ASK Automotive IPO review (Apply)
• AAL is a unique player in brake-shoe and advance braking systems for 2W.
• The company marked consistent growth in its top lines for reported periods.
• It marked a setback in bottom lines for FY22 following the Pandemic impact.
• Based on FY24 annualized earnings, the issue appears fully priced.
• Investors may park funds for the medium to long-term rewards in this long race horse.
ABOUT COMPANY:
ASK Automotive Ltd. (AAL) is the largest manufacturer of brake-shoe and advanced braking (“AB”) systems for two-wheelers (“2W”) in India with a market share of approximately 50% in Fiscal 2023 in terms of production volume for original equipment manufacturers (“OEMs”) and the branded independent aftermarket (“IAM”), on a combined basis (Source: CRISIL Report). It has been supplying safety systems and critical engineering solutions for more than three decades with in-house designing, developing and manufacturing capabilities. AAL’s offerings are powertrain agnostic, catering to electric vehicle (“EV”) as well as internal combustion engine (“ICE”) OEMs. The company’s brand “ASK” is recognised as the leading brand in the 2W IAM in terms of production volume for Fiscal 2023 in India (Source: CRISIL Report).
AAL commenced operations in 1989 by manufacturing brake shoe products for 2Ws and have since diversified its operations to include offerings such as: (i) AB systems; (ii) aluminium light weighting precision (“ALP”) solutions, where it is a prominent player for 2W OEMs in India with a market share of 9% in Fiscal 2023 in terms of production volume (Source: CRISIL Report); (iii) wheel assembly to 2W OEMs; and (iv) safety control cables (“SCC”) products. It supplies portfolio of AB systems, ALP solutions, wheel assembly, and SCC products to OEMs in (i) the automotive sector for 2Ws, three wheelers (“3Ws”), passenger vehicles (“PVs”) and commercial vehicles (“CVs”), and (ii) the non-automotive sector for all-terrain vehicles (“ATVs”), power tools and outdoor equipment.
Braking systems and SCC are considered critical for road safety, requiring technological knowhow and R&D to develop effective and economical products (Source: CRISIL Report). Furthermore, braking products have high entry barriers because they are developed using proprietary material formulations and manufacturing knowhow (Source: CRISIL Report). SCC are important parts in the automotive industry, used in motorcycles, scooters, mopeds and 2W EVs to actuate, control and operate critical applications including brake, accelerator, clutch, transmission gear, speedometer, fuel lid, seat lock, choke and battery charging lid (Source: CRISIL Report).
ALP solutions and products improve performance, safety and efficiency by reducing the weight of components, and assisting in thermal management, thereby increasing durability (Source: CRISIL Report). Precision aluminium alloy parts are a critical requirement of the industry, and they are also environmentally friendly and meet end-of life compliance standards for vehicles (Source: CRISIL Report). AAL supplies products to all of the top six 2W OEMs (in terms of production volume and value in Fiscal 2023) in India, the largest motorized 2W market in the world, with domestic sales of 16.25 million units during Fiscal 2023 (Source: CRISIL Report). In Fiscal 2022, the company commenced commercial supplies to 2W EV OEMs in India, including TVS Motor Company Limited (“TVS”), Ather Energy Private Limited (“Ather”), Hero MotoCorp Limited (“Hero MotoCorp”), Greaves Electric Mobility Private Limited (“Greaves”), Bajaj Auto Limited (“Bajaj”) and Revolt Intellicorp Private Limited (“Revolt”). AAL enjoys 16 to 30 years of customer relationships with all these customers and enjoys preferred partner status.
In addition to customers in India, the company also increasingly caters to customers overseas, both in the automotive and non-automotive sectors through export of AB systems and ALP solutions. Automotive customers outside India include UFI Filters India Private Limited (“UFI Filters”), Federal-Mogul Italy s.r.l. – racing & motorcycle division (“Federal-Mogul”), and FDP Virginia Inc., and non-automotive customers outside India include Stanley Black & Decker, Polaris Industries Inc. (“Polaris”) and MTD Products Inc. (“MTD Products”). As of June 30, 2023, it operated 15 manufacturing facilities across five states in India, majority of which are strategically located in close proximity to OEM customers. AAL recently commenced commercial manufacturing operations at 16th manufacturing facility in Bhiwadi (Rajasthan) in July 2023. It has also been allotted land in Kolar, Karnataka from the relevant regulatory authority, on which AAL proposes to develop a manufacturing facility. In addition, its Joint Venture operates one manufacturing facility in Gurugram, Haryana.
Its R&D capabilities include: (i) advanced material engineering capabilities, with a portfolio of 52 proprietary formulations (of which seven had been licensed) as of June 30, 2023, that it uses in the production of AB systems for 2Ws, 3Ws, PVs and CVs, customized to safety, durability and performance specifications of EV and ICE OEMs; and (ii) precision engineering, in-house tool designing, design simulation, prototyping and manufacturing abilities, provide it with a competitive advantage in quality, cost and delivery (“QCD”) parameters.
