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PKH Ventures Ltd: Avoid

PKH Ventures Ltd: Avoid
  • Date

    30 Jun 2023 - 04 Jul 2023

  • Price Range

    ₹140 - ₹148

  • Minimum Order Quantity

    100

  • (D) RHP

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Incorporated in 2000, PKH Ventures Ltd. is in the business of construction & development, hospitality and management services. They are into the execution of civil construction works for third-party developers on a project basis and have been awarded two government projects viz., Hydro Power Pro- ject and Nagpur Project, and three Government Hotel Development Projects viz., Rajnagar Garhi Project, Pahadikhurd Project and Tara Resort Project. The civil construction business is executed by their subsidiary and construction arm, Garuda Construction. The company’s hospitality vertical is in the business of owning, managing and operating hotels, restaurants, QSRs, spas and the sale of food products. PKH Ventures have been responsible for the development of the Delhi Police Head- quarters in April 2021, which involved the construction of twin towers of seventeen storeys each, with a complete glass façade and steel bridge connecting the two towers. The company is looking forward to developing forthcoming development projects which include real estate development at Amritsar, Punjab; real estate redevelopment project at Dadar-Matunga, Mumbai; agro-processing cluster at Jalore, Rajasthan; cold storage park/facilities at Indore, Madhya Pradesh; and a wellness centre & resort at Chiplun, Maharashtra. The knowledge and experience gained while developing their Mum- bai hotels led the promoter to venture into the business of civil construction through, Garuda Con- struction, which is now their subsidiary since 2 April 2020. Garuda Construction provides end-to-end construction services for residential and commercial buildings. Under the Management Services ver- tical, the company in the past managed airport entry ticket counters, retail outlets at airports and toll management services. Presently, there are no such active contracts for these Management Services. At present under Management Services vertical, they provide services for the annual maintenance of the DelhiPolice headquarters as per the agreement entered into with the concessionaire.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes: Investment by way of equity in its subsidiary, Halaipani Hydro Project Private Limited, for the development of Hydro Power Project (Civil Construction and Electromechanical Works);
  • Investment by way of equity in its subsidiary, Garuda Construction, for funding long-term working capital requirements;
  • Pursuing inorganic growth through acquisitions and other strategic initiatives; and To fund expenditures towards general corporate purposes.
Investment Rationale:
Diversified business model helps in cushioning business performance during downtimes PKH Ventures are in the business of Construction & Development, Hospitality and Management Services. The company’s businesses generate income from diverse activities completely independent of each other. Eternal Building Assets has already received an annuity for a period of three years on part COD and will receive an annuity of Rs. 780 million per year till FY33. Considering a 40% equity stake in Eternal Infra, the company will be entitled to a pre-tax amount of Rs. 278.6 million per an- num. Its civil construction works for third-party developers generate revenue from works contract charges and its hospitality vertical generates income from hotels, restaurants, and the sale of food. Further, under the Hydro Power Project awarded by the State of Arunachal Pradesh, the company will receive income from the sale of power once the Hydro Power Project is commissioned by June 2024. Asset light model in civil construction business aids financial performance The company has adopted an asset-light model approach for its civil construction business and for that, it relies on third-party suppliers for equipment and labour. Since the location of the Government Projects, Government Hotel Development Projects and forthcoming Development Projects are in different geographies like Punjab, Arunachal Pradesh, Maharashtra, Madhya Pradesh and Rajasthan, it is difficult and unviable to mobilize heavy equipment and machinery from one place to anoth- er for the execution of projects at such diverse locations. Also, a large amount of capital is required to acquire construction equipment and machinery, which can otherwise be effectively and more profitably deployed in other areas of the company’s business. The deployment of equipment and labour through third-party contractors at these locations helps to reduce fixed costs, make the execution of construction projects cost efficient and increase margins
Valuation and Outlook:
The construction and development sector will be a major driver for growth in India. The construction sector is the country’s second-largest economic segment after agriculture. The sector contributed 8% to the national GVA (at constant price) in FY22. PKH Venture’s diversification into new areas for the Construction & Development vertical will increase their financial and technical ability, making the eligible to bid for larger future projects and to effectively leverage their experience in the execution of such projects. Further, its subsidiary, GarudaUr-ban Remedies Limited, is proposing to set up an agro-processing cluster in the Jalore district of Rajasthan. The agro-processing cluster will provide basic enabling infrastructure like roads, water supply, power supply, drainage etc. and core infrastructure like warehouses, cold storage, sorting, grading etc. However, we are of the opinion that the company’s focus across different segments may be a concern in their effective implementation. On the financial front, the debt has increased significantly to Rs. 748 million for the nine months ended31De-cember 2022 compared Rs. 486 million posted in the year ended 31 March 2022 , whereas the revenue has shown a degrowth in the last three years. On the upper end of the price band, the issue will be valued at 24.8x of annualized FY23 earnings which we believe is richly valued. We, thus, recommend an “Avoid” rating for the issue

