The ₹858 crore-initial public offering (IPO) of Kaynes Technology kicked off for subscription on Thursday, November 10. The company has decided a price band of ₹559-587 per share for the issue, which closes on November 14.
The issue consists of the issuance of fresh equity shares worth ₹530 crore whereas existing shareholders and promoters will offload 55.84 lakh equity shares worth ₹328 crore via offer for sale (OFS).
The OFS comprises the sale of 20.84 lakh equity shares by promoter Ramesh Kunhikannan and 35 lakh equity shares by existing shareholder Freny Firoze Irani.
The company has trimmed its block for the fresh issue which was proposed to be ₹650 crore earlier as it raised the funds via pre-IPO placement in consultation with the managers of the issue.
The net proceeds from the fresh issue will be utilised towards repayment or prepayment of certain borrowings, funding capex for expansion of existing manufacturing facilities, investments in its subsidiary, working capital needs and general corporate purposes. Also, the company plans to invest in its arm Kaynes Electronics Manufacturing Pvt Ltd for setting up a new facility at Chamarajanagar in Karnataka.
The firm collected ₹257 crore from anchor investors ahead of its initial share sale. The company has allotted 43.76 lakh equity shares to anchor investors at ₹587 apiece. Nomura, Goldman Sachs, ICICI Prudential Mutual Fund (MF), Axis MF, Aditya Birla Sun Life MF, Tata MF, HDFC MF and WhiteOak Capital are among the anchor investors.
About the firm
Mysore-based Kaynes Technology is a leading end-to-end and IoT (Internet of Things) solutions-enabled integrated electronics manufacturing player, having capabilities across the entire spectrum of electronics system design and manufacturing services.
It has experience in providing conceptual design, process engineering, integrated manufacturing and life-cycle support for major players in the automotive, industrial, aerospace and defence, outer-space, nuclear, medical, railways, IoT, Information Technology (IT) and other segments.
The company has eight production plants in Karnataka, Haryana, Himachal Pradesh, Tamil Nadu and Uttarakhand.
For the year ended on March 31, 2022, it reported a net profit of ₹41.68 crore with a revenue of ₹706.25 crore. For the three months ended June 30, 2022, its net profit stood at ₹10.46 crore with a revenue of ₹199.27 crore.
Most brokerages recommend subscribing to the issue on the back of the diversified business and customer profile as well as its robust order book.
"With an impressive 3-year CAGR Revenue/PAT growth of 38 percent/111 percent, respectively, coupled with industry-leading operating margins and robust order book of ₹2,266 crore as of 30th June, 2022. Kaynes will continue to move up the value chain of EMS/ESDM sector. With the fresh issue of ₹530 crore the company plans to triple its existing capacity in coming years, reduce its debt and fund working capital requirements which further multiplies its growth prospects," said the brokerage.
On the valuation front at the upper band of the IPO price Kaynes is demanding a PE of 81.9x its TTM earnings attributable to post-issue equity demanding a market cap of ₹3,412.9 crore which it believes is fairly priced considering its decent historical growth, strong revenue visibility and growing demand of automation across underlying industries. the brokerage recommends a ‘SUBSCRIBE for long term’ rating to this IPO.
As per the brokerage, Kaynes technology is one of the leading players in printed circuit board assemblies (PCBA) in India with industry-leading capacity and is poised to see exponential revenue growth in the coming years on the back of favourable government policies, import substitution and China +1 strategy. The firm is in a sweet spot as it caters to many industries such as automotive, industrial, railways, defense, and consumer all of which are seeing significant traction in terms of localisation in India, noted PC.
"At the upper band of ₹587, Kaynes would trade at an FY23/24 EV/EBITDA of 19x/15x and PE of 33x/24x. The company has a strong customer base, is adding new customers and gaining wallet share with existing customers and has a strong order book. With a constant thrust towards product innovation and R&D and higher backward integration, the company will be able to achieve higher operational efficiency in the future. We recommend SUBSCRIBE," it explained.
"Considering the growth opportunities in the EMS sector due to sector tailwinds and strong fundamentals of Kaynes, we recommend a 'subscribe' rating with a price target of ₹675 (30 times FY25 P/E), which represents an upside of 15 percent over the IPO price in 18 months," said Ventura Securities.
In its bull case scenario, the brokerage estimates FY25 revenues of ₹1,800 crore (FY22-25 CAGR of 36.6 percent), net margin of 9 percent and FY25 PE of 32 times, to arrive at a target of ₹892 per share, which suggests a possible 51.9 percent upside from the issue price. In its bear case scenario, it has FY25 revenues of ₹1,300 crore (FY22-25 CAGR of 22.6 percent), net margin of 8 percent and FY25 PE of 27 times, to suggest a target of ₹483 per share, suggesting a potential downside of 17.7 percent from the IPO price.
At the higher price band, Kaynes is demanding an EV/Sales multiple of 4.1x, which is at a premium to the peer average. Thus the demanded valuation seems to be stretched, said the brokerage.
"However considering the policy tailwinds for the EMS/ESDM sector, Kaynes’ diversified business & customer profile and robust expansion in the order book, we assign a 'Subscribe with Caution' rating for the issue.
While the company witnessed 3.7 times rise in its order book value in the past 2 years with PAT margins also growing from 2.3 percent in FY21 to 5.9 percent in FY22, however, the loss of any top 5 customers of the company and increasing competition in the electronics market along with consistent negative cash flows continue to be key risks. On the upper end of the price band, the issued is valued at a P/E of 65.2x based on FY22 earnings which are on the steeper side and the brokerage initiated an “AVOID” recommendation to the IPO.