Forge Auto International coming with IPO to raise Rs 31.10 crore

Forge Auto International

• Forge Auto International is coming out with an initial public offering (IPO) of 28,80,000 equity shares in a price band Rs 102-108 per equity share.
• The issue will open on September 26, 2024 and will close on September 30, 2024.
• The shares will be listed on SME Platform of NSE.
• The face value of the share is Rs 10 and is priced 10.20 times of its face value on the lower side and 10.80 times on the higher side.
• Book running lead manager to the issue is HEM Securities.
• Compliance Officer for the issue is Medhavi Sharma.

Profile of the company

Forge Auto International is an engineering company engaged into forging and manufacturing of complex and safety critical, forged and precision machined components such as big ring, small ring, big ball stud, gear blank with broach, stub axle assembly, flange yoke 325 HS, catering to different industry sectors like auto industry including automobiles, tractors, railways etc. and non-auto sectors like agriculture parts, hydraulic parts, striking tools etc. It primarily serves its customers comprising of domestic and global original equipment manufacturers (OEMs) engaged into manufacturing for both automotive sector and other non-automotive sector, used across industries by a diversified base of customers. 

It manufactures precision machined components as per customer specifications and International Standard catering to the requirements of various industries such as tractor, agriculture parts, railways, automobiles, commercial vehicle industry, 5th wheel industry, striking tools, hydraulic parts and castor wheel parts and other related industries. The company’s revenue from sale of machined and forging products has increased from Rs 10951.99 lakh in Fiscal 2021 to Rs 18011.72 lakh in Fiscal 2024, at a CAGR of 18.04% which demonstrates its increased focus on its products. The company’s continued endeavor to increase value addition through focus on products with higher machining intensity, has enabled it to increase its realization and in Fiscal 2024, 2023 and 2022 its EBITDA margin was 7.62%, 6.39% and 5.41% respectively. 

The company manufactures products such as short fork 325HS, long fork, flange yoke 325 HS used in commercial vehicles, ball stud, small ball stud used in railway bogies, gear blank with broach, gear blank without broach, stub axle assembly used in tractors, agricultural equipment, sledge hammers etc. Its product range can be broadly classified into different categories i.e. Automotive sector (i.e. used in the manufacturing of auto components such as tractors, light vehicles, heavy commercial vehicles etc.) and non- automotive sector (i.e. which are used in manufacturing of agricultural, industrial and striking tools etc.).

Proceed is being used for:

• Meeting working capital requirements 
• Repayment of certain borrowing availed by the company, in part or full 
• General corporate purpose

Industry Overview

The automobile component industry turnover stood at Rs 5.6 lakh crore ($69.7 billion) between 2022-23. The industry had revenue growth of 32.8% as compared to 2021-22. Domestic OEM supplies contributed around 66% to the industry’s turnover, followed by domestic aftermarket (12%) and exports (22.3%), in FY23. The component sales to OEMs in the domestic market grew by 39.5% to $57.62 billion (Rs 4.76 lakh crore). Between 2022-23, exports of auto components grew by 5.2% to Rs. 1.61 lakh crore ($19.49 billion). As per the Automobile Component Manufacturers Association (ACMA) forecast, automobile component exports from India are expected to reach $30 billion by 2026. In FY22, India’s auto component Industry for the first time reached a trade surplus of $700 million. The aftermarket for auto components grew by 15% in 2022-23 reaching Rs 85,333 crore ($10.33 billion). Exports of auto components grew by 5.2% to Rs 1.61 lakh crore ($19.49 billion) in 2022-23 from Rs. 1.41lakh crore ($19 billion) in 2021-22. In 2023-24 (April-July), the export value of auto components/parts was estimated at $2.46 billion. North America, which accounts for 32% of total exports, increased by 8%, while Europe and Asia, which account for 31% and 26% of total exports, increased by 3% and 4%, respectively. 

