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00:00Hello and welcome to NDTV Profit. You are watching IPO RDA and my company in focus this
00:06time is KRN Heat Exchanges and Refrigeration Limited. The company's IPO is opening on September
00:1225th, closes on September 27th. Price between 209 to 220 rupees per share. It is a fresh
00:18issue of 342 crores which means around a dilution of nearly 25% of equities coming through IPO
00:25and joining me is Santosh Kumar Yadav, who is the Chairman and Managing Director of company
00:30and Ashok Holani, who is the Director at Holani Consultant, who is also the BRLM or the lead
00:39manager for the issue. Mr. Santosh and Mr. Ashok, thank you very much for joining us
00:46on NDTV Profit. Mr. Yadav, to begin with sir, give me a sense of your business model, the
00:53business you are in and how many clients or the areas that you cater to. So, good morning to all.
01:05So, my name is Santosh Kumar Yadav and I am the Managing Director of the KRN Heat Exchanger
01:10Refrigeration Limited. So, we are in business of HVAC and R, heating, ventilation, air conditioning
01:17and refrigeration. So, mainly we make heat exchanger for all like commercial side, mainly
01:26for application like air cooled chiller, data center cooling, bus air conditioning, truck
01:32refrigeration, heat pump, fan coil unit and we do like B2B business. So, we have main
01:39client like Daikin Air Conditioning, Schneider Electric, Blue Star and Kirlos Kerchiller
01:45and also we do export to UAE, Europe and North America market. So, we started our
01:53company in 2017. So, we complete almost 6 years and last year we applied for this our
02:00DRHP and it is approved now. So, we are opening for 25th of September for main board IPO.
02:09So, you are raising 342 crores, what is this going to be used for?
02:18So, mainly it will be used for new subsidiaries called KRN HVAC Products Private Limited.
02:24So, we will use almost 340 crore in this new venture and rest of GCP, General Corporate Affairs.
02:32Mr. Mani, since you are the merchant banker for the company, your pricing is between
02:37290 to 220 rupees per share. You did a pre-IPO placement at 200 rupees. How did you price
02:44the IPO and because there are no listed peers, how do you put a valuation to a company?
02:55In regard to the valuation of the company, we have considered various factors for having
03:00this particular price bank. The most important parameter is the growth story of the company
03:06from last 3 to 4 years. Company is operating at a margin of 19% EBITDA margin for last
03:132 continuous years and a splendid profit rate of 12%, 12.5% for last 2 years and the company
03:20is also going into the investing into a whole new subsidiary for setting up another manufacturing
03:26plant and it will be another state of art plant which they are coming up with a huge
03:31huge capacity. Probably one of the largest plant for heat exchanger, particularly for
03:37heat exchanger in India and with the key strength they have in their management, with their
03:44workforce, they are employed around 40 engineers, their night sports are increasing on daily
03:51basis, yearly basis. So these are the factors, multiple factors which we have taken into
03:56consideration and we are able to set up this particular price bank and before going into
04:02this IPO, we have done 2 pre-IPO placements, one at around 152 rupees in October 2023.
04:11Recently we did at 200 rupees. So there is ample demand for this particular commission
04:15in the market. So going by the strength of the company, the future prospect which they
04:21enjoy, so we have appropriately valued this stock at 209 to 220.
04:27How do you value a B2B company in this space, sir? I mean it is coming to nearly forward
04:32earnings of 23, 24 times forward earnings of FY25, if I use your compounded annual growth
04:39rate numbers to project forward. So how do you look at this company on a valuation point
04:47of view? I understand that you already got a valuation from one of 152 and 200 rupees
04:52from various pre-IPO placements, but on a multiple point of view, how do you look at
05:00the company?
