Carraro India Ltd. IPO: Key Details

Carraro India

• Carraro India is coming out with a 100% book building; initial public offering (IPO) of 1,87,12,574 shares of Rs 10 each in a price band Rs 668-704 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on December 20, 2024 and will close on December 24, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 66.80 times of its face value on the lower side and 70.40 times on the higher side.
• Book running lead managers to the issue are Axis Capital, BNP Paribas and Nuvama Wealth Management.
• Compliance Officer for the issue is Nakul Shivaji Patil.

Profile of the company

Carraro India is a technology driven integrated supplier that develops complex engineering products and solutions for its original equipment manufacturer (OEM) customers. The company is an independent tier 11 solution provider of axles, transmission systems and gears for the agricultural tractor and construction vehicle industries in India. It supports the full value chain of services as a solution provider for axles, transmission systems, gears and other related components with in-house product design manufacturing capabilities. Its 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 it pursuant to a licensing agreement with Carraro S.p.A.

The company was among the pioneers to enter the agricultural tractor and construction vehicle component market with its dedicated R&D team and center as the Carraro Group entered India in 1997 and established its manufacturing facility in Pune and R&D center in 2006. It has been present in India for 27 years and has developed an extensive network with local and international customers and suppliers based in India. As an early-mover, it has more time than its competitors to understand the market, identify customer needs and develop lasting customer relationships. As a result of its customized products, its customers are subject to high switching costs in case of a change of manufacturer.

The company primarily manufactures 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. The company’s products are mission critical for its customers, as its products constitute important components of its customers’ final products. It provides a diverse range of products including axles and transmission systems of different HP ranges for off-highway vehicles in the agricultural tractor and construction vehicle sectors, as well as gears, shafts and ring gears for industrial and automotive vehicles. It also supplies 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. 

Proceed is being used for:

• Carrying out the Offer for Sale of Equity Shares by the Selling Shareholders
• Achieving the benefits of listing the Equity Shares on the Stock Exchanges

Industry Overview

The scope of the study focuses on agricultural tractors and key components - transmissions, axles and gears. With the introduction of TREM-IV regulations, the growth in 41-50 HP tractor segment, increase in demand for 4WD tractors, OEMs building export capacities is also expected to bring a change in components industry. The growth of the Indian agricultural tractor component market is primarily driven by the overall expansion of the Indian tractor market. The Indian agricultural tractor market (unit sales) grew at a CAGR of 5.9% from CY2019 to CY2023. It is anticipated to continue this growth trajectory, with an expected CAGR of 8.2% from CY2024 to CY2029. The Indian agricultural tractor component market (unit sales) grew at a CAGR of 4.7% from CY2019 to CY2023. It is expected to grow at a CAGR of 8.6% between CY2024 and CY2029. The agricultural tractor components market is expected to reach 17.3 million units in terms of volume by CY2029.

Meanwhile, the Indian construction vehicle industry is poised for significant growth, driven by an expanding economy, supporting government initiatives, rising urbanization and industrialization, and large-scale infrastructure projects. The India construction vehicle sales are expected to grow from 109,028 units in CY2023 to 147,447 units by CY2029 at a projected CAGR of 5.0%. The components market will grow in line with the construction vehicle domestic sales and exports. With the upcoming CEV-V regulations in India, the demand for advancements in the components is expected to rise. Engine and transmissions will need a redesign to meet the new emission standards, such as using more efficient transmission systems that includes automatic transmissions, power shift transmissions, infinitely variable transmissions, and ECUs to improve productivity. The construction vehicles components market is expected to reach 854 thousand units by CY2029. 