The aftermarket for auto components grew by 15% in 2022-23 reaching Rs 85,333 crore ($10.33 billion). By 2026, the automotive aftermarket segment in India is expected to reach $32 billion. India’s auto components aftermarket witnessed a 15% growth from $8.70 billion in FY21 to $10 billion in FY22. Aftermarket turnover increased at a CAGR of 8.02% from $8.70 billion in FY16 to $10 billion in FY22 and is expected to reach $32 billion by 2026.  The ‘Drive Transmission and Steering’ product category accounted for 21% of the aftermarket share followed by ‘Engine Components’, and ‘Electricals and Electronic Components’ with 19% and 18%, respectively. In fiscal year 2023-24 (April-November), the total number of automobiles sold was 14.18 million units. In (April-November) 2023-24, the total production of passenger vehicles, commercial vehicles, three-wheelers, two-wheelers, and quadricycles was 15.56 million units.

Major global OEMs have made India a component sourcing hub for their global operations. Several global Tier-I suppliers have also announced plans to increase procurement from their Indian subsidiaries. India is also emerging as a sourcing hub for engine components with OEMs increasingly setting up engine manufacturing units in the country. The aggregate CAPEX outlay for the OEMs is estimated to remain high at $7.95 billion (Rs 650 billion) over 2023-2025. Further, India is emerging as a global hub for auto component sourcing and the industry exports over 25% of its production annually. The auto component industry exported $19 billion and imported $18.3 billion worth of components in 2021-22, resulting in the highest export surplus of $700 million. Auto component exports from India are expected to reach $30 billion by 2026.

Pros and strengths

Integrated manufacturing operations with diversified product portfolio: The company started the business as a partnership firm in the year 2001. In the initial years of its operations, it focused on manufacturing components such as tractor parts. Later, according to the market demand and customer’s requirement it gradually expanded its product portfolio to include heavy and light vehicle parts, agricultural parts, railway parts and many more. The manufacturing facility of the company is having an installed capacity of 20000MT for forging and 25 lakhs units for machining section as on June 30, 2024 for the owned Machinery. The manufacturing facility is equipped with machines like medium frequency induction heating equipment, CNCs, VMCs (vertical milling centres), hydraulic surface grinder with all accessories, HMI screw press, shot blasting machine, Electric Screw Presses of 1000 MT and 1600 MT, lathe machine, continuous heat treatment furnace with ISO thermal annealing, normalising, quenching and tempering, pillar drilling machine / circular saw machine, Spectrometer and PMI, Ultrasonic washing machine, MPI equipment, rolling machine, 6 Drop Forge Hammers ranging from 1MT to 2.5MT, Broaching (both Horizontal and Vertical), Laser Marking Machines, Coining Presses along with testing equipments and utility equipments capable of undertaking the forging and machining activities. The company’s continuous efforts to develop new products, have allowed it to serve a wide range of industries and customers, which has led it to attract new customers.

Long-standing relationship: The company enjoys long standing relationship with its key customers & suppliers. These long-standing relationships are result of its commitment to quality, timely delivery, promptness in payments and adaptability etc. It benefits immensely from this. Its business and growth are significantly depending on its ability to maintain good relationship with multiple Indian and global customers across different industries. Having many years of experience in the industry and being able to identify these players would give the company a competitive advantage in the business segment. These long-standing relationship with customers and suppliers have helped in establishing its reputation as a trusted business player in manufacturing industry. As on March 2024, its top 5 customers were 69.70% of total revenue from operations and top 5 suppliers were 59.37% of total purchases. It has long-standing relationships with its customers for whom it has executed repeat orders over an extended period of time, which it has been established and are strengthened by the dedicated infrastructure and its ability to meet Clients’ requirements for customized products.

Quality Assurance and Standards: Quality is a pre-requisite for a positive consumer experience and long-term loyalty of its customers. This focus towards quality delivery has formed the foundation of the expansion and diversification of its product portfolio since its inception. It has obtained ISO 9001:2015 for quality management systems, ISO 14001:2015 for environmental management systems, OHSAS 45001:2018 for occupational health and safety management systems, IATF 16949:2016 for doing business with OEMs manufacturing Components in Automotive Industry & ZED GOLD by Government of India for sustainability with Zero Effect and Zero Defect for its manufacturing facility. Its promoter has been in the business of manufacturing and supply of forging and machining components for more than a decade and has successfully ventured and supplied quality products to its customers. 