05:03One thing for sure, when we are assessing this company, the companies are not into strictly
05:11to the B2B, they are into the business of manufacturing the specialized coils which
05:17more of a technical nature and demands a premium over the market. So that's why they are able
05:22to substantiate their double digit profit margins of 12 to 13% for last 2 years and
05:28looking after with increasing their capacity. So that will help the company to boost their
05:33numbers in the future. Secondly, in regard to the profitability and valuation point of
05:40view, if you see that at current March 24 numbers, the stock is we have valued at P
05:46money of 25 price to earning ratio, which I think appropriately justifying the valuation
05:51of the company. I am not going for forward P, I am going for the past P of March 24,
05:57that comes around 25. Okay. Mr. Yadav, you are raising 342 crores, you have been growing
06:05at a healthy rate of a top line of 308 crores in FY24. If it is possible for you to give
06:12us an idea of when the new plant comes into play, the Nimrana plant where for which you
06:17are raising this fund, what is the kind of capacity that you will increase and what is
06:21the kind of potential revenue that can come in from this? So you can see like now we are
06:31around 10,000 square feet covered area, so we are building almost 600,000 square feet
06:38covered area, so it is almost 7x compared to existing. So we are like customer approaching
06:46to us and if you see last year, compared to FY20 to FY24, so we are increasing our export,
06:54so we just double the numbers. In FY23, we are supplying almost 16 customers and last
06:59March 24, we almost export 32 customers. So we are receiving inquiry from many of our
07:05export customers, so we need like big capacity to cater the domestic market as well as export
07:10market and mainly we are focusing on North America market, so because North America market
07:17now they have anti-dumping from China around 25% and they are keen to start supply from
07:23Indian supplier but they need at least good supplier with good capacity, good infrastructure,
07:28so that's why we need already plan to big space so that we can maybe make big like dream
07:35plant and then we can supply to our domestic and as well as export.
07:39So it is almost capacity size like 6 times, it will continue, will grow and then we like
07:48buy already land and we started considering almost 6 months back and this already like
07:53since 16th of, like 15th of July, we already invest in 32 crore on that new capacity.
08:00Give me a sense of the current contribution of exports to your top line?
08:09I say last balance sheet around 15%. And that do you expect that also to go up
08:14by nearly 6 times, means what is the kind of export contribution you foresee when the
08:19Nimrana plant comes into play? Actually to cater export customers, so you
08:27need like single piece flow, so earlier when we started like one acre, then next year we
08:34added another, then third year added no, so that you can say existing facility, the optimized
08:39plant, we earlier we didn't thought to put such growth, so we expand like optimized way
08:46but now we plan to make big facility in single go and then we can make good layout, single
08:52piece flow to receiving many inquiry from our export customers, domestic customers,
08:57so that's we plan, so for sure it will achieve. Give me a sense of your sourcing things, though
09:06you are increasing your capacity here basically to cater to the global markets, especially
09:12the US market, how do you plan to augment your sourcing capacity because currently I
09:18think most of your sourcing comes from Malaysia and Vietnam, these are two big countries from
09:24where you source most of the products, what are you doing to reduce your dependency both
09:31to Malaysia and Vietnam? So for that our Indian government already
09:40took the initiative under PLI, so you can say one of Malaysian vendor like MatTube,
09:47they already have factory in Gujarat, Sanan, they already started the production, they
09:51already offered some of sample to us, so under trial, so hopefully in next few months we
09:57will start to supply from MatTube as well as Hindalco have put their factory for copper
10:03tube in India based, so we are discussing with them as well and Hindalco already started
10:08like developing their aluminum foil as well, Jindal side also they are developing aluminum
10:13foil, so I think under PLI maybe 3 or 4 new venture will come and we are expecting in
10:20within year make in India supply will start, so it is already like our stage is under developing
10:27and I think our government took the good decision under PLI to develop this product in India.
10:33So by when do you expect the import substitution to take place for your sourcing?
10:43As per my personal opinion, I think within one year we will change maybe 60 to 70% from
10:50domestic side and rest for export because for export maybe to start domestic price will
10:56be maybe source higher side to compete the international market, so we will have to buy
11:02under advance license from outside also, so it will be the combination for the domestic
11:08as well as export, so based on quality and price we will decide further when supply will
11:15start.
11:16Also give me a sense on your receivable days because your receivable days have also gone
11:21up, if I am not wrong total receivables is to the tune of 52 crores at the end of FY24
11:29which is 17% of your revenue, how are you managing your receivable days, your networking
11:35capital days have also gone up to 88 days from 65 days.
11:44Actually since last almost 6 to 8 month government have started some new initiative, they asked
11:50to our international vendors to BIS certification and QCO certification, so they have deadline
11:57back, so we increase our inventory to maybe continue our customer line, so we fear that
12:03maybe we cannot buy, so that is why we increase our inventory and customer side earlier we
12:08took some cost like bill discounting from our customer, but since last few month we
12:14are not getting discounting, so that is why it is increase and also our turnover also
12:19increase, so payment term is around 60 days average, so it is big increase because of
12:26turnover and inventory increase.
