Kalyani Cast Tech Ltd IPO Review: Analyzing the Prospects and Risks

Kalyani Cast-Tech Ltd. (KCTL) is all set to make its debut in the capital markets with an Initial Public Offering (IPO) via the book-building route. The company operates in the business of castings and containers, serving a diverse range of industries, including railways, mining, cement, chemicals, fertilizers, and power plants. It is also involved in exporting its products, which showcases its ambitions to be a global player in its niche.

In this IPO review, we will delve into the company’s business operations, financial performance, and the prospects and risks associated with investing in Kalyani Cast-Tech Ltd.

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Business Overview

KCTL started its journey in the casting business, primarily serving the Indian Railways and various industrial sectors with a wide range of products such as MG Coupler components, CI Brake Blocks, Adapter for WEG4 Loco, Bearing Housing for Electrical Loco, Corner castings, and more. In addition to castings, KCTL has expanded its operations to include the manufacturing of containers for railways. The company has embraced modern techniques, using a no-bake system for molding and an automatic sand plant, which reflects its commitment to adopting advanced technology. Furthermore, KCTL is actively involved in exports, which opens up opportunities for global market penetration.

As of the filing date of this offer document, Kalyani Cast-Tech Ltd had 138 employees on its payroll, showcasing its commitment to fostering employment opportunities.

Also Read: Kalyani Cast Tech Ltd IPO Details

KCTL IPO Details

The IPO of Kalyani Cast-Tech Ltd comprises 2,166,000 equity shares with a face value of Rs. 10 each. The price band for the offering is set at Rs. 137 to Rs. 139 per share, and the company aims to raise approximately Rs. 30.11 crores at the upper end of the price range. The subscription window opens on November 08, 2023, and closes on November 10, 2023. The minimum application size is for a certain number of shares (specific number not provided), with subsequent applications allowed in multiples thereof. Once the allotment is completed, the shares will be listed on BSE SME. This IPO constitutes 30.17% of the post-IPO paid-up equity capital of KCTL.

The company plans to utilize Rs. 23.75 crores from the IPO proceeds for working capital requirements, with the remainder allocated for general corporate purposes.

Post-IPO, the current paid-up equity capital of Kalyani Cast-Tech Ltd, which stands at Rs. 5.02 crores, will increase to Rs. 7.18 crores. Based on the upper end of the IPO price band, the company is targeting a market capitalization of Rs. 99.81 crores.

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Financial Performance and Valuation

Kalyani Cast-Tech Ltd has exhibited notable growth in its financial performance over the past few years. For the fiscal years 2021, 2022, and 2023, the company reported total income/net profit figures of Rs. 11.35 crores/Rs. 0.35 crores, Rs. 49.47 crores/Rs. 1.17 crores, and Rs. 63.37 crores/Rs. 8.04 crores, respectively. In the first quarter of fiscal year 2024, ending on June 30, 2023, KCTL recorded a net profit of Rs. 2.94 crores on a total income of Rs. 24.68 crores.

KCTL’s financial metrics reflect an average earnings per share (EPS) of Rs. 8.93 and an average Return on Net Worth (RoNW) of 35.70% for the last three fiscal years. At the time of filing, the IPO was priced at a Price-to-Book Value (P/BV) ratio of 4.06, calculated based on the Net Asset Value (NAV) as of June 30, 2023.

Also Read: IPO Subscription Status Live Today

When annualizing the super earnings for fiscal year 2024 and attributing them to the fully diluted post-IPO paid-up capital, the IPO is valued at a Price-to-Earnings (P/E) ratio of 8.49. This suggests that the IPO is reasonably priced based on its recent earnings.

However, a closer look at KCTL’s Profit After Tax (PAT) margins reveals that they have fluctuated significantly in recent months, standing at 3.16% for FY21, 2.37% for FY22, 12.70% for FY23, and 11.92% for Q1-FY24. Such a rapid increase in margins over the last 15 months raises concerns about the sustainability of such earnings, especially when compared to industry peers who are operating on lower margins due to increased competition.

The management attributes the surge in margins to specialized containers that enjoy higher profitability, as well as favorable commodity prices post-COVID, thanks to fixed pricing contracts. As of the offer document, the company has orders worth Rs. 97 crores on hand.

Dividend Policy and Peer Comparison

Kalyani Cast-Tech Ltd has not declared any dividends in the reported financial years. The company plans to adopt a prudent dividend policy based on its financial performance and future prospects.

The offer document mentions Texmaco Rail and Titagarh Rail as listed peers, with P/E ratios of 62.59 and 43.29, respectively, as of November 06, 2023. However, it’s important to note that these peers may not be directly comparable to KCTL due to differences in their business models and financial performance.

Market Performance of Gretex Corporate Services Ltd.

Gretex Corporate Services Ltd. is the sole lead manager for the IPO, and their past track record includes handling 17 mandates in the last three fiscal years. Of the last 10 listings they managed, 3 opened at a discount, 1 opened at par, and the rest experienced premiums ranging from 1.31% to 90% on the day of listing. This highlights the varying performance of their mandates in the market.

Investment Outlook

Kalyani Cast-Tech Ltd operates in a highly competitive sector, providing castings and containers primarily for the railway industry. The rapid increase in profit margins over the last 15 months is a noteworthy feature but also raises concerns about its sustainability, especially when compared to industry peers.

Investors looking at this IPO should consider the company’s financial performance, business prospects, and the potential risks. Based on the FY24 annualized super earnings, the IPO appears to be reasonably priced. However, the sustainability of such high margins remains a critical concern. Well-informed investors may choose to allocate moderate funds for potential long-term rewards.

As with any investment, it is essential to conduct thorough research and due diligence, possibly seeking advice from financial experts, before deciding to participate in the IPO of Kalyani Cast-Tech Ltd. Investing in IPOs can be rewarding, but it also carries inherent risks, and it is crucial to make informed decisions.

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