KRN Heat Exchanger coming with an IPO to raise Rs 342 crore

KRN Heat Exchanger and Refrigeration

• KRN Heat Exchanger and Refrigeration is coming out with a 100% book building; initial public offering (IPO) of 1,55,43,000 shares of Rs 10 each in a price band Rs 209-220 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 25, 2024 and will close on September 27, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 20.90 times of its face value on the lower side and 22.00 times on the higher side.
• Book running lead managers to the issue is Holani Consultants.
• Compliance Officer for the issue is Praveen Kumar.

Profile of the company

KRN Heat Exchanger and Refrigeration manufactures fin and tube type heat exchangers for the Heat Ventilation Air Conditioning and Refrigeration Industry (HVAC&R). Heat exchangers manufactured by it is made of non-ferrous metals primarily Copper and Aluminium. The company’s product range includes condenser coils, evaporator units, evaporator coils, header/copper parts, fluid and steam coils and sheet metal parts. It manufactures heat exchangers of various shapes and sizes as per the requirements of the customers and/or demand in the market. The diameter of heat exchanger tubes it produce ranges from 5MM to 15.88 MM. Its products are well suited for wide range of air conditioning, heating and ventilation, refrigeration, and process cooling applications.

To enhance the longevity and corrosion resistance of heat exchangers and their components, various types of coatings such as nano coating, and powder coating are applied to the surfaces of copper tubes, brazing joints, and fin sheets. By applying these advanced coatings to heat exchangers and their components, its products ensure that the heat exchanger operates efficiently over an extended period, reducing maintenance costs and enhancing overall performance. The protective barrier provided by these coatings ensures that the heat exchanger withstands harsh conditions and maintains its optimal functionality.

Through this forward integration, the company is planning to venture into the distribution and sells channels which allow it to control the marketing and distribution of complete product range of heat exchangers. This enables it to capture a greater share of the value chain and establish direct connections with end customers. By incorporating KRN HVAC Products, the company can have greater control over the supply of HVAC industry products, enhancing customer reach and brand visibility. 

Proceed is being used for:

• Investment in its wholly owned subsidiary KRN HVAC Products in the form of equity, for setting up a new manufacturing facility at Neemrana, Alwar, Rajasthan
• General corporate purposes

Industry overview

Heat exchangers transfer thermal energy from one fluid to another, while ensuring that the fluids do not mix. This process is facilitated by conduction, enabling the heat exchanger to heat or cool a substance. Heat exchangers provide a means of regulating temperature, enhancing efficiency, averting overheating, and mitigating other potential hazards, resulting in an improvement in safety standards. Heat exchangers are considered more efficient and reliable in operations wherein some parameters, like temperature differential, flow rate and installation guidelines, are evaluated successfully. Being an efficient source of energy saving, heat exchangers find applications across a broad range of domestic and industrial applications such as steam power plants, chemical processing plants, food processing, HVAC systems, mining, pulp & paper, metallurgy etc. Heat exchangers typically are suitable for deployment in areas which have ample spaces such as industrial complexes, commercial space, hospitals, educational institutes etc. These systems are not generally preferred or feasible for smaller capacities, especially residential, as the economies of scale are difficult to overcome.

Finned tube heat exchanger has fins attached to the end of tubes. Such a construction increases the heat transfer area, which in turn helps in increasing the heat transfer rate. Typically, a dense liquid which is capable of transporting heat efficiently and a fluid with very little density (like gas or air) are used as heat transfer mediums. The flow pattern of fluids in this type of heat exchangers is primarily cross flow, with fluids travelling perpendicular to each other. Since air is one of the fluids used to transfer heat, finned tube heat exchanger is also called air cooled heat exchanger or air fin coolers. Some of the advantages finned tube heat exchanger enjoys over other variants include increased heat transfer coefficient (due to higher heat transfer surface area), reduced equipment size, and compatibility with a range of materials (like copper, aluminum, carbon steel, stainless steel, and titanium).

