Quadrant Future Tek Ltd. IPO: Key Details

Quadrant Future Tek

• Quadrant Future Tek is coming out with a 100% book building; initial public offering (IPO) of 1,05,45,454 shares of Rs 10 each in a price band Rs 275-290 per equity share.
• Not more than 75% 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 10% for the retail investors.
• The issue will open for subscription on January 7, 2025 and will close on January 9, 2025.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 27.50 times of its face value on the lower side and 29.00 times on the higher side.
• Book running lead manager to the issue is Sundae Capital Advisors.
• Compliance Officer for the issue is Pankaj.

Profile of the company

Quadrant Future Tek is a research oriented company, engaged in developing new generation Train Control and Signalling Systems under KAVACH project of the Indian Railways that offers the highest level of safety and reliability to rail passengers and also possess a Speciality cable manufacturing facility with Electron Beam Irradiation Centre. The speciality cables manufactured by the company is used in Railways rolling stock and Naval (Defence) industry. The company’s facility also possess end to end infrastructure capabilities for production of Solar & EV Cables. The company has one facility for manufacturing, testing, researching, and developing specialty cables and also to manufacture the hardware required for Train Control & Signalling Division, which is situated at Village Basma Tehsil Banur, Distt Mohali.

The company offers Speciality Cables for the industrial usage and other applications where fire and safety, light weight and long term performance are of utmost importance. The in-house formulated low smoke fire resistant polymers for insulation / sheath of the cables are treated with Electron Beam radiations that enable the cross-linking of the molecules to achieve much superior mechanical and thermal properties. The higher temperature-bearing capacity enables the industry users to specify lower cross-section conductor / cable sizes that enables significant weight reduction. Thus, these Speciality cables are the ultimate choice for rail vehicles, trains, naval ship vessels & submarines, electric vehicles and fuel cell electric vehicles where weight & fire Safety are the most significant criterion for component / material selection. The Speciality cables also have major application in Solar & Wind installations where thermal resistance, long term durability & extended warranties are the key factors.

The company has dedicated Railway Signalling & Embedded System Design centre for the development of Train Control Products & Solutions and is working towards development of Train Collision Avoidance System and Electronic Interlocking System under KAVACH as a means of Automatic Train Protection System to enable safety and capacity augmentation in Indian Railways. The company has built this indigenously developed Train Collision Avoidance System that uses radio transmission & support LTE technology meeting the Safety Critical standards as per SIL-4 requirements, interoperability with other competitors’ product & systems and to detect and stop a possible train collision under the KAVACH project developed by the Research Designs & Standards Organisation (RDSO) under the Ministry of Railways. It has vertically integrated manufacturing operations for the hardware and software required for Train Control and Signalling Division which allow it to manage manufacturing processes in-house, from design and development to manufacturing and delivery. 

Proceed is being used for:

• Funding long-term working capital requirements of the company
• Capital expenditure for development for Electronic Interlocking System
• Prepayment or repayment of all or a portion of outstanding working capital term loan availed by the company
• General corporate purposes

Industry Overview

India has wide track length of over 1,28,305 kms as on March 2022. Despite, such extensive railway network, the legacy signalling and safety solutions have outlasted their useful lives. Train Control System is an advanced and cost-efficient technology that ensures safety of human life and the rail infrastructure. These are the hardware and software equipment that monitor train locations and movements. The primary focus of the system is to enhance the efficiency and safety of the railway network. The Indian train control system industry plays a crucial role in ensuring the smooth and secure operation of trains across the Indian Railways network. For which, Indian Railways is developing and creating technology in areas such as signalling and telecommunication with 15,000 kms being converted into automatic signalling and 37,000 kms to be fitted with 'Kavach', the domestically developed Train Collision Avoidance System. In Union Budget 2024-25, allocation towards Kavach was amounting to Rs 557 crore. This shows the increasing efforts for scaling up the implementation of Kavach and ensuring safety by the government.

Meanwhile, the Indian interconnect products industry refers to the sector involved in the design, manufacturing, and distribution of various interconnect solutions. Interconnect products play a critical role in facilitating electrical and electronic connections between different components or devices. These components enable the flow of signals, power, and data within electronic systems. The industry encompasses a wide range of products and technologies, including connectors and wire harnesses. Further, electrical connectors and wire harnesses play a critical role in many electrical assemblies. A wire harness is a collection of cables or wires used to transmit electrical power, signals, and data, while connectors, also known as electrical connectors, are end components used to join wire. In CY23, the domestic interconnect products market was valued at $2,692 million, which is further expected to reach $2,948 million in CY24E. For the forecast period CY24E-CY30, the market is predicted to grow at a CAGR of 6.6%.