ideaForge Technology Ltd: Subscribe

ideaForge Technology Ltd: Subscribe
  • Date

    26 Jun 2023 - 29 Jun 2023

  • Price Range

    ₹638 - ₹672

  • Minimum Order Quantity

    22

  • (D) RHP

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ideaForge Technology Ltd, a manufacturing company offering Unmanned Aircraft Systems (UAS), is engaged in drone manufacturing and deployment with applications across mapping, security and surveillance. The company has categorized its product portfolio into hardware, software and embedded sub-systems. The company offers a broad range of products with feature-based differentiation targeted to serve civil services and defense (dual use). The company’s growth in revenue and profitability can be accredited to the robust product portfolio and technology differentiation with a market share of 50% in FY22. Along with this, their drones assist defense forces in conducting intelligence, surveillance and reconnaissance (ISR) operations along borders, help navigate a wide range of mining area planning and help boost construction and real estate. The reach and acceptance of the company’s products can be gauged from the fact that an ideaForge- manufactured drone takes off every five minutes for surveillance and mapping on average. Presently, the company has its manufacturing facility in Navi Mumbai, Maharashtra, with in house automation systems, modern technology and advance equipment catering to 100 channel partners and three national distributors as of 31 May 2023.
Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • Repayment/ prepayment, of certain indebtedness availed by the company.
  • Funding working capital requirements.
  • Investment in product development.
  • General corporate purposes
Investment Rationale:

Market leading position in the Indian UAS market provides headroom for growth

ideaForge is the pioneer and market leader in the Indian ‘UAS’ market, with a market share of approximately 50% in FY22. Incorporated in 2007, the firm enjoys the first-mover advantage in the market, as it is among the first few Indian firms to enter the UAV industry as well as the first company to design and produce VTOL UAVs domestically in India in 2009. Additionally, they were the first business to take part in the 2018 Indian Mobile Congress demonstration of 5G-enabled UAVs. Their internal design, development, engineering, and manufacturing skills have allowed them to create better products based on changing client expectations, ultimately improving the customer experience. Their capacity to create fully integrated systems and command over the entire stack set them apart from other market participants. Due to their leadership and first mover advantage, they have been able to improve users’ experiences by incorporating consumer data and ongoing technological advancements.

Diversified product portfolio catering to a wider customer base provides cushion to  business 

With a wide variety of products, ideaForge differentiates them based on features like weight class (about 2-7 kg), endurance class (25-120 minutes of flight time), take-off altitude range (up to 6,000 metres), communication range (around 2-15 km), payload kinds, etc. Their UAVs are used in a variety of civil and military applications. Additionally, their UAVs may be altered to handle applications in infrastructure, retail, agricultural, and delivery. As of 31 May 2023, the company catered to 265 clients spanning across Indian defence customers and civil customers comprising certain of the central armed police forces, state police departments, disaster management forces, forest departments and private contractors. Over the years, their consistent emphasis on product quality and dependability has resulted in client loyalty.
Valuation and Outlook:
The business model aids companies like ideaForge to maintain long-term business relations with customers along with attaining healthy margins due to inherently high customer retention (approximately 90% of its revenue attained from repeat customers). The company has all the right ingredients such as the first mover advantage in the drone industry, diversified product portfolio, wide range of customers to sustain business performance in the long run. Moreover, sector tailwinds such as a ban of imports from drone manufacturers opens up a large opportunity for the company going forward. Additionally, as of 2022, the potential market size for the Indian drone industry was approximately USD 2.7 billion, with the Indian drone industry estimated to grow at an 80% CAGR in the FY22-27 period to USD 812 million. On the upper end of the price band, the issue is valued at 82.8x of the floor price. Also, the company’s order book value contracted to Rs 192.3 crores inFY23 From R.s 310.9 crores a year earlier, with about 70% of revenues coming from Indian defence forces in FY23. Therefore, we recommend a ‘’SUBSCRIBE’’ rating for the benefit of listing gains.

