IPO: INOXCVA

INOXCVA, a cryogenic equipment manufacturer, is coming out with its IPO (initial public offering) on December 14, 2023. Here's a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Its three-year average ROE and ROCE are 28 per cent and 31 per cent, respectively. It also reported positive cash flow from operations in each of the last three financial years.
  
• Growth : Its revenue and net profit have grown by 28 and 26 per cent annually over the last three years.
  
• Valuation : The stock will be valued at a P/E and P/B of 35 and 11 times, respectively.
  
• Overview: Demand for clean energy and the government's recent push to increase the share of natural gas in its energy basket should drive growth. However, the strict regulatory environment of the segment and high working capital requirements are a concern.

About INOXCVA

INOXCVA is a leading global cryogenic equipment manufacturer, primarily specialising in cryogenic tanks. It also provides end-to-end cryogenic solutions for the storage, transportation and distribution of industrial gases. Additionally, it is involved in the procurement, liquefaction, storage, transportation, and regasification of natural gas. It has three primary revenue sources:

• Industrial gas (70 per cent of FY23 revenue)
  
• Liquified natural gas (24 per cent)
  
• Cryo scientific division (4 per cent)

Strengths of INOXCVA

• It is the largest Indian supplier of cryogenic equipment by revenue. In FY22, its revenue was four times higher than the second-largest player in the segment.
  
• High customer retention . Repeat customers accounted for 49 per cent of its FY23 revenue.

Weaknesses of INOXCVA

• Revenue concentration : Its top 10 customers accounted for 47 per cent of FY23 revenue.
  
• High working capital requirement . It has a high cash conversion cycle, around 147 days in FY23, and has to rely on debt for working capital requirements.

Risk report

Company and business

• Are earnings before tax of INOXCVA more than Rs 50 crore in the last 12 months?
  Yes. The company's profit before tax for FY23 was Rs 205 crore.
• Will INOXCVA be able to scale up its business?
  Yes. Rising demand for clean energy and the government's push to increase the share of natural gas in its energy basket should help it scale up.
• Do INOXCVA have recognizable brands with client stickiness?
  Yes, repeat customers accounted for 49 per cent of FY23 revenue.
• Does the company have a credible moat?
  Yes. It is the leading Indian cryogenic equipment manufacturer in India in terms of revenue. Also, the industry has stringent regulatory demands and high working capital requirements.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post IPO, the promoters' stake will be 75.2 per cent.
• Do the top three managers have more than 15 years of combined leadership at INOXCVA?
  Yes. Key managerial personnel and senior management have more than 15 years of experience.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is INOX CVA 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 are 28 and 33 percent, respectively. In FY23, its ROE and ROCE were 29 and 35 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flows from operations in each of the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt-to-equity ratio, as of March 2023, was 0.02 times.
• Is INOXCVA free from reliance on huge working capital for day-to-day affairs?
  No. The company's business affairs are working capital intensive.
• Can the company run its business without relying on external funding in the next three years?
  No, the company, despite effectively managing its debt, typically depends on debt to fulfil its working capital expenses.
• Is INOXCVA free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of total equity stood at around 31 per cent. Of that, 97 per cent accounts for corporate guarantees and guarantees given by banks, which are performance guarantees by the company.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 3.5 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  It will trade at a P/E of 34.7 times. It has no listed peers.
• Is the stock's price-to-book value less than its peers' average level?
  It will trade at a P/B of 10.8 times. It has no listed peers.

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

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