Gears used in construction vehicles are of different types: spur gears, helical gears, bevel gears, worm gears, rack, and -pinion gears. The Indian construction vehicle gears market is expected to reach 614.2 thousand units by CY2029. The hydrostatic transmission used in backhoe loaders and wheeled loaders eliminates the need for gears for its smooth functioning. Backhoe loaders in India primarily use hydrostatic transmission. Further, electric vehicles require electric transmission, motor, inverter, controller, and energy management software to ensure optimized vehicle performance. The ICE operated backhoe loader is fitted with torque converter transmission and ECU, whereas the electric backhoe loader requires electric gearbox, electric motor, and ECU. The primary electric components of construction vehicles are axles, motors, and electric transmission. Electrification could potentially impact construction vehicle component manufacturers in the longer run, as more than 90% of the component manufacturers produce non-electrified traditional construction vehicle components. the rise in the electrification of construction vehicles is expected to diversify the product portfolio of component manufacturers to meet the anticipated demand for construction vehicles.

Pros and strengths

One of the leading tier 1 suppliers of transmission systems: The company is one of the leading independent tier 1 suppliers of axles, transmission systems and gears for the agricultural tractor and construction vehicle industries in India, and as of March 31, 2024, the company has established itself as the market leader in providing transmission systems for tractors up to 150HP and four-wheel drive capabilities. As of 2023, 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% share of the non-captive construction vehicle transmission market. The company has leveraged its deep understanding of the Indian market based on its early-mover advantage, long-term relationships with customers and diversified product offering with established reliability to provide itself with a competitive moat as a tier 1 solution provider of choice for its Indian customers.

Customer-centric offering of customized solutions to a longstanding OEM customer base: The company’s products constitute an indispensable mission critical component of the final product sold by its OEM customers. It is a one-stop shop tier 1 OEM supplier that develops customized solutions to its India-based customers, including customers in India and international customers with Indian subsidiaries or operations, by covering the full value chain from R&D to manufacturing of axles and transmission systems. It endeavors to identify emerging customers’ needs and provide a comprehensive solution to its customers from planning to launching and maintaining their off-highway vehicles and gears.

Longstanding relationships with marquee local and international supplier base: As a one-stop shop OEM supplier, it has an established presence in the agricultural tractor and construction vehicle markets, during which time it has developed longstanding relationships with local suppliers in India and leveraged on the Carraro Group’s support for their relationship with international suppliers. As of September 30, 2024, it has a supplier base of 220 suppliers spanning across eight states in India and 58 suppliers internationally. As it conducts assembly and machine castings in-house, all of its suppliers are component suppliers, from whom it sources components such as bearings, forgings, castings, brakes and clutch, cylinders and hydraulic rear lifts.

Strong in-house R&D capabilities with proprietary IP rights: The company was among the first to enter the agricultural tractor and construction vehicle component market with its dedicated R&D team and center as the Carraro Group entered India in 1997 and established its manufacturing facility in Pune and R&D center in 2006. After the company’s acquisition of CTIPL in June 2024, it also acquired the R&D center in Pune, Maharashtra, India and the R&D team of CTIPL. CTIPL will continue providing service support to the Carraro Group’s R&D departments. After the foregoing transfer of IP rights and acquisition of CTIPL, the company has integrated the design, R&D and manufacturing capabilities of its products, which is pivotal in enhancing its competitive position in India.

Risks and concerns

Maximum revenue comes from limited customers: The company is dependent on certain key customers for a significant portion of its revenue. It derived 69.55% and 87.88% of its revenue in the six months ended September 30, 2024 and 69.37% and 85.39% of its revenue in Fiscal 2024 from its top five and top 10 customers, respectively, and any inability to retain its key customers or attract new customers and expand its customer network, could negatively affect its business and results of operations. Furthermore, the Carraro Group was its largest customer in terms of revenue contribution on consolidated group basis in the six months ended September 30, 2024 and 2023 and Fiscals 2024, 2023 and 2022, representing 33.27%, 34.21%, 33.91%, 32.86% and 30.99% of its total revenue for the same periods, respectively. Any adverse change in its business relationship with this related party, including contract renegotiation, termination, or changes in purchasing behavior, could lead to a material decline in its revenue and profitability.