HMA Agro Industries Ltd: AVOID

HMA Agro Industries Ltd: AVOID
  • Date

    20 June 2023 - 23 June 2023

  • Price Range

    ₹555 - ₹585

  • Minimum Order Quantity

    25

  • (D) RHP

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HMA Agro Industries Ltd. (HAIL) is a three-star export house recognized by the Government of India. It’s a flagship company of the HMA Group which has been in the meat industry for over four decades. HAIL is currently among the largest exporters of frozen buffalo meat products from India and it accounts for more than 10% of India’s total export of frozen buffalo meat. The company products are mainly packaged under the brand name Black Gold, Kamil & HMA and exported to over 40 countries across the globe. The company deals in buffalo meat and allied products. Unlike beef or pork, buffalo meat is free from religious constraints and has the added advantage of low fat and cholesterol. The company has four fully integrated packaged meat processing plants which are located at Aligarh, Mohali, Agra, and Parbhani, and is in the process of setting up a fifth fully integrated-owned meat product processing unit in Haryana. HAIL is also in advanced stages to acquire an additional plant at Unnao and expects to complete this acquisition by Q2FY24. These plants together would take total in-house meat product processing capacities to more than 4,00,000 mtpa spread over six different owned plants by FY24. Further, the procurement of raw material is done by the company and then this raw material is sent to various processing units to process the raw material into final products. It exports these branded finished products through its distribution channels and most of these processing units are owned by its subsidiaries and third parties own some.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
  • Funding working capital requirements of the company.
  • General Corporate Purpose.
Investment Rationale:
Maintain long-standing customer base with well-established brands
HAIL’s business model is more customer-centric and requires optimum utilization of existing facilities, assuring a quality supply of raw materials, and achieving consequent economies of scale. The company has long-standing relations with customers which are spread in various geographies across the globe. The company has over the last few years executed such relationships and hence developed new markets by exploring higher margin areas by maintaining consistent quality output and delivery timelines. Further, the company is in the top three meat exporters in India exporting to more than 40 countries under the brands Black Gold, Kamil & HMA. These products have been sold under these brand names for many years and due to continuity, they carry brand recall values at the end customer level. Ever since its inception, HAIL has been laying utmost importance on building a brand by focusing on the quality of products which has helped to get repetitive orders from customers and helps the company’s business model to prove successful and scalable.
Well diversified market reach with focus on new geographies to accelerate growth going ahead
HAIL caters to both, the domestic as well as international markets. The products are exported to more than 40 countries. To take advantage of its robust export business and well-established distribution channels, the company has recently diversified its product portfolio by adding frozen fish products & basmati rice and plans to start poultry and other agri products as business verticals. In the last few years, the company has been strategically reducing focus on low-margin markets such as Vietnam, Myanmar, and Philippines, and gradually shifting towards higher-margin markets such as Egypt, Hong Kong, and Malaysia which will improve margins and provide growth visibility going ahead
Valuation and Outlook:
HAIL is a three-star export house processing and exporting processed food products. Currently, the company is one of the top three market leaders in the export of packaged frozen buffalo meat products from India and recently begun a product diversification process into other food processing and exports of products such as frozen fish and basmati rice. Further, the company intends to keep adding new products and become one of the trusted and well-recognized names in the food export business from India. In the last few years, the company has been strategically reducing its focus on low-margin markets and gradually shifting towards higher-margin markets to improve margins and accelerate growth going ahead. The company has long-standing relations with customers which are spread in various geographies across the globe. However, it is to be noted that the company is heavily dependent on the export business for its business operations which contributed to around 90.2% of its revenue in FY22. The company grew its Rev/EBITDA/PAT at a CAGR of 14.0%/85.7%/60.1% during the FY20-22 period. On the upper end of the price band, the issue is valued at a P/E of 24.0x based on FY2022 earnings which we feel is richly valued. It is also interesting to note that Rs. 330 crores of the issue size is an OFS. In terms of listing gains, we recommend an “Avoid” rating for the issue . Following a moderation in valuation going forward, we will revisit the company to take a long term perspective on the business

Cyient DLM Ltd: Subscribe

Cyient DLM Ltd: Subscribe
  • Date

    27 Apr 2023 - 30 Apr 2023

  • Price Range

    ₹250 - ₹265

  • Minimum Order Quantity

    56

  • (D) RHP

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Cyient DLM Limited (“Cyient DLM”) was incorporated on 30 June, 1993. Promoted by Cyient Limited, Cyient DLM is one of the leading integrated Electronic Manufacturing Services (“EMS”) and solutions provider with strong capabilities across the value chain and the entire life cycle of a product. Cyient DLM is a qualified supplier to global OEMs in the Aerospace and Defence, Medical Technology, and Industrial sectors. ‘Low volume, high mix’ (LVHM) is a type of contract manufacturing setup that typically has a very high emphasis on quality and customization which changes according to the requirements of the customer. They have over 22 years of experience in developing high-mix, low-to medium volume highly complex systems. Their EMS is provided as Build to Print (“B2P”) and Build to Specification (“B2S”) services to their clients. The company’s B2P solutions involve their client providing the design for the product for which they provide agile and flexible manufacturing services. Their B2S services involve utilizing their promoter’s design capabilities to design the relevant product based on the specifications provided by the client and manufacturing the product. Their solutions primarily comprise: (i) printed circuit board (“PCB”) assembly (“PCBA”), (ii) cable harnesses, and (iii) box builds which are used in safety-critical systems such as cockpits, inflight systems, landing systems, and medical diagnostic equipments. The company has three facilities spread across Mysuru, Hyderabad and Bengaluru, with a total manufacturing area of 229,061 sq. ft.
Objects of the issue:

The net proceeds from the fresh issue will be used towards the following purposes:

  • Repayment/ prepayment, of certain of the borrowings
  • Funding incremental working capital requirements
  • Funding capital expenditure of the company
  • Achieving inorganic growth through acquisitions
  • General corporate purposes
Investment Rationale:
High entry barriers for competitors due to technical expertise and long-standing relationship with customers
The company’s clients are primarily engaged in industries such as aerospace and defense, medical technology, and industrials which are typically highly regulated industries. Their engagement with the client commences at the early stages of the product life cycle right from the design stage, which also leads to higher customer stickiness. The company’s key capabilities are in the domain of highly complex, safety-critical electronic systems with a high criticality of failure, such as cockpit systems and flight control systems which differentiates them from other EMS companies. Since specialized sectors such as aerospace and defense, and medical are highly complex and expensive, there are obvious challenges and barriers that make it almost impossible for new players to enter this market. High capital requirements and strict regulations are the key barriers preventing companies from entering these sectors. Cyient DLM has an industry-leading order book amounting to Rs. 2,432.6 crores as of 31 March, 2023, and a pipeline of prospective projects. They have consciously focused on reducing the long tail of customers by focusing on growing their business and relationships with strategic and marquee customers. Their long-term contracts with clients have a term ranging between 3 years and more than 15 years. One such contract is their contract with Honeywell International Inc for avionics LRUs.

