IPO: Krystal Integrated Services

Krystal Integrated Services, an integrated facility management service company, will launch its IPO (initial public offering) on March 14, 2024. To help investors make an informed decision, here's a breakdown of the company's strengths, weaknesses and growth prospects.

In a nutshell

• Quality: The company's three-year average ROE (return on equity) and ROCE (return on capital employed) are 17.3 and 24.3 per cent, respectively. It also reported positive cash flow from operations in the last three financial years.
• Growth: Its revenue grew 23 per cent annually between FY21-23. Also, its PAT (profit after tax) compounded 87 per cent annually in the same period.
• Valuation: The stock is valued at a P/E (price-to-earnings) ratio and P/B (price-to-book) value of 29.6 and 2.8 times, respectively.
• Overview: Rapid urbanisation and growing requirement for professionally managed residential and commercial spaces are expected to support the increasing demand for outsourced services such as housekeeping, cleaning and warehouse management. However, the company faces stiff competition from many unorganised and organised players, where these services are easily replaceable.

About Krystal Integrated Services

Krystal Integrated Services is a facility management service company that offers various services such as housekeeping, landscaping, warehouse management, staffing and security personnel. It boasts a B2B business model which caters to several industries.

Strengths of Krystal Integrated Services

• Diversified offerings: The company provides various services and caters to multiple industries.

Weaknesses of Krystal Integrated Services

• High client concentration: Government contracts alone account for about 74 per cent of the company's total revenue from operations. As a result, a delay in payment can result in a significant blow to its financials. The company's top five customers accounted for 54 per cent of the revenue, with 47 per cent coming from Maharashtra alone
  
• Low entry barriers: Given that the industry has very minimal barriers to entry, the company faces stiff competition from many listed and unlisted players.

Risk report

Company and business

• Was the profit before tax of Krystal Integrated Services more than Rs 50 crore in the last 12 months?
  No. Its profit before tax for FY23 was Rs 39 crore.
• Will Krystal Integrated Services be able to scale up its business?
  Yes. The company primarily caters to government clients and can expand its operation to address other private demands.
• Do Krystal Integrated Services have recognisable brands with client stickiness?
  Yes. Its government contracts are repetitive. Further, it has long been associated with four of its top 10 customers.
• Does the company have a credible moat?
  No. It faces stiff competition from other listed and unlisted players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do the promoters hold more than a 25 per cent stake in the company?
  Yes. Post-IPO, the promoters' stake will increase to 70 per cent.
• Do the top three managers have more than 15 years of combined leadership at Krystal Integrated Services?
  Yes. The key managerial personnel and senior management of the company have over 15 years of combined 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 the company free of promoter pledging of its shares?
  Yes. The promoters have pledged no shares at present.

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 17.3 and 24.3 per cent, respectively. In FY23, both ROE and ROCE were 21 per cent respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flow from operations in the last three financial years. However, it reported a negative cash flow in H1FY24.
• Is the company's net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio, as of September 2023, was 0.4 times.
• Is Krystal Integrated Services free from reliance on huge working capital for day-to-day affairs?
  No. The company's 74 per cent of the FY23 revenue came from government contracts with a history of delayed payments, leading to high trade receivables and increased working capital requirements.
• Can the company run its business without relying on external funding in the next three years?
  No. It would have to rely on short-term debt for its working capital requirements.
• Is Krystal Integrated Services free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of total equity stood at around 23 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. According to FY23 numbers, the stock offers a 2.7 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a P/E of 29.6 times compared to its peers' median P/E of 32.6 times.
• Is the stock's price-to-book value less than its peers' average level?
  No. The stock is valued at a P/B of 2.8 times compared to its peers' average P/B of 2.2 times.

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

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