HVAC applications is expected to play a key role in expanding the demand for finned tube heat exchangers in India. The emerging landscape in real estate construction, manufacturing, warehousing, and transportation all points to a continuation of HVAC demand. It is the strong demand from these sectors that is expected to drive the annual turnover in Indian HVAC market from $9.1 billion in 2023 to nearly $23.5 billion in 2029. This demand growth would translate into an increase in the production of HVAC equipment, creating demand for all the components & accessories used. Since heat exchanger is an integral part of HVAC equipment, the growth in production of HVAC systems would be most favourable for heat exchanger industry. On the back of this supportive demand landscape, the annual turnover in finned tube heat exchanger, the annual turnover is set to increase from $146 million in 2023 to nearly $326 million in 2029, more than doubling in size by growing at a CAGR of 12.6%.

Pros and strengths

Long?standing business relationships with leading clientele: The company focuses on building sustained and long-term client relationships with its clients and constantly try to cater to customer needs with products in demand. Its experience in automated production facilities is focused on research and development, coupled with technologically advanced, quality consistency on-time delivery and cost-competitive manufacturing technology processes has resulted in repeat orders from its key customer groups. Its long-term relationship with its customers allows it to understand and cater to their diverse requirements, including the development of new products and helps it solicit new business from potential customers in the same industry.

Effective quality control checks: The company maintains an in-house facility for checking the quality of its manufactured products. Its products go through stringent quality control checks such as Helium Leak Test, Water Leak Test, Contamination Test, Salt Spray Testing, Burst Pressure Testing and Pressure Cyclic Testing to ensure the best quality products are supplied to its customers. Key employees of its production team hold BS EN ISO-13585 certification, which specifies the basic requirements for the qualification testing of brazers and brazing operators which is one of the key processes of manufacturing heat exchangers.

Established Manufacturing facility: The company’s registered office and the manufacturing facilities are located at renowned RIICO industrial areas of Neemrana, Rajasthan. Its manufacturing unit is equipped and capable of carrying out end-to-end manufacturing activities. Its years of experience in precision engineering, strategically located production facilities, and focus on design, coupled with technologically advanced and cost-competitive manufacturing technology processes have enabled it to meet its customers’ bespoke and stringent requirements. It has full service capabilities across the product cycle including product design and development, material sourcing, designing, testing and measurement infrastructure, all under one roof to meet the requirement of its global customers. The entire process is carried out under one roof.

Consistent financial performance: The company has grown from a single product to a multi-product manufacturing company. It has demonstrated consistent growth in terms of revenues and profitability. The recognition of its product quality has enabled it to penetrate the heat exchanger products market and cater to new customers in addition to its existing customer network. Increased acceptance of newer product categories due to improved designs and efficient pricing has further established its reputation.

Risks and concerns

Maximum revenue comes from limited number of customers: The company is dependent on a limited number of customers. Most of its revenue is derived from its top ten, top five and the largest customer. The company garnered 72.31%, 70.87% and 75.82% of its revenue from top 10 key customers for the Financial Year 2024, 2023 and 2022 respectively. However, it has no long-term written agreement with its customers. The company relies on the success of its customers in the marketing and selling of these products and therefore any negative impact on their reputation may also have an effect on its business. Accordingly, risks that could seriously harm its top customers, could harm it as well, including, recession in the geographies in which its key customers operate their business, its key customer’s inability to effectively manage their operations or changes in laws and policies may adversely affecting its customers’ profitability.

No long-term agreements with any of its customers: The company’s customers do not make long-term commitments to it and may cancel or change their sourcing requirements, which may adversely affect its financial condition, cash flow and operations. It primarily follows a business-to-business (B2B) model that relies on purchase orders rather than long-term contracts. Although it has established long-standing relationships with many of its customers like Daikin Air-conditioning India, Schnider Electric IT Business India, and Blue Star. Its customers do not, typically, place firm purchase orders until a short time before the products are required from it as a result of which, it does not hold a significant order book at any point of time, making it difficult for it to forecast revenue, production or sales. The absence of long-term contracts with its customers introduces substantial uncertainty and risk in its operations, potentially impacting its financial condition, profitability, and growth prospects.