Diverse in-house manufacturing infrastructure, robust supply chain, and strong capabilities across the product value chain

Cyient DLM is a complete, end-to-end integrated EMS and solutions provider with robust capabilities providing both B2P and B2S services. As an integrated manufacturing partner providing ‘design-led manufacturing’ solutions to their customers, they provide design through the design team of their promoter and, manufacturing, testing, and certification support. The company’s Mysuru and Hyderabad facilities are focused on electronics manufacturing processes including PCBA, cable harnesses, and box builds, which closely align with their core competence in electronics systems, integration, and manufacturing services, and are equipped with advanced equipment. Their Bengaluru facility is focused on producing high-precision, low-volume mechanical manufacturing products and is equipped with milling, drilling, turning, and grinding machines. Their supply chain process is electronically managed, monitored, and interconnected by way of a supply chain control tower and visualization tool. Currently, their dedicated supply chain and materials team consists of 73 members. As of 31 March, 2023, they have over 776 active vendors of raw materials, with over 63.3% of them from outside India.
Valuation and Outlook:
The company enjoys several competitive advantages and capabilities, giving them a strong edge and also providing them with certain key factors which are difficult to replicate. Some of these factors include their sectoral expertise, the high complexity of products they manufacture and the solutions they provide, their ability to provide end-to-end solutions, and the trust of their customers they enjoy. Cyient DLM has carved itself a niche in the EMS and solution-providing sectors. With its strategies in motion, it is prepared to capitalize on the promising opportunities lined up due to sectoral tailwinds. Post-IPO, the reduction in debt will save financial cost and increase the company’s earnings. We advise cash surplus investors to park funds for long-term rewards.

On the upper end of the price band, the issue will be valued at 34.2x FY23 EPS which we believe is fairly priced. We, thus, recommend a “SUBSCRIBE” rating for the issue.

Mankind Pharma Ltd : AVOID

Mankind Pharma Ltd : AVOID
  • Date

    25 Apr 2023 - 27 Apr 2023

  • Price Range

    ₹1026 - ₹1080

  • Minimum Order Quantity

    13

  • (D) RHP

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Mankind Pharma Ltd. is India’s fourth largest pharmaceutical company in terms of domestic sales and third largest in terms of sales volume for Moving Annual Total (MAT) as of December 2022. The company is engaged in developing, manufacturing, and marketing a diverse range of pharmaceutical formulations across various acute and chronic therapeutic areas in India, including anti-infective, gastro, cardiovascular, anti- diabetic, CNS, VMN, and respiratory. Mankind also entered the consumer healthcare industry in 2007 and has since established several differentiated brands in the condoms, pregnancy detection, emergency contraceptives, antacid powders, vitamin and mineral supplements, and anti-acne preparations categories. Further, the company operates 25 manufacturing facilities across India in the states of Himachal Pradesh, Sikkim, Rajasthan, Andhra Pradesh, Maharashtra, and Uttarakhand, and had 4,121 manufacturing personnel as of December 31, 2022. The company also has a pan-India marketing presence, with a field force of 11,691 medical representatives and 3,561 field managers, as of December 31, 2022. The company is purely a domestic focus play, with revenue from domestic busi- ness contributing 97.6% of total sales for FY22. The company’s products are sold in 21 countries, including regulated and semi-regulated emerging markets such as the United States, Latin America, Southeast Asia, Africa, the Middle East, and the Commonwealth of Independent States.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
  • To carry out the offer for sale.
Investment Rationale:
Focus on domestic business for long-term growth visibility.
Mankind Pharma Ltd. is India’s fourth largest pharmaceutical company in terms of domestic sales and third largest in terms of sales volume for Moving Annual Total (MAT) as of December 2022. The market share of the company in terms of Domestic Sales in the IPM increased from 4.1% to 4.3% between FY20 and MAT December 2022, which represents the fastest growth among the 10 largest corporates in the IPM. The revenue from operations in India contributed to 97.6% of the total sales for FY22, which was one of the highest among peers. In India, Mankind has historically been present through its product portfolio in acute therapeutic areas and has slowly shifted focus to chronic thera- peutic areas. Their Domestic Sales in acute therapeutic areas grew at a CAGR of 11% from FY20 to MAT December 2022, which has outpaced IPM’s growth rate for acute therapeutic areas by 1.2 times. Further, with the increased focus on chronic therapeutic areas, the Domestic Sales in chronic therapeutic areas grew at a CAGR of 14% from FY20 to MAT December 2022, which has outpaced the IPM’s growth rate for chronic therapeutic areas by 1.4 times. The growth has been driven by vol- umes and had the third largest volume share among the Top-10 largest corporates in the IPM for MAT December 2022. Further, the company strategically acquires brands and companies across key markets as well as explores in-licensing and co-development opportunities with other companies to diversify its therapeutic portfolio.
Pan-India presence with a strong distribution network to cater future demand.
Mankind has a pan-India marketing and distribution presence, and had one of the largest distribution networks in the IPM with 11,691 medical representatives and 3,561 field managers, as of December 31, 2022, and over 80% of doctors in India prescribed their formulations during MAT December 2022. They have also established a significant distribution network and sold their products to over 12,000 stockists and engaged with 75 C&F agents. They have an established presence and a large share of Domestic Sales in Class II-IV cities and rural markets. The Domestic Sales from Class II-IV cities and rural markets contributed 47% of their total Domestic Sales for MAT December 2022, higher than 37% recorded for the IPM, indicating their established presence across high-growth markets in India.
Valuation and Outlook:
Mankind Pharma is engaged in developing, manufacturing, and marketing a diverse range of phar- maceutical formulations across various acute and chronic therapeutic areas, as well as several con- sumer healthcare products. The company has operated with a combination of the Indian pharmaceu- tical formulations and consumer healthcare sectors to provide quality products at affordable prices and has an established track record of building and scaling brands in-house. They are present in several acute and chronic therapeutic areas in India, including anti-infective, cardiovascular, gastrointestinal, anti-diabetic, CNS, VMN, and respiratory. Further, the company entered the consumer healthcare industry in 2007 and established several differentiated brands in the condoms, pregnancy detection, emergency contraceptives, antacid powders, vitamin, and mineral supplements, and anti- acne preparations categories. They are the category leaders in (I) the male condom category, (ii) the pregnancy detection kit category, and (iii) the emergency contraceptives category. Further, the com- pany has a track record of sustained growth in revenues and profitability. The company grew its revenue at a CAGR of 14.2% during the FY20-22 period. On the upper price band, the issue is valued at a P/E of 30.2x based on FY2022 earnings which we feel is richly valued, as it is higher than the industry’s major players such as Sun Pharma, Cipla and Dr. Reddy’s. We, therefore, recommend an “Avoid” rating for the issue.