12:29How do you plan to bring that down because you are keeping a very high inventory day
12:33as well, if an inventory turnover is at 112 versus 76 last year in FY23, so how do you
12:41plan to bring down your inventory days as well.
12:46So, there will be two plan for like buying side, we will try to Indian vendor, so we
12:54will reduce, able to reduce our inventory of course, and customer side we are targeting
12:59more on export, so export side we are receiving advance also from some of customers, so I
13:05think we will work on both plant and maybe we able to reduce both things.
13:13Give me also a sense of your order book, because I read in your RHP that you get advance order
13:20into intermissions from your customers from 6 to 6, 3 to 6 months in advance, so what is
13:27the current order book that you are sitting on.
13:31It is like we are not like seasonable company, so we have average order almost same remain
13:39like around the year, because we like supply, we first develop with our customer and then
13:45we start supply based on their product manufacturing. So, we have forecast from some of our customer
13:52like 6 month and firm order for 1 month, but it is rolling like around the month or around
13:58the year, so it is cannot say full year they cannot pay off or maybe like they need after
14:041 month, so in case of export we receive sometime 2 month prior or 1 month prior for domestic,
14:10even we receive like 4 week or 3 week prior, so it is like rolling.
14:15Give us an idea of what is the value of the order book that you are sitting on.
14:24Roughly we will have always around 40s year.
14:30Another thing which I wanted to get indication on is you know you mentioned Mr. Olani also
14:37mentioned about the fact your EBITDA margins are around 19% for last 2 years, do you expect
14:44this margin to inch up given the fact that you are looking at you know domestic sourcing
14:49of your raw materials or you know is there any way that you know you can you know increase
14:57that margin band going forward.
15:00As I already said we are more focusing on North America and Europe market for export
15:08side, so our margin is compared to domestic market is higher side on export, so it will
15:15be for sure improve and new facility like we will have we are going to buy new machinery
15:21with advanced technology and some automation, so productivity also will try to increase,
15:27so we will try to remain same or for sure to try to increase.
15:34Can you also give us an idea of the kind of cash flow generation that your business sees
15:38normally and what kind of cash flow we can see from an operating point of view?
15:49So I think that maybe Mr. Olani can reply.
15:54In regard to the cash flow the companies you know all the last 3 years is cash positive,
16:02the cash flow operation is on the positive side, although the company has been making
16:08the continuous CAPEX investment in last 3 years and has been investing heavily in the
16:13CAPEX, still the company is cash positive and with this IP proceed which we are proposing
16:20to invest in our subsidiary for this CAPEX project, so the revenue from operation will
16:25be coming to the company and will increase the cash and cash by carry of the company
16:29for the future also.
16:31You know my understanding is that the new plant will come in by April 2025 that means
16:36FY26 is when the revenues will start coming in from the new plant, what is the kind of
16:42potential revenue that you see from this new plant?
16:50So as our RHP said we are going to add 3 new product as well like existing product will
16:59we are expanding the capacity and we are going to add roll boundary operator and the
17:05bar and plate heat exchanger as well, so it means we are going to add 3 new product with
17:11existing capacity increasing, so we will try to achieve maximum turnover side.
17:18My final question to you is that you know you are dependent on some of the metals, copper
17:29and aluminum and metals prices are volatile, how do you plan to hedge yourself against
17:36this volatility in prices?
17:39No actually our business model is like that we do like last quarter average for LME copper,
17:47LME aluminum and USD to INR, so we apply to our customers, so it means we change each
17:53quarter our pricing based on last quarter average, so we are not hedging but it's applying
17:59average on our customers.
18:01Because you get, my question was because you get advance orders of 1 month or 2 months
18:04or you know 6 months in advance, how do you manage the cost or volatility in prices because
18:11of the changes in LME copper or aluminum?
18:18I said our like business is around the year almost same way, so we keep like 60 days inventory
18:26and then each month requirement, so we need almost similar way, so we buying each month
18:31similar quantity, so we apply average, so I think it's manageable.
18:37Okay, Mr. Yadav and Mr. Hulani, thank you very much for joining us on IPO Addah, your
18:43company KR and Heat Exchanges and Refrigeration IPO is opening on September 25th and closes
18:48on September 27th, price between 209 to 220 rupees per share, it's a fresh issue of 342
18:55crores, that gives the company a market value of nearly 1400 crores at the upper end of
19:00the price band and it's 25% of equity which is coming through IPO, thank you very much
19:04for joining us on NDTV Profit.