Its agricultural tractor business is seasonal in nature: The sales of its agricultural tractor products are influenced by the cyclicality and seasonality of demand in the countries in which it operates. In the Indian agricultural market, tractor demand typically peaks between June and November, which is driven by the arrival of the monsoon, the Kharif crop season, preparations for the upcoming rabi planting season, increased harvesting activities, and improved rural cash flow during this period. The demand for its exported products also depends on the cyclicality and seasonality of agricultural tractors in each country. In the six months ended September 30, 2024 and the past three Fiscals, it experienced higher sales volume of agricultural tractors between March and May and between September to November. A decrease in its sales during some quarters could have an adverse impact on its financial performance.

Geographical constrain: The company manufactures all of its axles and transmissions at its driveline and gears manufacturing plants. It owns and operates two manufacturing plants in Pune and events impacting this geographical area may disrupt its production and operations. Its manufacturing plants are also subject to operating risks such as the breakdown or failure of equipment, disruption in power supply or processes, severe weather conditions, performance below expected levels of efficiency, obsolescence, labor disputes, natural disasters, industrial accidents, infectious diseases, political instability, the need to comply with the directives of relevant government authorities and the requirement to obtain certain material approvals to operate its manufacturing plants. The company cannot assure that its manufacturing plants will not be subject to operating risks in the future. Further, it may encounter manufacturing difficulties such as increased manufacturing costs and delays in production resulting from events beyond its control.

High working capital requirement: The company has a high working capital requirement and had total borrowings of Rs 1,957.77 million, Rs 2,125.46 million, RS 1,883.30 million and Rs 1,781.38 million as of September 30, 2024, March 31, 2024, March 31, 2023 and March 31, 2022, respectively and a net working capital turnover ratio of 4.20, 6.35, 12.87, 10.63 and 17.87 for the six months ended September 30, 2024 and 2023 and Fiscal 2024, Fiscal 2023 and Fiscal 2022, respectively. If it is unable to comply with repayment and other covenants in its financing agreements, its business, financial condition, cash flows and credit rating could be adversely affected.

Outlook

Carraro India is engaging in manufacturing components ranging from the smallest gear to complete tractor manufacturing. The company is Tier 1 suppliers of transmission systems and a key supplier of axles in India's agricultural tractor and construction vehicle industries with competitive moats for mission-critical and complex driveline components. On the concern side, the company derived 69.55% and 87.88% of its revenue in the six months ended September 30, 2024 and 69.37% and 85.39% of its revenue in Fiscal 2024 from its top five and top 10 customers, respectively, and any inability to retain its key customers or attract new customers and expand its customer network, could negatively affect its business and results of operations. Moreover, the company depend partially on other entities in the Carraro Group for its operations, such as the license of the Carraro brand, customer sourcing, procurement, R&D and general support of its operations.

The company is coming out with a maiden IPO of 1,87,12,574 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 668-704 per equity share. The aggregate size of the offer is around Rs 1250.00 crore to Rs 1317.37 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 4.23% to Rs 18,065.47 million in Fiscal 2024 from Rs 17,332.98 million in Fiscal 2023, primarily due to an increase in its revenue from operations by 4.43% to Rs 17,889.65 million in Fiscal 2024 from Rs 17,131.45 million in Fiscal 2023. Moreover, its profit for Fiscal 2024 increased by 29.11% to Rs 625.63 million from a profit of Rs 484.59 million for Fiscal 2023.

With an aim to drive growth on a sustainable basis, the company has introduced the “Industrial Design Cost Optimization” function, which works in a cross-functional team approach across the R&D, sourcing, sales and manufacturing and engineering teams to enhance its capability to actively redefine its designs and costs, including reducing its share of imports and implement a meticulous cost and design optimization process. The company plans to increase purchases and procurement from its existing local suppliers and widen its base of local suppliers to lower its production cost, optimize supply chain logistics and minimize transportation lead times, as well as to develop strategic partnership with its suppliers for cost control and maintenance of quality control and assurance standards. Its cost-saving initiatives would help it to scale up sales volumes and increase margin benefits, which is instrumental in maintaining its competitive edge.