Avalon Technologies Ltd : AVOID

Avalon Technologies Ltd : AVOID
  • Date

    03 Apr 2023 - 06 Apr 2023

  • Price Range

    ₹415 - ₹436

  • Minimum Order Quantity

    34

  • (D) RHP

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Avalon Technologies is one of the leading fully integrated Electronic Manufacturing Services (EMS) companies with end-to-end capabilities in delivering box build solutions in India, with a focus on high value precision engineered products. Through a unique global delivery model, they also provide a full stack product and solution suite, right from printed circuit board (PCB) design and assembly to the manufacture of complete electronic systems (Box Build) to global original equipment manufacturers (OEMs) located in the United States, China, Netherlands, and Japan. For FY22, the company derived 37.8% through domestic sales, while US contributed around 62.2% of total sales. Through end-to-end operations, the company believes that customers achieve tangible benefits such as reduced manufacturing costs, improved supply chain management and reduced inventory oldness. The company has 12 manufacturing facilities located across the United States and India. Ten units in India, in the states of Tamil Nadu (8) and Karnataka (2) and two units in the US in the states of California and Georgia
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
  • Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the Company and one of their Material Subsidiaries, ATSPL.
  • Funding incremental working capital requirements of the company.
  • General corporate purposes.
Investment Rationale:

Well-diversified business with varied opportunities for expansion.

The company’s business is well-diversified in terms of end-use industries, customers, geographies, and offerings. They have over the years diversified and expanded their customer bases, and developed operations to cater to various end-use industries across multiple product capabilities. They are present in major industry verticals, including clean energy, mobility, industrial, communication, and medical. In FY22 and eight months ended November 30, 2022, the clean energy segment accounted for 20.3% and 23.4% of revenues, respectively. They also cater to industries that require high-precision manufacturing, including aerospace, defense, and medical. Further, the company has also diversified in terms of offerings, namely PCBA, cable assembly and wire harnesses, sheet metal fabrication, machining, magnetics, injection molded plastics, and end-to-end box-build. The diversification on this front allows them to grow in multiple verticals and also shields them from a slowdown in some industries.

Long-standing relationships with marque customers enable to maintain strong financial performance.

Avalon Technologies has built long-term relationships with customers over the years through their diversified product portfolio. As of November 30, 2022, they had an average relationship of eight years, with these customers accounting for 80% of the revenue in FY22 and in the eight months ended November 30, 2022. The company has established and will continue to focus on strengthening long-standing relationships with well-known customers across the end-use industries. Further, Avalon Technologies is a supplier to certain key customers in the railway and aerospace vertical in India. The company also provides final integrated solutions to some of their customers’ end clients through logistics and warehousing support, realizing significant supply chain efficiencies for such customers. Certain customers locate their distribution centers inside the company’s manufacturing facilities in addition to having dedicated lines, thereby ensuring highly efficient distribution operations for customers.

