Carraro India Limited. (Neutral)

Highlights

Carraro India Limited (CIL) incorporated on 1997, is engage in the business of supplying and developing complex engineering products and solution for Original Equipment Manufacturer (OEM). They are independent tier 1 solution provider of axles, transmission system and gears for the agriculture tractor and construction vehicle industries in India.

They primarily manufacture axles and transmission systems for agricultural tractors and construction vehicles such as backhoe loaders, soil compactors, cranes, self-loading concrete mixers and small motor graders. Their products are mission critical for their customers, as products constitute important components of customers’ final products.

They also supply gears mainly used in industrial and automotive markets, spare parts which are primarily loose components of agricultural tractors and construction vehicles and other products which are non-core parts of agricultural tractors and construction vehicles.

CIL Promoter, Carraro S.p.A., is the parent company of the Carraro Group which designs, manufactures and sells transmission systems (axles, transmissions and drives) mainly for agricultural and construction equipment for off-highway vehicles, in addition to marketing a wide range of gears for diverse sectors, from automotive to trucks to agricultural and construction vehicles. The Carraro brand is owned by Carraro S.p.A. and licensed to us pursuant to a licensing agreement with Carraro S.p.A.

Out of the total proceeds of Rs. 12,500 mn, ~Rs. 12,500 entire proceeds would go towards existing promoter selling shareholders of the company and CIL will not receive any share sale proceeds from the Offer.

Key Highlights

• Global sales of construction vehicles and agricultural tractors are projected to increase from 35.60 mn units in CY2023 to 46.40 mn units by CY2029. As per reports, the agricultural tractors volume in India grew at CAGR of 5.9 pct from 0.80 mn units in CY19 to 10.11 mn units in CY23. The sales volume of construction vehicles in India increased at CAGR of 4.2 pct from 92,500 units in CY2019 to 109,000 units in CY2023 and is expected to grow at CAGR of 5.0 pct from CY24 to CY29.
• The company own and operate two manufacturing plants in Pune, Maharashtra, India, which are the driveline manufacturing plant occupying a plot area of approximately 84,000 square meters and the gears manufacturing plant occupying a plot area of approximately 78,000 square meters.
• They have developed expertise in the agricultural tractor and construction vehicle industry in India and have developed a network of 220 suppliers based in eight states in India and 58 suppliers internationally.
• The company is the leading sole supplier in the non-captive segment of the agriculture tractors transmission market and the market leader with a 60-65 pct share of the non-captive construction vehicle transmission market. They have leveraged their deep understanding of the Indian market based on early-mover advantage, long-term relationships with customers and diversified product offering with established reliability to provide ourselves with a competitive moat as a tier 1 solution provider.
• CIL usually enter into long-term contracts with their customers of at least five years, with additional schedules executed based on each new order received. They have a long-term relationship with their top 10 customers which have continuously engaged us for at least 15 years.
• CIL’s key growth strategies include (i) Maintain strong positioning in axles and transmission systems with an aim to secure market position (ii) Drive growth through introduction of new products and product application innovation (iii) Develop future-ready solutions for emerging technologies and potential entry into new market segments (iv) Enhance and expand production capabilities in India (v) Increase share of localization and further improving efficiencies of supply chain.
• The company’s sales/EBITDA and Profit has grown by 9.32 pct/35.9 pct/70.79 pct CAGR Over FY22-24. During FY24, company reported sales of Rs. 17,890 mn which grew by 4.43 pct YoY while EBITDA grew by 20.18 pct YoY to Rs. 1,500 mn as EBITDA margin expanded by 110 bps FY24. As of FY24 the company reported profit of Rs. 626 mn which was grew 29.11 pct YoY. As of H1FY25 company registered sales/EBITDA/Profit of Rs. 9,146 mn/Rs. 1,011 mn/ Rs. 497 mn.

Key Risk

• Agricultural tractor business is seasonal in nature and a decrease in CIL sales during some quarters could have an adverse impact on their financials.
• CIL is exposed to risks in connection with the potential failure or non-performance of distributors or authorized dealers that provide after-sales services to CIL’s customers.

Financial Performance

Peer comparison based on FY24 Financials

Valuation

CIL unique positioning as a key supplier to OEM customers, backed by 27 years of operating experience in India, competitive R&D and manufacturing capabilities and long-standing customer and supplier networks, have enabled them to deliver growth over the years in terms of profitability, return on equity and return on capital employed. At the upper end of the price band of Rs. 704 the issue is priced at a PE of ~40.3 its FY25E annualised earnings. The issue looks fully priced.

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