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Updated on: Tuesday, September 14, 2021, 11:31 AM IST

Sansera Engineering IPO opens for subscription today; should you subscribe?

Sansera Engineering IPO consists of a pure offer for sale of 1.72 cr shares by its existing shareholders and promoters./ Representational image | Photo credit: Freepik

Sansera Engineering IPO consists of a pure offer for sale of 1.72 cr shares by its existing shareholders and promoters./ Representational image | Photo credit: Freepik

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Auto component maker Sansera Engineering Ltd said it has mopped up Rs 382 crore from anchor investors ahead of its initial share sale, which opens for public subscription on Tuesday.

The company has decided to allocate 51,35,162 equity shares to anchor investors at Rs 744 apiece, valuing the transaction to Rs 382.05 crore, according to a circular uploaded on the BSE website on Monday.

Government of Singapore, Monetary Authority of Singapore, Nomura, Abu Dhabi Investment Authority, Axis Mutual Fund (MF), ICICI Prudential MF, SBI Life Insurance Co Ltd, Max Life Insurance Company and Kuber India Fund are among the anchor investors.

The initial public offering (IPO) is entirely an offer for sale (OFS) of 17,244,328 equity shares by promoters and investors.

Those offering shares in the OFS are existing investors Client Ebene, CVCIGP II Employees Ebene and promoters -- S Sekhar Vasan, Unni Rajagopal K, F R Singhvi and D Devaraj.

The issue, with a price band of Rs 734-744 a share, will open for public subscription on September 14 and conclude on September 16.

At the upper end of the price band, the initial share-sale is expected to garner Rs 1,283 crore.

Half of the issue size has been reserved for qualified institutional buyers (QIBs), 35 per cent for retail investors and the remaining 15 per cent for non-institutional investors.

The company expects that listing of the equity shares will enhance its visibility and brand image and provide liquidity to shareholders. Also, the listing will provide a public market for the equity shares.

This is the company's second attempt to go public. Earlier, Sansera Engineering had filed IPO papers with Sebi in August 2018 and had also received its clearance to float the public issue. However, it did not go ahead with the launch.

The IPO consists of a pure offer for sale of 1.72 cr shares by its existing shareholders and promoters.

The company

SEL, incorporated in 1981, is a leading supplier of complex and high quality precision components to OEMs. Bengaluru-based company is largest supplier of connecting rods, rocker arms and gear shifter forks to two-wheeler OEMs and connecting rods and rocker arms to passenger vehicles in India.

The company has 16 manufacturing plants out of which 15 are located in India and 1 in Sweden.

The Bengaluru-based firm is an engineering-led integrated manufacturer of complex and critical precision engineered components across automotive and non-automotive sectors.

Within the automotive sector, the company manufactures a wide range of precision forged and machined components and assemblies that are critical for engine, transmission, braking and other systems for the two-wheeler, passenger vehicle and commercial vehicle verticals.

In the non-automotive sector, Sansera Engineering manufactures precision components for the aerospace, off-road, agriculture and other segments, including engineering and capital goods.

Business model, revenue

The business model is well-diversified across customer base, geographical spread and product portfolio. As of FY21, SEL caters to 71 customers which includes 47 from automotive segment and 28 from nonautomotive segment.

Revenue break-up on sub-segment wise include 50.4 percent from two wheelers, 24.1 percent from PVs and 13.1 percent from CVs, aerospace at 3.8 percent, off-road at 4.2 percent in FY21.

Key customers

Key two-wheeler customers of the company are Bajaj auto, HMSI, TVS Motors and Yamaha Motors. Maruti Suzuki and Honda Cars India are key customers under passenger vehicles category.

SEL is a global supplier as 35 percent of revenue in FY21 was derived through exports to Europe, USA and other foreign countries. It is an integrated manufacturer of complex and critical precision engineered components which requires stringent quality requirement given their criticality to automotive systems. Owing to its expertise in critical components which requires complex engineering processes, the company has become largest supplier of connecting rods, rocker arms and gear shifter forks to TWs and PVs in India. This also represents entry barriers for the new players to enter these products segments.

The company also maintains long standing relationship with marquee OEMs such as 34 years with Maruti Suzuki, 25 years with Bajaj Auto, 24 years with Yamaha Motors and 21 years with Honda Motorcycles (HMSI). Bajaj Auto is the largest customers for the company accounting for 20.7 percent of revenue in FY21.

SEL’s revenue grew by a CAGR of 13 percent during FY16-FY20 which was higher than peer average of 8 percent. In the last two fiscals, it has been challenging for OEMs as auto players was earlier hit by weak demand, high insurance cost and increase RTO charges and later by COVID pandemic. SEL’s revenue contracted by (-)2.3 percent during FY19-FY21 compared to over 5 percent decline in peer business.

Though business size of SEL was small compared to mentioned peers in RHP, it witnessed marked recovery from the impact of COVID-led complete lockdown in H1-FY21.

Revenue grew by 37 percent YoY to Rs 910 cr H2FY21. Margin trend also remained at satisfactory level. SEL reported EBIDTA margin at 17.6 percent and NPM at 7.1 percent in FY21 compared to peer average of 14 percent and 7 percent. RoE was stood at 12.5 percent in FY21 which is expected to improve with expansion in revenue growth. Net debt/equity stood at 0.55x in FY21 seems at comfortable level. SEL generated OCF at Rs256 cr in FY21 with OCF margin at 16.5 percent. Strong OCF generation along with cash position (Rs 65 cr cash in FY21), SEL is confident to fund capex with internal accruals. Capacity utilisation was 56 percent across products, indicates operating leverage gain to expand business. Investors’ sentiments remain weak towards automotive companies amid fear of rising competitions from electric vehicles (EV) players and requirement for capex requirement for EV expansion.

As per the CRISIL report, EV penetration in TW motorcycles will be less than 1 percent by FY26, 4 percent for PVs and 25 percent for TW scooters which indicates shift towards EVs would be more gradual in the longer term. While SEL manufactures core components for ICE engine, SEL intend to develop multiple technology driven systems and components to cater to growing opportunities in electrification of vehicles. Fungibility of production lines allowing company to interchange capacity and product mix over product categories will also benefit business.

Primary raw materials for SEL are alloys steel rounds bars, non-ferrous alloys aluminium and titanium. Thereby volatility in metal prices include steel poses risk to business as raw material cost was 50 percent of total operating expenditure in FY21 (43 percent of sales).

Should you subscribe?

Choice Broking says, 'Subscribe'. "At the higher price band of Rs 744, the issue is valued at P/E of 34.8x on FY21 EPS basis which is in line with peer avg. trailing P/E of 34x. As per our view, likely strong revenue growth and healthy EBIDTA margin over 15 percent to boost profitability in coming future."

ICICI Securities, IIFL Securities and Nomura Financial Advisory and Securities (India) Private Limited are the book running lead managers to the issue

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Published on: Tuesday, September 14, 2021, 11:31 AM IST
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