Kross IPO analysis

Kross IPO will open for subscription on September 9, 2024 and close on September 11, 2024. We break down the auto parts manufacturer's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Kross IPO in a nutshell

• Quality : Its three-year average ROE and ROCE were nearly 26 per cent each during FY22-24.
  
• Growth : Its revenue and net profit grew 44.4 and 91.8 per cent per annum, respectively, during FY22-24.
  
• Valuation : Post the IPO, the stock will be valued at a P/E and P/B of 34.5 and 3.9 times, respectively.
  
• Overview: The company will benefit from the growing demand in the automotive sector, especially in the commercial vehicle segment. The increased freight rates, growing requirement for replacement auto parts and healthy industrial and infrastructure growth will support this growing demand. However, Kross operates in a cyclical industry and faces stiff competition from many organised players.

About Kross

Incorporated in 1991, Kross manufactures a range of forged and machined components, such as trailer axles and suspension assemblies, especially for commercial vehicles. The company operates five manufacturing facilities in Jharkhand, with a capacity utilisation of 68 per cent in FY24. Medium and heavy commercial vehicles (M&HCVs) accounted for over 85 per cent of its FY24 revenue. Kross majorly caters to the domestic market and exports account for only 1 per cent of its total revenue.

Strengths of Kross

• Loyal clients: Kross' marquee clients include major players such as Ashok Leyland and Tata International, which have long-term relationships with the company. Automobile clients tend to stick with component manufacturers due to the high costs and time investment involved in manufacturer onboarding, product testing and fitting.

Weaknesses of Kross

• Revenue concentration: Almost 50 per cent of Kross' total revenue comes from its top three clients. Such heavy reliance on a few clients is risky-any disputes with any of them will lead to huge fluctuations in its revenue.
  
• Geographic concentration: Kross' five manufacturing facilities are located in Jharkhand. This exposes the company to significant operational risk, as any adverse situation or calamity in the region can impact its production.

Risk report

Company and business

• Are earnings before tax of Kross more than Rs 50 crore in the last 12 months?
  Yes. The company reported a profit before tax of Rs 61 crore in FY24.
  
• Will Kross be able to scale up its business?
  Yes. The growing commercial automotive sector will create demand for the company's products.
  
• Does Kross have recognisable brands with client stickiness?
  Yes. The company benefits from strong client stickiness in the auto ancillary industry. Due to the stringent testing and approval processes involved in component manufacturer onboarding, clients tend to maintain long-term relationships with suppliers.
  
• Does the company have a credible moat?
  No. It operates in a very competitive industry with many organised players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, the promoters' stake will be 67.7 per cent.
  
• Do the top three managers have more than 15 years of combined leadership at Kross?
  Yes. Sudhir Rai, the chairman and managing director, has been with the company since its incorporation in 1991.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Kross free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE were nearly 26 per cent each. In FY24, its ROE and ROCE were around 31 per cent and 33 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flow from operations (CFO) during FY22-24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's debt to equity ratio was 0.8x in FY24.
  
• Is Kross free from reliance on huge working capital for day-to-day affairs?
  No. Kross operates in a working capital-intensive business. It recorded a working capital cycle of over 85 days in FY24.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. Proceeds from the IPO should help the company run its operation without relying on external funds.
  
• Is Kross free from meaningful contingent liabilities?
  No. Its contingent liabilities as a percentage of total equity was around 26 per cent as of FY24.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. After listing, the stock will offer an operating earnings yield of 4.5 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  No. Post-IPO, the stock will be valued at a P/E of 34.5 times compared to its peers' median of 20 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. Post-IPO, the stock will be valued at a P/B of 3.9 times compared to its peers' average of 4.3 times.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

Also read: Tolins Tyres IPO