AAL has entered into technology licensing arrangements with global companies such as : (i) a Japanese manufacturer of asbestos-free brake shoes supplying to 2W manufacturers globally; (ii) NUCAP Industries Inc., Canada (“NUCAP”) – a global player in patented retention systems (mechanical bonding) for disc brake pads in the 2W, PV and CV sectors; and (iii) Safety Control Cable Ind. Co. Limited (“HSH”) – a SCC manufacturer serving automobile OEMs globally. AAL also has a license agreement with a research organization in the defence sector, pursuant to which it has licensed a semi-solid metal processing technology for Aluminium casting for ALP solutions. Additionally, its Joint Venture AFFPL supplies AB products to the global and Indian IAM for CVs. Its products have recently been approved by two CV OEMs in India and supplies have commenced.
As of June 30, 2023, its workforce comprised 1,302 staff (i.e., workforce excluding shop-floor personnel) and 846 non-staff or shop-floor personnel. Additionally, during the month of June 2023, the company utilized the services of 4,392 contract labour.
ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book building route Offer for Sale (OFS) of 29571390 equity share of Rs. 2 each. It has announced a price band of Rs. 268.00 – Rs. 282.00 per share and mulls mobilizing Rs. 833.91 cr. at the upper cap. The issue opens for subscription on November 07, 2023, and will close on November 09, 2023. The minimum application to be made is for 53 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 15% of the post-IPO paid-up capital of the company. Since this being a pure secondary issue, no funds are going to company. The issue is done for unlocking the listing benefits, partial exit to its stakeholders and improve visibility in the global markets. Setback for FY22 bottom line is attributed to post Pandemic impact on general economy and volatility in the commodity markets. Now the things have started to be back to normalcy and is set to improve performance going forward.
The four Book Running Lead Managers for this issue are JM Financial Ltd., Axis Capital Ltd., ICICI Securities Ltd., and IIFL Securities Ltd., while Link Intime India Pvt. Ltd. is the registrar of the issue.
Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 20 – Rs. 60 per share (on the basis of Rs. 2 FV) between March 2003 – May 2005, and has also issued bonus shares in the ratio of 20 for 1 in March 2018, and 3 for 1 in March 2021. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.02 per share.
Post-IPO, AAL’s paid-up equity capital will remain same at Rs. 39.43 cr. as this is a pure secondary issue. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 5559.42 cr.
FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, AAL has posted a total income/net profit of Rs. 1567.77 cr. / Rs. 106.20 cr. (FY21), Rs. 2024.26 cr. / Rs. 82.66 cr. (FY22), and Rs. 2566.28 cr. / Rs. 122.95 cr. (FY23). For Q1 of FY24 ended on June 2023, it earned a net profit of Rs. 34.83 cr. on a total income of Rs. 657.55 cr.
For the last three fiscals, AAL has reported an average EPS of Rs. 5.32 and an average RoNW of 16.75%. The issue is priced at a P/BV of 8.20 based on its NAV of Rs. 34.41 as of June 30, 2023, and based on its post-IPO NAV.
If we annualized FY24earnings and attribute it to post-IPO paid-up equity capital of the company, then the asking price is at a P/E of 39.89.
For the reported periods, the company has posted PAT margins of 6.77% (FY21),4.08% (FY22), 4.79% (FY23) and 5.30% (Q1-FY24), similarly RoACE margins of 21.98%, 16.76%, 22.06% and 5.31% for the corresponding periods respectively.
DIVIDEND POLICY:
The company paid a dividend of 20% for FY21 and then skipped for the rest of the reposted period of the offer document. It has already adopted a prudent dividend policy in May 2023, on the basis of its financial performance and future prospects.
COMPARISON WITH LISTED PEERS:
As per the offer document, AAL has shown Endurance Techno, Uno Minda, Suprajit Engg., and Bharat Forge as their listed peers. They are trading at a P/E of 49.06, 69.82, 26.20, and 43.17 (As of November 02, 2023). However, they are not comparable on an apple-to-apple basis.
MERCHANT BANKER’S TRACK RECORD:
The four BRLMs associated with the issue have handled 88 public issues in the past three financial years, out of which 28 issues closed below the issue price on listing date.
Conclusion / Investment Strategy
AAL is the largest manufacturer in India for brake-shoe and advanced braking systems and is the most preferred partner for 2W companies like HeroMotocorp, TVS, Bajaj, etc. It marked consistent growth in its top lines for the reported periods. It suffered a minor setback for FY22 in bottom lines in line with general global trends following the pandemic. Based on FY24 annualized earnings, the issue appears fully priced. Investors may park funds for the medium to long-term rewards in this long race horse.
Review Author
DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here. With entry barriers, SEBI wants only well-informed investors to participate in such offers. With crazy listings in the past, SME IPOs drew the attention of investors across the board. However, as SME issues have entry barriers and continued low preference from the broking community, any reader taking decisions based on any information published here does so entirely at own risk. The above information is based on information available as on date coupled with market perceptions. The Author has no plans to invest in this offer.
(SEBI registered Research Analyst-Mumbai).
About Dilip Davda
Dilip Davda is veteran journalist associated with stock market since 1978. He is contributing to print and electronic media on stock markets/insurance/finance since 1985.
Dilip Davda is a leading reviewer of public issues and NCDs in the primary stock market in India. The knowledge he gained over 3 decades while working in the stock market and a strong relationship with popular lead managers makes his reviews unique. His detail fundamental and financial analysis of companies coming up with IPO helps investors in the primary stock market. Dilip Davda has a special interest in analyzing the SME companies and writing reviews about their public issues. His reviews are regularly published online and in news papers.
Email: dilip_davda@rediffmail.com
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