The market demand for wire harnesses in the medical device and equipment industry is growing rapidly, attributed to advancements in technology that have facilitated the development of new & innovative medical devices and equipment. Wiring harnesses play an important role in these medical devices and equipment as they provide the necessary electrical connections between the various components. Furthermore, the demand for the biocompatible wire harness market for medical devices and equipment is increasing due to the rising incidence of chronic diseases and ageing population. Such key factors are likely to propel the growth of the wiring and harness market in India.

Pros and strengths

Entered into an exclusive MoU with RailTel: On May 01, 2024, the company has entered into a Memorandum of Understanding (MoU) with RailTel Corporation of India (RailTel), a Government of India undertaking, to define a framework of inter-se co-operation to (i) establish high level understanding of intended opportunities to pursue within the said MoU, (ii) KAVACH as a means of Automatic Train Protection System for Railways in India and abroad, and (iii) to re-align and broaden the above targeted scope as per the opportunities within other countries and their Railway System. The company has partnered exclusively with RailTel on delivering the specific targeted opportunity related to KAVACH in Indian Railways and other Countries Railways for which RailTel and Quadrant has agreed to work jointly. In terms of the said MoU, RailTel will ensure that none of its Related Party (as defined) will, solicit, negotiate, accept, encourage, consider or otherwise pursue any offer or inquiry from any person or entity, or engage in discussions or other communications or furnish any information, any acquisition or disposition of any interest regarding such particular business transaction mutually agreed.

In-house design and product development capabilities: The company’s Railway Signalling & Embedded System Design centre is located in Bengaluru and Hyderabad and consists of 28 employees as on October 31, 2024 in the Railway Signalling & Embedded System Design centre, which is around 9.49% of its total employees. The company’s Railway Signalling & Embedded System Design centre focuses on the development of product, solutions with latest technology, understanding the expectations of RDSO on Automatic Train Protection systems, whilst simultaneously focusing on cost competitiveness and innovation. It has designed, developed and engineered the software for Train Collision Avoidance System in-house with a focus on performance, reliability and autonomy and in line with the needs of Indian Railways. It undertakes its manufacturing operations at its manufacturing facility, situated in Basma, Mohali, Punjab, with a dedicated Production floor area of its 60,000 sq. ft. and is equipped with advanced equipment, modern technology, and automation systems to manufacture the hardware required for Train Control & Signalling Division. Its ability to drive technology and product innovation also led it to develop a custom in-house train Collision avoidance system which is adhering to the requirement of RDSO.

Unique technology for the manufacture of cables: The company offers a wide range of speciality cables for railways as well as defence sector. It has a range of speciality cables meeting the requirements of its customers where Fire & Safety, Light Weight & Long-Term performance are of utmost importance. Offering high-quality products and operational execution focused on continual improvement supports its ability to offer a wide range of products for varied applications. There have been steady developments in radiation cross-linking of wire and cable and heat shrink products. These have been mostly focused on process control and control systems. There are still opportunities for further process improvements and optimization in various industries including utilisation for higher safety in high rise apartments, hospitals, etc.

Advanced manufacturing facilities: The company is one of the few manufacturers in India approved by RDSO, DGQA and Indian Register of Shipping with in-house capabilities of manufacturing and supply of Single Core / multi core Control & Power Cables, Signalling Cables for use in Railway Coaches, Locomotives & EMU's and also for the supply of Single Core/Multi Core, Screened/Un-Screened & Power Cables for Naval Ships. Its Railway Signalling & Embedded System Design team and technological capabilities have helped it in diversifying its products in the speciality cables segment. It has made its first supply of cable for Naval Ships during the Fiscal 2022 with an insignificant turnover of Rs 30.45 million and later increased to Rs 369.16 mn, representing 24.16% of the total sales during the Fiscal 2023.

Risks and concerns

Maximum revenue comes from limited customers: The company’s revenue from operations from this division are concentrated with, and it is dependent on, a limited number of customers. The company has derived 86.20%, 95.13% and 96.16% of its total revenue from top 10 customers in FY24, FY23 and FY22 respectively. There are no long term contracts with any of its customer and therefore it may not be able to retain its customers in the future or expand its sales volumes, maintain its relationships with its key customers and may experience material fluctuations or decline in its revenue and reduction in its operating margins, as a result of which its business, results of operations and financial condition could be materially and adversely affected.

