Gala Precision Engineering IPO analysis

Gala Precision Engineering IPO will open for subscription on September 2, 2024 and close on September 4, 2024. Here's a breakdown of the high-precision industrial component manufacturer's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Gala Precision Engineering IPO in a nutshell

• Quality : The company's three-year average ROE and ROCE were nearly 21 and 19 per cent, respectively, during FY22-24.
  
• Growth : The company's revenue and profit after tax jumped 18 and 84 per cent per annum, respectively, during FY22-24.
  
• Valuation : Post the IPO, the stock will be valued at a P/E and P/B ratio of 30.1 and 2.5 times, respectively.
  
• Overview: Gala Precision Engineering manufactures highly critical and niche industrial components that find applications in the automotive, railway and wind energy sectors. Its domain expertise, client stickiness, and growth in India's capital expenditure are favourable factors. However, a limited addressable market coupled with tough competition can impact the company's growth trajectory.

About Gala Precision Engineering

Incorporated in 2009, Gala Precision Engineering manufactures technical springs and special fastening solutions (nuts and bolts) that hold applications in the automotive, power, and infrastructure industries. The spring business is its largest revenue segment, which made up 80 per cent of its revenue as of FY24. Within this, the company primarily sells disc and strip springs (DSS) with a 10 per cent overall market share. But it holds a dominant 70 per cent share in DSS catering to the renewable energy sector. The company exports to 25 countries. This business made up nearly 38 per cent of its revenue as of FY24.

Strengths of Gala Precision Engineering

• Client stickiness: Gala manufactures critical industrial components that have to undergo a long-period of testing and audits before they can be commercialised. This is why the company enjoys long-standing relationships with most of its clients, who prefer to stick through rather than going through the hassle of finding other reliable and trustworthy replacements. Hence, the company boasts an average relationship of over eight years with its top 10 clients.

Weaknesses of Gala Precision Engineering

• Small addressable market: The components that Gala manufactures are highly critical with niche applications resulting in a small addressable market for the company. Moreover, the company requires a long period of time to onboard new clients and faces tough competition from much larger players in the international market.

Risk report

Company and business

• Are Gala Precision Engineering' earnings before tax more than Rs 50 crore in the last 12 months?
  No. The company reported a profit before tax of Rs 25 crore in FY24.
  
• Will Gala Precision Engineering be able to scale up its business?
  Yes. The steady growth in the renewable energy sector and the automobile industry, where the company's products hold a dominant presence, are expected to help the company scale up. It will also be undertaking capex ahead that will increase the size of its operations.
  
• Does Gala Precision Engineering have a recognisable brand recall with client stickiness?
  Yes. The company has long-standing relationships with many of its clients.
  
• Does the company have a credible moat?
  No. The company operates in a highly competitive environment with no particular product differentiation.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. Post the IPO, the promoters will hold a 55.4 per cent stake.
  
• Do the top three managers have over 15 years of combined leadership at Gala Precision Engineering?
  Yes. Chairman and managing director, Kirit Gala, has been associated with the company since its incorporation in February 2009.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information suggests otherwise.
  
• Is the company's accounting policy stable?
  Yes. No information suggests otherwise.
  
• Is Gala Precision Engineering free of promoter pledging of shares?
  Yes. The company's promoters have not pledged any shares.

Financials

• Did Gala Precision Engineering generate a current and three-year average ROE of more than 15 per cent and a ROCE of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE were nearly 21 and 19 per cent, respectively. In FY24, its ROE and ROCE were 21 and nearly 20 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. The company's operating cash flows were positive between FY22 and FY24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. Gala Precision Engineering had a net debt-to-equity ratio of 0.5 as of March 2024.
  
• Is Gala Precision Engineering free from reliance on huge working capital for day-to-day affairs?
  No. The company's average cash conversion cycle exceeded 150 days during FY22-24 due to high working capital requirement.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. The manageable level of debt on the balance sheet and the IPO proceeds should ensure that the company runs its business without relying on external funding.
  
• Is Gala Precision Engineering free from meaningful contingent liabilities?
  Yes. The company is free from meaningful contingent liabilities.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 4 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock will trade at a P/E ratio of 30 times compared to its peers' median level of 41.9 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B ratio of 2.5 times compared to its peers' average level of 6.1 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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