KRN Heat Exchanger IPO analysis

KRN Heat Exchanger IPO will open for subscription on September 25, 2024 and close on September 27, 2024. We break down the heat ventilation equipment manufacturer's strengths, weaknesses, and growth prospects to help investors make an informed decision. KRN Heat Exchanger IPO in a nutshell Quality : Its three-year average ROE and ROCE were around 57 and 39 per cent, respectively, between FY22 and FY24. Growth : Its revenue and net profit grew nearly 41 and 92 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 35 and 3 times, respectively. Overview: KNR Heat Exchanger , whose products primarily find usage in air conditioning and heat ventilation, is expected to benefit from the rapid growth in real estate, construction, manufacturing and warehousing sectors. The growth in these industries will keep the demand for commercial air conditioning and ventilation buoyant, translation into firm demand for the company's products. However, its high revenue concentration to a handful of customers is a key risk. About KRN Heat Exchanger and Refrigeration The company manufactures finned tube heat exchangers, used to improve heat transfer efficiency in the heating, ventilation, air conditioning and refrigeration industry (HVACR). Its product range includes condenser coils and evaporator units, among many others. The company derives close to 80 per cent of revenue from the HVACR industry, which is poised to grow nearly 15 per cent per annum till 2029. Moreover, the domestic heat exchanger market is also projected to clock double-digit growth by 2030. Strengths of KRN Heat Exchanger Established customer base: The company serves prestigious air conditioner giants, including Daikin, Schneider Electric, Blue Star , Voltas and Carrier. Forward integration: The company incorporated a wholly-owned subsidiary KRN HVAC Products to increase value-added products in its existing portfolio. It plans to manufacture new types of heat exchangers to cater to a wider range of product applications. Weaknesses of KRN Heat Exchanger Concentrated revenue: The company earns 33 per cent of its revenue from its largest customer Daikin, and 55 per cent from the top five customers. Any delay or cancellation of orders by these customers can adversely impact the company. Moreover, the company has no long-term agreements with its customers. Rising receivables and inventory: The company's revenue is not translating into operating cash flows as most of the money is stuck in receivables and inventory. Also, the percentage of inventory over cost of goods sold has more than doubled to 37 per cent between FY22-24, indicating an overestimation of demand and inefficiencies in production planning. KRN Heat Exchanger IPO details Total IPO size (Rs cr) 342 Offer for sale (Rs cr) - Fresh issue (Rs cr) 342 Price band (Rs) 209 - 220 Subscription dates September 25-27, 2024 Purpose of issue To fund a new manufacturing facility and general corporate purposes Post-IPO M-cap (Rs cr) 1,367 Net worth (Rs cr) 474 Promoter holding (%) 70.8