Relies on limited number of suppliers for raw material procurement: The company relies on limited number of suppliers and procure 14.94%, 17.29% and 17.46% of its raw materials for the Financial Year 2024, 2023 and 2022 from its largest supplier and further it procures 57.73%, 57.98% and 52.38% of its raw materials from its Top 5 suppliers and 77.99%, 78.48% and 70.07% of its raw material from its top 10 key suppliers for the Financial Year 2024, 2023 and 2022 respectively. The company purchased raw materials from 510 suppliers in Financial Year 2024 and 55 suppliers in Financial Year 2023. While it has not historically encountered problems with availability, and its sourcing team has mitigated these risks by increasing inventory for some of these materials, this does not mean that it will continue to have timely access to adequate supplies of raw materials in the future or the supplies of these materials will be available on satisfactory terms when needed. Any delay in the supply of its raw materials by these suppliers may adversely affect the results of operations and financial condition.

Limited operating history: The company has a limited operating history, making it challenging for investors to assess its historical performance or predict its future prospects. The company was incorporated on August 25, 2017, and commenced its operations in June 2018. Due to this short period of operations, there is limited historical data available for evaluation, which increases the uncertainty regarding its business model, strategies, and potential for future success. As a result, investors may find it difficult to make informed decisions about its financial stability and long-term viability. Additionally, its limited operating history may not adequately reflect the challenges and risks it may encounter as it continues to grow and expand its business. The limited track record makes it difficult to conduct a meaningful comparative analysis, which could affect investment decisions.

Outlook

KRN Heat Exchanger and Refrigeration is a leading manufacturer of fin and tube-type heat exchangers. The company manufactures Copper and Aluminium fins and copper tubes heat exchangers, water coils, condenser coils, and evaporator coils. It manufactures heat exchanger tubes of different shapes and sizes from 5 mm diameter to 7 mm, 9.52 mm, 12.7 mm, and 15.88 mm. All the products offered are used in the domestic, commercial, and industrial Heating, Ventilation, air conditioning and refrigeration (HVAC&R) industry. On the concern side, the company is dependent on single customer namely Daikin Air-conditioning India for significant part of revenue and further it derives majority of its revenue from top 10 key customers. Delay or Cancellation of orders by any one or all of its top customers could have a material and adverse effect on its business, results of operations and financial condition. Moreover, the company does not have any long-term agreements with any of its customers. If its customers choose not to source their requirements from it, it would lead to financial instability and operational uncertainty and its business and financial conditions may be adversely affected.

The company is coming out with a maiden IPO of 1,55,43,000 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 209-220 per equity share. The aggregate size of the offer is around Rs 324.85 crore to Rs 341.95 crore based on lower and upper price band respectively. On performance front, the company’s total revenue has increased by 25.47% to Rs 31354.12 lakh during Financial Year 2023-24 from Rs 24,988.51 lakh during Financial Year 2022-23. The company’s profit after Tax for FY 2023-24 has increased to Rs 3906.86 lakh i.e. 20.90% from Rs 3231.35 lakh for FY 2022-23. Meanwhile, the company’s focus is on utilizing its core strengths for expanding its operations in existing as well as new markets. The company meticulously engineered with a cutting-edge technology and aptly supported by an efficient team of trained personnel who marketed the product in unexplored markets, had soon positioned itself as one of the popular brands in Indian market and paved the way for acquiring bigger share of this competitive market. It intends to continue to provide high quality products to its clients and grow its business by leveraging its strengths and implementing the strategies like expanding its customer base, enhancing existing products base and product quality and focus on increasing operational efficiencies to improve returns.