Business is dependent on single manufacturing facility: The company has a single manufacturing facility situated in Basma, Mohali, Punjab which is equipped with advanced equipment, modern technology and automated PCB assembly line. The said manufacturing facility caters to both the business divisions of the company, i.e. Speciality Cables Division and Train Control & Signalling Division and the entire manufacturing and supply is dependent on this facility. However, its manufacturing facility is subject to various operating risks, including the breakdown or failure of equipment and performance below expected levels of output or efficiency. It has provisioned the redundancy in most of its production & test equipment, however, high capex equipment like Electron Beam Accelerator and polymer compounding line currently do not have backup. Any significant malfunction or breakdown of Electron Beam Accelerator or polymer compounding line, its automation systems, or any other equipment / machinery may entail significant repair and maintenance costs and cause delays in its operations.

Dependent on top 5 suppliers for majority of raw materials supply:  The company is dependent on its suppliers for uninterrupted supply of raw materials i.e. copper & tin and polymers and fillers which are majorly procured domestically by it. The company has procured 84.62%, 77.29% and 86.34% of its total raw material supply from top 5 customers in FY24, FY23 and FY22 respectively. It relies on such suppliers to perform their conditions and deliver adequate supplies and quality raw materials and other inputs in a timely manner. Its suppliers are associated with it through purchase orders, and it does not enter into definite-term agreements with them. Any failure of its suppliers to deliver these raw materials in the necessary quantities or to adhere to delivery schedules or specified quality standards and technical specifications would adversely affect its production processes and its ability to deliver orders on time and at the desired level of quality.

High working capital requirement: The company’s business requires significant working capital for its business operation, furnishing of bank guarantees for orders awarded or deduction of retention money from amount receivable by it, financing inventory and any change in terms of credit or payment would affect its working capital. It proposes to use Rs 1,497.22 million out of Net Proceeds of the Issue towards meeting its requirement for working capital. The working capital projections made by the company are based on certain key assumptions by its management and it may require alternative means of funding in Fiscal 2025 and Fiscal 2026 even after the utilization of Net Proceeds. Its inability to meet its present working capital requirements or its enhanced working capital requirements will have an adverse impact on its results of operation, business and financial condition. 

Outlook

Quadrant Future Tek develops next-generation Train Control and Signaling Systems for the Indian Railways' KAVACH project, enhancing safety and reliability for passengers. The company also has a speciality cable manufacturing facility with an Electron Beam Irradiation Centre. It has advanced cable manufacturing technology that meets strict standards for Railways, Naval Defence, Renewable Energy, and Electric Vehicle sectors. Also, it has Advanced manufacturing facilities with a diverse range of power and control cables with a focus on innovation and cost competitiveness. On the concern side, the company is dependent on and derive a substantial portion of its revenue from a limited number of customers. Cancellation or orders by customers or delay or reduction in their orders could have a material adverse effect on its business, results of operations and financial condition. Moreover, its business is dependent on single manufacturing facility, and it is subject to certain risks in its manufacturing process. Any slowdown or shutdown in its manufacturing operations could have an adverse effect on its business, financial condition and results of operations.

The company is coming out with a maiden IPO of 1,05,45,454 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 275-290 per equity share. The aggregate size of the offer is around Rs 290.00 crore to Rs 305.82 crore based on lower and upper price band respectively. On performance front, the company’s total revenue decreased by 0.73% to Rs 1,518.23 million for the Fiscal 2024 from Rs 1,529.45 million for the Fiscal 2023 and the revenue growth was stagnant. The company has taken efforts and utilised the surplus funds towards development of Kavach System and therefore the revenue growth of wires and cables division has been on same level. Moreover, the company has reported 9.99% rise in net profit at Rs 219.23 million in FY24 as compared to Rs 199.32 million in FY23.

The company continually track the upcoming trends & requirements of the industry & focus on research and development on these new generation technologies as a core thrust of its business. Going forward, it intends to continuously invest in research, design, and innovation to build safer, valuable, cost-effective solutions for its customers. Constant research and development would enable it to remain ahead of the competition, help customers with lower costs, and enhance their efficiency. It also focuses on process improvements to reduce operational costs and enhance the quality of products. Through in-house quality control and research and development, it has created its knowledge database and provided new products to its customers. The company continuously tries to apply modern techniques in the manufacturing process as a practice to achieve better quality products.