I recently attended their concall and following are my notes based on my understanding
Krishca Strapping Solutions Ltd
What they do – They are manufacturing Steel straps, Strapping seals and strapping tool and the same are being used in steel mills to pack / tie /strap the minimum 500-1000kg steel coils, steel rods etc.
Industry Structure
Total installed capacity in India – 14000 ton / month and consumption is 9000 ton/month
Concentrated profit pools – only 4 major players in India, They are ITW Signode India Ltd (US MNC), Grip strapping (German MNC), Kolkata based Indian co & Krishca and their market share in manufacturing capacity are 49%, 28%, 10% and 7-8% respectively.
Others can’t enter this segment easily since “product approval cycle by customers are quite long (it will take 1-2 years).
JSW steel or Tata steel or SAIL can easily manufacture this product but they don’t do since the market size is small for the size of JSW or Tata steel. But they turned out to be buyers of steel strapping from these above mentioned players
ITW Signode enjoyed market leading position for long term & their employees are considered themselves as a god’s gift to mankind and enjoyed huge perks & they established themselves as a very long term sole supplier of steel strapping to steel industry
Steel industry capacity in India are 120 million ton & Govt target is 300 million ton in 2030 (am skeptical), hence end user industry growth is around 10%,
Co should focus on gaining market share
Whether any replacement for steel strap in future ? – PET Straps / plastic straps are used in low end application (less tonnage) and PET strap replaced steel strap in textile industry but As of now, steel strap is not replaceable in steel industry due to high tonnage.
Management;
Mr.Bala Manikandan is a promoter but don’t have any experience in this filed and he was in IT sector. But he formed this co in 2017 & scaled up revenue to 70 Cr in 5 years.
His wife is co CFO (red flag). She is MBA marketing
In concall, he mentioned that he don’t have other business interest
Manufacturing capacity
Now, co has 18000 ton capacity.
Through IPO proceeds, co spends 12 Cr to establish another production line with 18000 ton capacity (doubling)
Now co sets up office in Dubai and later, it will explore options to establish production line in Dubai to export to USA (Export to USA from India will attract anti dumping duty – Hence, co avoids export from India to USA)
Competitive advantages:
Co claims that they installed induction furnace (electric I guess) for manufacturing steel strap. Due to that, their production cost / energy cost is 50% lower than competitor.
Production line is fully automated compared to 3 step process followed by competitor, Now co not recruits new employees for doubling its capacity.
Selling price of co is 5-6% lower than competitor.
Co’s EBITDA margins are above 14% while competitor margins are single digit
Procurement people from customer side are willing to accommodate new steel strap supplier since they got bored with same Signode & grip strapping since they are there for very long period,
Basically, co is low cost producer and sells at lower price than competitor,
Co get into long term contract with customer i.e 5 year contract with JSW steel, 6 months contract with POSCO,
Prince fluctuation is pass through with 1-3 month lag
Financials,
Current sales is 70 Cr with 20% EBITDA margin & 10-12% PAT margin
Co guides for 40% growth in revenue for FY24 and aspire to grow at same 40% for next 5 years, (bit skeptical since to do this, their capacity should go 4X of today).
Debt is being paid off via IPO proceeds but they will keep working capital debt,
Valuation:
Bit higher for microcap,
20PE, 30X Price / cash flow, 2.5X Price to sales,
Investment thesis,
Concentrated profit pool, Indian manufacturer,
Tailwinds for entire industry to grow at 10%
Low cost producer
Selling at discount against competitor,
Scaled up turnover from 0 to 70 Cr in 4 years with decent profitabllity
Long term Debt free, cash flow+ve (though it is due to higher trade payable & i observe that their cash flow statement is not accurate one (borrowings are added in CFO) & it is serious red flag for me since cash flow statement can not be manipulated without an intention),
Capex is lined up to double capacity
High growth guidance of 40%pa
Aspiration to grow fast & export to USA
Risks
Inexperienced promoter,
Competitors are MNC and have deep pockets and many of the procurement team in customer place are seems to be bribed by competetor (i guess based on previous work experience), hence it is difficult to gain market share
End user industry is deep cyclical
Since raw material & finished goods both are steel, there would be inventory losses when price corrects,
Promoter should not do diversification in unrelated industry – Capital allocation is key risk
Due to 40% growth aspiration, there would be equity dilution or debt funded,
What should I do now,
Wait since valuation is not cheap
Track execution and attend concalls / AGM
Track movement of co from SME platform to main board and it will reduce lot size,
| Subscribe To Our Free Newsletter |
