manufacturers. The Commercial Vehicle market is expected to see a constant rise in vehicle tonnage, which is expected to significantly change the industry’s landscape. Market dynamics are changing significantly as the industry’s average payload rises, especially increasing intensity of trailer axles for CV trucks.

Diversified product portfolio: The company is a diversified player involved in manufacturing and supply of wide range of forging and machined precision components and assemblies. It is widely recognized as a prominent manufacturer of trailer axles and suspension assembly in India and are also a prominent manufacturer of differential spiders in the M&HCV segment. Further, it is a specialist in manufacturing high precision safety critical components which include companion flanges, axle shafts, rear end spindles, anti-roll bars and stabiliser bar assembly, differential spiders and inter-axle kits, bevel gear assembly, suspension linkages and trunnion pin, universal joints, gear joint assemblies, clutch release forks, pole wheels, input and output shafts, adapter ring gears, planet carrier assembly, cam shafts and wide variety of tractor components for the hydraulic lift arrangement such as control spring assemblies, arm rams, arm hydraulic lifts, PTO shafts and spindle front axles.

Integrated manufacturing operations coupled with in-house product and process design: The company operates out of its five manufacturing facilities in Jamshedpur, Jharkhand which are equipped with capabilities to design, develop and manufacture its diverse product portfolio. It is backward integrated with design, process engineering, forging, casting and machining capabilities which allows it to greater control over process, delivery timelines, pricing and quality. This reduces its dependence on third parties, streamlines its production process and improves its operational efficiencies. In addition, it also enables it to maintain control over the entire manufacturing process and also provides better delivery timelines to its customers at a more competitive cost. Further, its backward integration helps it in reacting to emerging trends and develop prototypes in anticipation of the same.

Risks and concerns

Significant revenue comes from top 5 customers: The company derives majority of its revenue from operations from sales to its top five customers. The company generated 66.02%, 68.37% and 70.47% of topline in FY24, FY23 and FY22 respectively from top 5 customers. Loss of all or a substantial portion of sales to any of its large customers, in particular for any reason (including, due to loss of contracts or failure to negotiate acceptable terms, loss of market share of these customers, disputes with these customers, adverse change in the financial condition of these customers, decline in their sales, plant shutdowns, labour strikes or other work stoppages affecting production of these customers), could have an adverse impact on its business, results of operations, financial condition and cash flows.

Derive a substantial portion of revenue from supply of trailer axle and suspension assembly: The company relies heavily on revenue generated from the sale of trailer axle and suspension assembly and a wide range of forged and precision machined high performance safety critical parts for M&HCV and farm equipment segments. While some reports expect the EV adoption in the HCV segment to be negligible in the near future, in the past there have been instances of faster adoption across other vehicle segments supported by multiple factors including government policy initiatives, financial incentives, reduction in prices, changes in technology and changes in consumer preference. If there is a significant increase in the adoption of battery electric vehicles, particularly in M&HCV and farm equipment segments, it could adversely affect the company’s financial condition, cash flows and results of operations, as the market for its products may shrink.

Geographical constrain: The company currently operates through five manufacturing facilities in Jamshedpur, Jharkhand. There are no instances in the past three fiscals linked to the location of the company’s manufacturing facilities that have materially and adversely affected business and operations of the Company. However, due to the geographic concentration of its manufacturing operations, the company’s operations are susceptible to local and regional factors, such as accidents, system failures, economic and weather conditions, natural disasters, demographic and population changes, political uncertainty and changes in regulations by state government, adverse changes in availability of key inputs including labour and power, the outbreak of infectious diseases and other unforeseen events and circumstances.

Dependent on a limited number of third parties for the supply of raw materials: The company purchases steel required for its manufacturing facilities in India primarily through purchase orders raised on its suppliers and does not have any long term contracts or arrangements with its steel suppliers. The company’s top three suppliers of steel in each of Fiscal 2024, Fiscal 2023 and Fiscal 2022, accounted for 40.60%, 44.22% and 53.33% of its overall raw material purchases. While it envisages to maintain a diversified set of suppliers to eliminate adverse impact on its business in the event of any disruption or estimated disruption, there is no guarantee that in the event of disruption in supplies by any of its top suppliers that it would be able to source similar quality and quantity of steel or other raw materials in the timely manner without incurring additional costs. 

Outlook

Kross manufactures and supplies trailer axles and suspensions and a wide range of high-performance forged and precision machined safety critical parts for medium and heavy-duty commercial vehicles (M&HCV) and agricultural equipment. The company is backward integrated with design, process engineering, forging, casting and machining capabilities which allows it to greater control over process, timelines, pricing and quality. Its in-house design capabilities have been instrumental in its success by allowing it to work closely with customers for design and development of high performance and safety-critical components and assemblies, such as, anti-roll bars and stabiliser bars, where it along with the OEM’s design team, conceptualised the design and framework of the product. On the concern side, the company’s top five customers contributed a significant portion (more than 66% in each of the previous three Fiscals) of its revenues. The loss of a major customer or reduction in demand for its products from any of its major customers may adversely affect its business, financial condition, results of operations and prospects. Moreover, the company derives a substantial portion of its revenue from supply of trailer axle and suspension assembly and a wide range of forged and precision machined high performance safety critical parts for medium and commercial vehicles (M&HCV) and farm equipment segments. Any change in demand for such components would have a material adverse effect on its business, financial condition, results of operations and cash flows.

The company is coming out with a maiden IPO of 2,19,29,824 equity shares of Rs 5 each. The issue has been offered in a price band of Rs 228-240 per equity share. The aggregate size of the offer is around Rs 500.00 crore to Rs 526.32 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by 26.94% from Rs 4,886.28 million in Fiscal 2023 to Rs 6,202.50 million in Fiscal 2024. This increase is primarily attributed to increase in revenues from sale of goods by 31.09% from Rs 4,596.83 million in Fiscal 2023 to Rs 6,025.78 million in Fiscal 2024 which was partially offset by decrease in other operating income by 41.83% from Rs 286.62 million in Fiscal 2023 to Rs 166.72 million in Fiscal 2024. Moreover, the company recorded an increase in its profit for the year by 45.10% from Rs 309.31 million in Fiscal 2023 to Rs 448.81 million in Fiscal 2024.

While the company’s revenue from operations have grown at a CAGR of 44.40% between Fiscal 2022 and Fiscal 2024, it has been predominantly focussed on domestic market with exports contributing to less than 1.50% of its revenue from operations in each of the Fiscal 2024, Fiscal 2023 and Fiscal 2022. It aims to leverage its diverse product portfolio, customer acceptance in domestic markets and backward integrated manufacturing facilities to expand into international markets. As the company increases its exports to international markets, it will be able to increase its addressable market, expand its geographical footprint and improve its profitability. Furthermore, its strategy of diversifying its revenue base and expanding its geographical footprint helps it to mitigate the risks associated with economic fluctuations in any one region and its high dependence on select customers.