Valuation and Outlook:

Avalon Technologies has a unique global delivery model, comprising design and manufacturing capabilities across both India and the United States. Avalon Technologies is the only Indian EMS company with full-fledged manufacturing facilities in the United States, which gives them a unique competitive advantage in the North American markets. The company also developed strong relationships with certain customers through a client servicing model which aims to provide fully integrated solutions, robust manufacturing capabilities, delivering quality products on time, supply chain efficiency as well as a focus on new product development. The company’s strong product capabilities, high quality, and loyal customer base have enabled them to maintain strong financial performance. The current order book (open order) of the company stood at Rs 11,902 mn, with majority of the open orders to be fulfilled within ~1.5 years. The company’s financial stability and positive cash flow have enabled them to meet the present and future requirements of its customers. Further, the company has a track record of sustained growth in revenues and profitability. The company grew its revenue at a CAGR of 14.2% during FY20-22 period, though lower than the industry average of 43.9% registered during FY20-22 period. On the upper price band, the issue is valued at a P/E of 38.8x based on FY2022 earnings which we feel is richly valued. We, therefore, recommend an “Avoid” rating for the issue.

Udayshivakumar infra Pvt Ltd : SUBSCRIBE

Udayshivakumar infra Pvt Ltd : SUBSCRIBE
  • Date

    20 Mar 2023 - 23 Mar 2023

  • Price Range

    ₹33 - ₹35

  • Minimum Order Quantity

    428

  • (D) RHP

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Incorporated on 22 August, 2002, Udayshivakumar Infra Limited (UIL) is a company engaged in the construction of roads including national highways, state highways, district roads, smart roads under PM’s Smart City Mission projects, smart roads under municipal corporations, Bruhat Bengaluru Mahanagara Palike (BBMP), local area roads in various taluka places, etc. in the state of Karnataka. The company is also engaged in construction of bridges across major and minor rivers, Railway Over Bridges (ROB), construction of major and minor irrigation and canal projects in Karnataka. As on December 31, 2022, the company’s equipment base comprised 111 construction pieces of equipment, 46 dumpers, 51 other construction vehicles, and seven Ready Mix Concrete (RMC) plants (out of which one is taken on lease). Also, they have one stone quarry owned by M/s. Udayshivakumar Stone Crusher.
Objects of the issue:
The objects of the net fresh issue is to raise funds for:
  • Funding incremental working capital requirements of the company.
  • General corporate purposes.
Investment Rationale:

Large and consistent order book of roads, flyovers, and irrigation projects from the Karnataka state government

The primary focus on roads, bridges, flyovers and irrigation projects has helped UIL in gaining technical expertise for undertaking projects of different sizes involving varying degrees of complexities by establishing a modern fleet of construction machinery, equipment, and skilled manpower. As on 31 December, 2022, UIL had an order book of 46 projects (including 24 roads, 7 smart roads, 1 bridge, 9 irrigation projects, 3 civil construction works, and 2 toll plazas) with a total value of Rs. 12,903.8 million, out of which 30 projects are underway and work is yet to begin on the remaining 14 projects. The consistent growth in order book in the past was primarily due to UIL’s ability to successfully bid and win new projects. Technical capabilities, timely performance, reputation for quality and timely delivery, financial strength as well as price competitiveness have enabled the company to successfully bid and win projects. UIL has developed long-standing relationships with clients like PWD,NH, Morth, BBMP, KBJNL,VJNL,KIADB,DHUDA,KPWP & IWTD, and other local bodies.

Strong execution capabilities and experienced management team.

Since fiscal 2015, UIL along with the erstwhile partnership firm, M/s. Udayshivakumar has completed 30 projects, having an aggregate contract value of Rs. 6,846.8 million. UIL has three important ingredients required by any infrastructure company i.e., an in-house design and engineering team, a fleet of modern construction machinery and equipment to ensure high-quality construction, and skilled manpower to execute projects on time. The in-house engineering team of 27 engineers has the necessary skills and expertise in preparing detailed architectural and/or structural designs based on the conceptual requirements of clients. UIL’s management team is well qualified and experienced in the roads, bridges, and irrigation projects’ construction and has been responsible for the growth of their business and operations. The company’s promoter has more than 25 years of experience in the infrastructure sector and has been instrumental in driving growth since the inception of the business.

Valuation and Outlook:

Going forward, UIL intends to capitalize on its experience and continue to selectively pursue larger roads, bridges, and irrigation projects, both independently and in partnership with other players. Inhouse integration has been an integral part of growth over the years and the company seeks to further enhance its in-house competencies by expanding into various functional aspects of projects, thereby eliminating dependence on third parties to avoid risks and minimizing costs associated with these functions. On the financial front, UIL’s EBITDA margin (11.19% in FY21 vs 13.35% in FY22 vs 16.16% in 6MFY23) and PAT margin (4.41% in FY21 vs 6.52% in FY22 vs 9.35% in 6MFY23) have shown an improving trend. However, the company carries concentration risk as it is primarily focused on the State of Karnataka and there has been no meaningful growth in revenues over the past few years. At the upper end of the price band, the issue is valued at a P/E of 11x based on FY2022 earnings which we feel is reasonable. Hence, we recommend a “SUBSCRIBE” rating for the benefit of listing gains.

