The KRN Heat Exchanger & Refrigeration Ltd. (KHERL) IPO has generated significant buzz due to the company’s rapid growth and strong presence in the manufacturing of fin and tube-type heat exchangers, primarily used in the HVAC&R (Heat Ventilation Air Conditioning & Refrigeration) industry. With the IPO opening on September 25, 2024, and closing on September 27, 2024, this is an exciting opportunity for investors looking for medium to long-term gains. Let’s dive deeper into the details and evaluate whether it’s worth applying for this IPO.

About KRN Heat Exchanger & Refrigeration Ltd. (KHERL)

Founded just seven years ago, KRN has quickly emerged as a key player in the production of heat exchangers, leveraging non-ferrous metals like copper and aluminum. The company manufactures a wide range of heat exchangers, including condenser coils, evaporator units, fluid coils, steam coils, and sheet metal parts. These are vital components used in cooling and heating appliances.

To enhance the durability and performance of its products, KHERL applies advanced coatings such as nano coatings and powder coatings, ensuring long-term efficiency and reducing maintenance costs. This quality-driven approach has helped the company attract prestigious clients such as Daikin Air-conditioning India, Blue Star Ltd., Kirloskar Chillers, and Schneider Electric IT Business India Pvt. Ltd..

Growth Strategy and Expansion Plans

KHERL has also ventured into forward integration by setting up a wholly owned subsidiary, KRN HVAC Products Pvt. Ltd., which will focus on manufacturing heat exchangers currently not produced by the parent company. This move is designed to give KHERL greater control over its value chain, expanding its market reach and distribution channels.

The company’s growth trajectory has been impressive, with a compound annual growth rate (CAGR) of 25.46% in revenue over the last three years. Export sales have been particularly strong, increasing at a CAGR of 44.71% in the same period. With a new plant set to open in Neemrana, Rajasthan, by April 2025, KHERL expects to increase its business volume by 7X in the coming years.

Financial Overview

KHERL’s financial performance has been commendable, showcasing consistent growth. For FY22, FY23, and FY24, the company reported the following key metrics:

• FY22: Revenue of ₹158.23 crore with a net profit of ₹10.59 crore.
• FY23: Revenue of ₹249.89 crore with a net profit of ₹32.31 crore.
• FY24: Revenue of ₹313.54 crore with a net profit of ₹39.07 crore.

With a growing earnings per share (EPS), averaging ₹7.19 over the last three fiscal years, KHERL's return on net worth (RoNW) has averaged 39.83%. As of March 31, 2024, the company’s net asset value (NAV) was ₹28.53 per share, which is expected to increase to ₹77.68 post-IPO.

IPO Details

The KRN Heat Exchanger IPO is set to raise ₹341.95 crore through the issuance of 15,543,000 fresh equity shares, priced between ₹209 and ₹220 per share. Investors can apply for a minimum lot size of 65 shares, and the IPO constitutes 25.01% of the company’s post-IPO paid-up equity capital.

The funds raised will primarily be used to:

• Invest ₹242.46 crore in the subsidiary KRN HVAC Products Pvt. Ltd. for setting up a new manufacturing facility.
• General corporate purposes.

Once allotted, the shares will be listed on both BSE and NSE.

Valuation and Pricing

Based on FY24 earnings, the IPO is priced at a price-to-earnings (P/E) ratio of 34.98, which some analysts consider to be on the higher side. However, given the company’s strong fundamentals and growth prospects, it may still attract investors who believe in its long-term potential.

When compared to its price-to-book value (P/BV), the IPO is priced at 7.71 based on its FY24 NAV, and 2.83 post-IPO NAV, further indicating that the issue is fully priced. Despite this, the company’s return on capital employed (RoCE) margins have been impressive, standing at 34.65% in FY22, 50.46% in FY23, and 31.21% in FY24.

Pros and Cons of KRN Heat Exchanger IPO

Pros:

1. Emerging Market Leader: KHERL has established itself as a key player in the HVAC&R industry, supplying top-tier clients.
2. Strong Financial Growth: With a consistent increase in revenue and profit margins, KHERL is well-positioned for future growth.
3. Expansion Plans: The new manufacturing plant and forward integration via the subsidiary KRN HVAC Products Pvt. Ltd. signal aggressive growth plans.
4. High RoNW and RoCE: The company has delivered excellent returns to shareholders over the last three years.

Cons:

1. Fully Priced: The IPO appears fully priced based on FY24 earnings, leaving limited upside for short-term investors.
2. No Listed Peers: KHERL doesn’t have direct listed competitors, making it difficult to benchmark against industry standards.
3. No Dividend History: The company has not declared any dividends in recent years, although it has adopted a dividend policy in August 2023.

Should You Apply?

Despite being fully priced, KRN Heat Exchanger IPO presents a strong investment opportunity for those looking for medium to long-term growth. With impressive financials, a clear expansion strategy, and a robust client base, KHERL is well-poised to capitalize on the growing demand in the HVAC&R industry.

While short-term listing gains might be limited, investors with a long-term perspective could benefit from the company’s potential to increase business volume exponentially in the coming years. Dilip Davda, a renowned analyst, has recommended subscribing to the IPO, citing the company’s promising future prospects.

See Our Manba Finance Limited IPO Blog