Risks and concerns  

Significant revenue comes from limited customers: The company derives a significant portion of its revenue from its top 10 customers. As of March 31, 2024, its top 10 customers contribute 85.16% of revenue from operations. Further, the share of its top 10 customers for the Fiscal year 2023, and 2022 was approximately 85.91% and 89.65%. The loss of all or a substantial portion of sales to any of its top 10 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, operations and could have impacted its financial strength.

Depend on few suppliers for supply of raw material: The company is engaged in manufacturing of forging and machining components which requires steel as its primary raw material. Further, it is required to undertake the manufacturing activities in strict compliance with the regulatory standards and specifications of the customers. High quality steel required for manufacturing of the forging and machining components as per its requirements is supplied by selected suppliers in the Indian market that forces it to rely on a few suppliers to supply steel for its operations. Further, the share of its top 10 suppliers for the Fiscal year 2024, 2023 and 2022 was approximately 78.95%, 91.19%, and 94.14%. It does not enter into definite-term agreements with its suppliers (who typically supply it through purchase orders) and they may not perform their obligations in a timely manner or at all, resulting in delays to its production schedule and adversely affecting its output. It cannot assure that no such instance will arise in the future where delay in supply of steel would not have an adverse impact on its results of operations, cash flows, financial condition or business.

Substantial working capital requirement: The company’s business requires a significant amount of working capital which is based on certain assumptions, and therefore, any change of such assumptions would result in changes to its working capital requirements. As part of its business process, significant amounts of working capital are required to finance the purchase or manufacturing of materials, providing credit to the customers before payment is received from clients and maintaining stock of inventory. Its working capital requirements may increase due to an increase in the size of its operations and the number and size of orders received. Its capital expenditure requirements and growth strategy thus require continued access to significant amounts of capital on acceptable terms. It cannot assure that market conditions and other factors will permit future financings, debt or equity, on terms acceptable to it. Its ability to arrange financing and the costs of such financing are dependent on numerous factors, including general economic and capital market conditions, credit availability from financial institutions, the amount and terms of its existing indebtedness, investor confidence and laws that are conducive to its raising capital in this manner.

Outlook

Forge Auto International is an engineering company that forges and manufactures complex, safety-critical, forged, and precision-machined components for the auto industry (automobiles, tractors, railways) and non-auto sectors (agriculture parts, hydraulic parts, striking tools). The company's revenue from the sale of machined and forging products increased from Rs 10951.99 lakh in Fiscal 2021 to Rs 17664.85 lakh in Fiscal 2023, reflecting a 27% CAGR, demonstrating its heightened focus on its products. On the concern side, the company is dependent on a limited number of customers for its revenue from operations. The loss of any of these customers individually or severally could have a material adverse effect on its business, operations and could have impacted its financial strength. Moreover, the company depends on a few suppliers for the supply of steel, its primary raw material. Further, it does not have definitive supply agreements with its suppliers for the supply of steel. If its suppliers fail to fulfil its requirement, it may have adverse effect on the business. 

The company is coming out with a maiden IPO of 28,80,000 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 102-108 per equity share. The aggregate size of the offer is around Rs 29.38 crore to Rs 31.10 crore based on lower and upper price band respectively. On performance front, the company’s total income has increased marginally by 2.21% to Rs 18157.30 lakh in Fiscal 2024 from Rs 17764.43 lakh in Fiscal 2023. The reason for the increase is mainly due to the gain on sale of fixed assets amounting Rs 53.41 lakh. Further the revenue from operations has increased marginally by 1.96% or Rs 346.87 lakh. Moreover, the profit after tax of the company increased from Rs 496.29 lakh in the Fiscal 2023 to Rs 668.88 lakh in the Fiscal 2024 representing an increase of 34.78%.

As a part of the company’s growth strategy, its focus is on increasing sales volume through expansion, diversification and spread in geographical outreach. It has a track record of developing forging and machining products for both automotive and nonautomotive sectors over a decade. In Fiscal 2024, 2023 and 2022, its revenue from sale of products to the foreign industrial market was Rs 1035.92 lakh, Rs 850.07 lakh and Rs 431.19 lakh, respectively. Further, its customer base of the foreign industrial market increased from 3 customers in Fiscal 2021 to 11 customers in Fiscal 2024. Its growth in domestic and international market can fetch it new business expansion and opportunities. To tap into the growing industrial market, it intends to leverage its engineering and product development capabilities to manufacture precision components for industrial applications.