 

Radiant Cash Management Services Ltd : AVOID

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  • Date

    13 Mar 2023 - 15 Mar 2023

  • Price Range

    ₹133 - ₹140

  • Minimum Order Quantity

    100

  • (D) RHP

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Founded in 2005, Radiant Cash Management Services Ltd. (RCMSL) is an ISO-certified company offering integrated cash logistics services. The company operates its services under five business verticals which include cash pick-up and delivery, network currency management, cash processing, cash vans /cash in transit, and other value-added services. The company’s client base encompasses some of the largest foreign, private, and public sector banks, with Axis Bank, Citibank, Deutsche Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Standard Chartered Bank, State Bank of India, The Hong Kong and Shanghai Banking Corporation Limited and Yes Bank being their key clients. Additionally, in the end user segment, they have diversified their services into multiple sectors including e-commerce, retail, NBFCs, insurance, e-commerce logistics, railways, and retail petroleum distribution. RCMSL has been servicing its clients through 739 fabricated armoured vans and a support team consisting of 8,780 employees and contractual workers. As of July 31, 2022, the company extended its presence to 55,513 touch points, covering 13,044 pin codes across all districts in India (other than Lakshadweep).
Objects of the issue:
The IPO proceeds of the fresh issue will be used towards the following purposes:
  • Funding working capital requirements;
  • Funding capital expenditure requirements for the purchase of specially fabricated armored vans;
  • General corporate purposes.
Investment Rationale:

Higher focus on network currency management and other value-added services and favorable industry dynamics to drive business growth.

The RCM market is estimated at Rs.6.8 billion in FY2021 and is projected to grow at a CAGR of 20.3% to reach a market size of Rs.20.4 billion in FY2027. The company provides retail cash management services (except ATM related services), with a focus on network currency management and other value-added services. This provides the company with better pricing power and operating leverage compared to ATM-related services, leading to higher margin realizations. It is to be noted that RCMS is in the top three players that account for more than 75% of the total market share of the RCM market. Moreover, regulations in the industry are designed to ensure that cash management companies meet certain operating standards concerning the handling of cash. This industry policy is in the company’s favor as it is expected to drive further consolidation and create high entry-level barriers for other
new players.

Strong presence in Tier 2 and Tier 3+ locations

As of July 31, 2022, out of the total touch points covered by the company, 86.1% of touch points were located in tier 2 and tier 3+ towns and cities which contributed about 85.6% of the total revenues of the company. With the government’s financial inclusion programs like Pradhan Mantri Jan Dhan Yojana and other direct benefit transfers in place, cash utilization and circulation is expected to grow further in tier 2 and tier 3+ towns and cities, leading to an increase in the demand for cash management services in these areas. Moreover, a higher preference for cash management services among retailers, NBFCs, restaurants, insurance companies, and railways, especially in lower-tier cities, is likely to fuel growth for the company’s business.

Valuation and Outlook:
Radiant Cash Management Services Ltd. is one of the largest players in the RCM segment in terms of network locations served in the industry. The company believes that increased financialization and formalization of theIndian economy will require a greater amount of cash to be processed and in circulation, benefitting the company in the long run. In addition, the company aims to shift its business mix towards providing more value-added services which will help to improve the margin profile. However, RCMSL is exposed to multiple operational risks and is subject to seasonal fluctuations in the end-user industries. On the upper end of the price band, the issue is valued at a P/E of 26.3x based on FY2022 earnings which we feel is on the steeper side compared to its peer
group (SIS Limited and CMS Info Systems). We, therefore, recommend an “AVOID” rating for the issue.

Global Surfaces Ltd : AVOID

Global Surfaces Ltd : AVOID
  • Date

    13 Mar 2023 - 15 Mar 2023

  • Price Range

    ₹133 - ₹140

  • Minimum Order Quantity

    100

  • (D) RHP

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Incorporated in 1964, Divgi TorqTransfer Systems Ltd. (DTTSL) is engaged in manufacturing and supplying transfer case systems, torque couplers, and providing DCT solutions to various segments of the automotive industry. The company has also focused on designing and developing prototypes of transmission systems for EVs and is in the process of launching domestically manufactured DCT systems for the Indian market. Moreover, DTTSL is the only player in the market that manufactures and exports transfer cases to global OEMs from India along with being the sole manufacturer of torque couplers in India. The company is in the list of a select few to serve both as a systems-level solution provider as well as a component kit supplier to global OEMs and Tier I transmission systems suppliers. The company’s client base includes several marquee domestic and global OEMs in the automobile sector such as Tata Motors and Mahindra & Mahindra, and global suppliers such as BorgWarner. Presently, the company has three manufacturing and assembling facilities across India located at Sirsi in Karnataka, and Shivare and Bhosari near Pune in Maharashtra. On the global front, the company has expanded its services to automotive OEMs across key markets like the USA, China, Korea, Russia, etc.

Objects of the issue:
The IPO proceeds of the fresh issue will be used towards the following purposes:
  • Funding capital expenditure requirements for the purchase of equipments/machineries of the company’s manufacturing facilities.
  • General corporate purposes.
Investment Rationale:

Higher focus on the engineered quartz segment is set to drive business growth going forward 
It is estimated that the market for EV transmission is expected to grow at a CAGR of 77-82% in the FY2022-27 period in both volume and value terms. To capitalize on this opportunity, the company intends to increase its market share in both the Indian and overseas markets by providing comprehensive transmission solutions and components to EV OEMs and acquiring new customers within this segment. Presently, the company has a contract for the supply of EV transmission systems for one of the leading providers of EVs in India. However, this has not materialized yet commercially. Another area of interest for the company is the UV segment in which its share in total PV production has risen to 35% from 20% earlier. Thus, with higher penetration of DCT in the compact UV and UV segments, the company stands to benefit as it is the only company to manufacture DCT systems in the Indian market.

