IPO Size: Rs.168 cr 

• Rs. 135 cr is Fresh Issue for (i) capex Rs. 48 cr (ii) debt repayment Rs. 45 cr (on Rs. 51 cr net debt, becoming near debt-free post IPO)
• Rs. 33 cr is Offer For Sale (OFS) mainly by the promoter (75% to shrink to 55% post IPO)

Price band: Rs. 503-529 per share

M cap: Rs. 670 cr, implying 25% dilution

IPO Date: Mon 2^nd Sep to Wed 4^th Sep 2024, Listing Mon 9^th Sep 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Precision Components Manufacturer

Gala Precision Engineering manufactures disc strip springs, coil spiral springs and fasteners at Wada, Maharashtra. Rs. 203 cr revenue of FY24 was split 60:20:20 between these products, used in wind and hydro energy, industrials, railways and automobile sectors. Nearly 30% revenue is derived from renewable energy sector, with wind as a focus area, and company enjoying 10% market share in the Rs. 1,000 cr domestic disc strip springs market. Exports, mainly to US and Europe, account for 37% of topline.  

Fresh Issue to fund Capex

With capacity utilization of 70-85% across three product categories, Gala Precision is undertaking greenfield and brownfield expansion of nearly Rs. 60 cr. This is sizeable, as net fixed assets stood at Rs. 41 cr, as of 31.3.24.  

Plant and machinery of Rs. 11 cr will be purchased from IPO proceeds for brownfield expansion and Rs. 48 cr greenfield capex is underway in Tamil Nadu. Rs. 10 cr has already been incurred till 30.6.24 and Rs. 37 cr will be funded via IPO proceeds.

The high tensile fasteners and hex bolts greenfield plant is coming closer to its wind energy customers in South India, including one of the largest wind turbine generator manufacturers globally. The Tamil Nadu plant is likely to be commissioned in phases, beginning Q4FY25E and achieve peak utilization of 10.07 million units or 4,600 MT pa capacity in FY27E.

Growing Financials

Company revenue has grown at 18% CAGR between FY22-FY24, with 40% CAGR in operating EBITDA, to Rs. 39 cr in FY24. Operating leverage expanded EBITDA margin from 14% in FY22 to 19% in FY24. On PAT of Rs.23 cr, net margin was healthy at 11%, with EPS of Rs. 24.

Company has high working capital requirement of nearly 6 months in inventory and debtors combined. Yet RoE is healthy at 23% in FY24.

Attractively Priced

FY25 estimated EPS of about Rs.26 leads to a PE multiple of over 20x, on current year basis. Other engineering component makers catering to industrial and automotive sectors with double-digit net margins like Harsha Engineers (Rs.1,000 cr topline, 12.5% net margin) and Rolex Rings (Rs. 1,200 cr topline,13% net margin) are trading at PE multiples of 34x, while fastener maker Sterling Tools, with Rs. 1,000 cr topline and 6% net margin, is trading at a PE of 28x.  

Thus, even though Gala Precision has smaller scale and will be a micro-cap stock post listing, double digit net margin, 23% RoE and presence in high-potential wind-energy sector makes the current IPO valuation attractive.