The designer and manufacturer of complete RACs including window ACs (WACs) and indoor units (IDUs) and outdoor units (ODUs) of split ACs (SACs), with specifications ranging from 0.75 tonne to two tonnes across energy ratings and types of refrigerant also makes critical and reliability functional components of RACs such as heat exchangers, motors, inverter and non-inverter printed circuit boards and multi-flow condensers and other RAC items including sheet metal components, copper tubing and injection moulding components.

One of the few Indian manufacturers with the capability to design and manufacture inverter RACs is developing new models of fan coil unit and IOT (internet of things)-based inverter RACs. There is ability to develop, design and manufacture models of RACs across energy ratings specified by the Bureau of Energy Efficiency, Ministry of Power and by using various types of refrigerant including green refrigerants.

The product portfolio also comprises liners for refrigerator, plastic extrusion sheets and printed circuit boards for the consumer durables and automobile industries, sheet metal components for microwave, washing machine tub assemblies and metal ceiling.

There are 11 manufacturing facilities across seven locations in India. The total installed capacity was 1.59 million ODUs, 1.37 million IDUs and 0.59 million WACs annually end FY 2017. There is a dedicated R&D centre located at the Rajpura facility in Punjab . It is equipped with a psychometric lab that is accredited by the National Accreditation Board for Testing and Calibration Laboratories with ISO and IEC 17025:2005 certification and facilities for 3D modelling, quality and product testing and a dedicated team.

Products are exported to Saudi Arabia, Oman, Sri Lanka, Nigeria and Maldives. The aim is to initiate RAC exports to others countries in the Middle East, South and South East Asia as well as Europe.

Around 81.8% of the sales in the six months ended September 2017 and 83.6% in FY 2017 comprised RAC and related components. Remaining sales were of other components for consumer durables and automobiles.

A 100% subsidiary PICL (India) Pvt Ltd was acquired in FY 2013. A 70% stake was purchased in IL JIN in December 2017.

The Offer and the Objects

The offer comprises an initial public offering of Rs 475 crore. At t he lower price band of Rs 855 per share, the offer works out to 55.56 lakh equity shares. At the higher price band of Rs 859, the issue size is 55.30 lakh equity shares. The offer also comprises offer for sale of Rs 125 crore. At the lower price band of Rs 855 per share, the issue works out to 14.61 lakh equity shares. At the higher price band of Rs 859, the issue size is 14.55 lakh equity shares. The selling shareholders, comprising promoters Jasbir Singh and Daljit Singh, will offer total Rs 125 crore worth of shares (Rs 62.50 crore each).

The minimum bid lot is 17 equity shares and in multiples. The issue will be through the book-building process. It will open on 17 January and close on 19 January 2 017.

The object of the issue is to repay certain borrowings of Rs 400 crore. The balance funds will be utilized for other corporate purposes apart from the benefits of listing the equity shares on the BSE and the NSE such as enhanced visibility and brand image and providing liquidity to the existing shareholders.

Strengths

A trusted and experienced one-stop solution provider for the RAC industry

The Indian RAC market volumes are expected to record a CAGR of 12.8% from FY 2017 to FY 2022. Due to the current low penetration of 4%, the Indian RAC market presents huge opportunity. Growth of the Indian economy, population, disposable income and urbanization as well as changing lifestyle trends, shortening of replacement cycle, easy access to credit, longer hot weather conditions, better availability of electricity, increasing affordability of operating a RAC due to launch of energy-efficient models and the growing advantage of domestic manufacturers compared with imports are some of the major factors that will drive future growth.

Nearly 34% of the total value of Indian RAC market was catered by OEM and ODM players in FY 2017. The size is anticipated to grow to 56% by FY 2022, as per Frost & Sullivan report. Thus, there will be an opportunity to increase sales. Further, the thrust of the Union government on the Make-in-India initiative and the growing advantage of domestic manufacturers compared with the importer will boost the customer base of Indian manufacturers.

Most of the operations are integrated backward. Processes such as product development and manufacturing solutions including designing, tooling and validating to final assembling and testing are carried out in-house. The assembly lines are flexible and can shift from assembling WACs to ODUs of SACs within no time.

Multiple manufacturing locations help in meeting the requirements of customers at different locations and enable optimal utilization of capacities, adjusting for seasonality.

Weaknesses

The Top 5 customers accounted for 74.77% of the revenues and the Top 10 92.5% in FY 2017. The Top 5 customers comprised 75.1% of the revenues and the Top 10 92.5% in the six months ended September 2017. A significant portion of the revenues depends on a few key customers. Any loss of customer or reduction in demand from a customer can materially affect the financials.

Change in rules and regulations and laws on outsourcing, any state-level regulations on outsourcing and the trend in the OEM and OED business can significantly affect the business.

The capital-intensive business requires maintaining a substantial fixed asset base. Lower volumes can significantly affect the margins.

Higher working capital requirement is required due to higher receivables from customers. The total debt was Rs 491.50 crore and non-fund-based limits of Rs 88.1 crore outstanding end November 2017.

A significant amount of sales takes place prior to summer. Any adverse weather conditions during such peak season might materially affect the business.

Copper, aluminium and steel are major raw materials. Any increase in raw material costs can affect the margins.

Valuations

Net sales were up 51% to Rs 1644.40 crore and the operating profit margins (OPM) stood down 260 basis points to 7.8%, thus restricting the operating profit (OP) growth to 13% to Rs 128.58 crore in FY 2017. Other income (OI) spurted 154% to Rs 7.86 crore. Interest cost was higher by 10% to Rs 58.34 crore, while depreciation increased 29% to Rs 39.70 crore. Thus, the growth in profit before tax was restricted to 17% at Rs 38.40 crore. After paying tax of Rs 10.50 crore, up 22%, profit after tax (Pat) spurted 16% to Rs 27.90 crore.

Net sales stood at Rs 938.16 crore, with OPM of 8.9% resulting in OP of Rs 83.74 crore in the six months ended September 2017. OI was Rs 3.39 crore. Interest cost was Rs 26.69 crore and depreciation stood at Rs 22.88 crore. After providing for total tax of Rs 10.24 crore, Pat stood at Rs 27.31 crore. Due to seasonality of business, half-yearly earnings cannot be annualised.

The diluted equity share capital stands at Rs 31.45 crore of face value of Rs 10. EPS for FY 2017 works out to Rs 8.9. At the higher price band of Rs 859, P/E on FY 2017 diluted EPS is 96.8. The high price seems to largely discount the near- and medium-term growth prospects.

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