Strategically located manufacturing facilities
The business has followed a strategic approach in setting up its facilities in a manner that helped them to minimize its costs. Illustrating this, the company’s manufacturing facility – Unit I is located near its key raw material (i.e. blocks of natural stones) where it could source its raw materials more efficiently, thereby reducing the logistics and transportation cost of the business. Moreover, the company has positioned its new manufacturing facility in The Jebel Ali Free Zone, Dubai where it enjoys the benefit of being income tax exempt and having free trade privileges as compared to manufacturing units established in landlocked areas that use rail and roads for transportation.

Valuation and Outlook:

On the way forward, Global Surfaces Ltd. aims on increasing its focus on the engineered quartz segment wherein it commands higher margins as compared to the natural stones segment. While the company’s overall capacity utilization for natural stones stood at 63.0%, 57.2%, and 28.7% for FY20, FY21, and FY22, respectively, the engineered quartz segment’s overall capacity utilization was reported at 70.4%, 64.0%, and 69.0% for the period. On the upper end of the price band, the issue is valued at a P/E of 13x based on FY2022 earnings. However, the declining margin profile of the business (EBITDA margin: 24.7% in FY20 v/s 22.0% in FY22) and deterioration in key return ratios like ROCE (33.0% in FY20 v/s 20.9% in FY22) and ROE (32.5% in FY20 v/s 26.6% in FY22) remain a cause of concern. We, therefore, remain cautious over this issue and recommend an “AVOID” rating.

Divgi TorqTransfer Systems Ltd : SUBSCRIBE

Divgi TorqTransfer Systems Ltd : SUBSCRIBE
  • Date

    01 Mar 2023 - 03 Mar 2023

  • Price Range

    ₹560 - ₹590

  • Minimum Order Quantity

    25

  • (D) RHP

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Incorporated in the year 1991, Global Surfaces Ltd. (GSL) is involved in the business of mining, producing, and exporting natural stones and engineered quartz. The company’s product offering includes slabs and countertops that can be used for various purposes like flooring, indoor wall cladding, vanity tops, reception desk, table tops, staircases, and more. Presently, the company has two manufacturing units in Rajasthan, with Unit I exclusively dedicated to processing natural stones such as marble, granite, and quartzite and Unit II for manufacturing engineered quartz. The company is an export-driven business (derived ~99% of revenue through exports for FY20, FY21, and FY22) and sells products in countries like the United States of America, Canada, Australia, and the Middle East.
Objects of the issue:
The objects of the net fresh issue is to raise funds for:
  • Prepayment, in full or part, of borrowings availed by the company’s subsidiaries.
  • General corporate purposes.
Investment Rationale:

Tapping onto new opportunities with the growing EV space and passenger UVs segment.
It is estimated that the market for EV transmission is expected to grow at a CAGR of 77-82% in the FY2022-27 period in both volume and value terms. To capitalize on this opportunity, the company intends to increase its market share in both the Indian and overseas markets by providing comprehensive transmission solutions and components to EV OEMs and acquiring new customers within this segment. Presently, the company has a contract for the supply of EV transmission systems for one of the leading providers of EVs in India. However, this has not materialized yet commercially. Another area of interest for the company is the UV segment in which its share in total PV production has risen to 35% from 20% earlier. Thus, with higher penetration of DCT in the compact UV and UV segments, the company stands to benefit as it is the only company to manufacture DCT systems in the Indian market.

Long-term relationships with key marquee customers across geographies and continued focus on cost optimization to drive the business forward.

The company has been able to formulate well-established relationships with several marquee clients such as BorgWarner, Tata Motors, and Mahindra & Mahindra for over two decades, providing them a significant competitive edge. This can be attributable to the company’s consistent track record and its ability to manufacture and supply components as per the customer’s varied requirements. Additionally, the company’s strategy of having its manufacturing facilities near its key customers has reduced logistic concerns and enabled it to fulfill customer’s demand schedule more efficiently. Moreover, the company’s ability to manufacture automotive transmission products and critical precision products at a large scale enables them to offer its products at competitive prices to OEMs in India who are currently more reliant on imports, thereby reducing their costs as well.

Valuation and Outlook:

Divgi TorqTransfer Systems Ltd. is one of the leading companies supplying transfer case systems to OEMs and the largest supplier of transfer case systems to passenger vehicle manufacturers in India. Along with this, DTTSL is also a prominent manufacturer of steel synchronizers produced domestically. Overall, the company’s strength lies in its in-house software development capabilities, providing them an edge over other competitive players in the field. Going forward, the company’s approach to focus on its research& development (R&D) in response to serving emerging trends and improving its market share by catering to new customers bodes well with its growth strategy plan. On the upper end of the price band, the issue is valued at a P/E of 35.2x based on FY2022 earnings which is one of the lowest compared to the listed peer group. Also, the company maintained a healthy financial performance despite the overall slowdown in the global automotive sector in FY2020 and the impact of the COVID-19 pandemic. We, therefore, recommend a “SUBSCRIBE” rating for the long term.