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Krishna Defence And Allied Industries

• Krishna Defence And Allied Industries is coming out with a 100% book building; initial public offering (IPO) of 30,48,000 shares of Rs 10 each in a price band Rs 37-39 per equity share.

• The issue will open on March 25, 2022 and will close on March 29, 2022.

• The shares will be listed on NSE Emerge Platform.

• The face value of the share is Rs 10 and is priced 3.70 times of its face value on the lower side and 3.90 times on the higher side.

• Book running lead manager to the issue is Hem Securities.

• Compliance Officer for the issue is Charmy Shah.

Profile of the company

The company is engaged in the diversified business of manufacturing defence application products, dairy equipment products and kitchen equipments. It has entered into various licensing agreement with Defence Research and Development Organisation (DRDO) for obtaining the know-how and rights which enable it to manufacture and supply specialized defence application products for the Indian Armed Forces. Under defence application, it provides a wide array of high performance products for naval applications and other utilities such as ship building steel bulb bar, special steel alloy bricks used as ballast weight for critical applications, super alloys weld consumables like welding wire, flux and electrodes, food container and improved space heating device, which is also known as bukhari. In the year 2020, the company has also forayed in a new business vertical of manufacturing and marketing of Homeland & Security products, wherein it plans to manufacture products like Modular Vehicle Barrier, Automatic tyre Killer, Multi-purpose Launcher and Long Range LED Searchlight used by the Indian Armed Forces, for which it has entered into agreements with foreign vendors for import of critical component required to manufacture/assemble these products in its factory. It proposes to sell such product under MAKE IN INDIA Program.

The company has two manufacturing facilities in Gujarat, located at Kalol and Halol district near Vadodara. Its manufacturing facilities are accredited with ISO 9001:2015 quality management system as manufacturer and exporter of stainless-steel milk cans, milking machine, milk coolers, dairy and kitchen Equipment, milk testing Equipment, Galley Equipment, shipbuilding steel bulb bars, modular vehicle barrier & automatic tyre killer. It has diversified its products under various business verticals, mainly due to its strong research and development (R&D) and technological capabilities. Its R&D capabilities include product design, product engineering, product simulation, prototyping and testing. Its R&D activities are mainly undertaken at its manufacturing facilities. Its research activities are focused on creating new products and solutions which are customized to meet customer expectations and end-user preferences and also improving its production processes and improving the quality of its existing products. With its R&D capabilities, it is currently developing several new products for some of which it has secured orders as well.

Proceed is being used for

• Meeting working capital requirements.

• General corporate purpose.

Industry overview

India accounts for 3.7% of the global military spending, making it the third highest military spender in the world. The defence expenditure constituted 2.9% of India’s total GDP with approximately $72.9 billion spent on defence in 2020. Under the Field Artillery Rationalization Plan - 1,580 towed guns, 100 tracked guns, 814 Mounted Gun System will be required in India. With the growing demand in the defence sector the government has identified it as one of the core areas to boost ‘Atma Nirbhar Bharat or Self-Reliant India. The value of exports of defence items including major items in FY 2014-15 and 2020-21 was Rs 1,940.64 crore and Rs 8,434.84 crore respectively. The government has also spelt out its vision of achieving a turnover of $25 bn including export of $5 bn in Aerospace and Defence goods and services by 2025. To support defence modernisation, in the budget 2021-22 the defence capital outlay has been increased by 18.75% from the preceding year. This is the highest ever increment in the last 15 years. The government of India has called for increased participation of defence manufacturing companies from the private sector to cater to the growing demand. The opening up of the Indian defence industry also paves the way for foreign original equipment manufacturers to enter strategic partnerships with defence equipment manufacturers in India.

Dairy is the single largest agricultural commodity contributing 5 per cent of the national economy and employing more than 8 crore farmers directly. India is ranked 1st in milk production contributing 23 per cent of global milk production. Milk production in the country has grown at a compound annual growth rate of about 6.2 per cent to reach 209.96 million tonnes in 2020-21 from 146.31 million tonnes in 2014-15. The Indian dairy sector has witnessed a phenomenal growth where milk production today stands at 155.5 million tonnes per annum or 4620 litres per day (LLPD) and marketable surplus is 52% i.e. 2400 LLPD. The present chilling and processing capacity can handle only 757 LLPD and 1396 LLPD respectively. Further, 60% of the existing dairy plants are over 30 years old and needs modernisation with newer technology in plant & machinery, energy efficient systems, new packaging technology, efficient energy system etc. The proposed National Action Plan aims at meeting the projected demand of about 254.5 million tonnes by 2021-22 and 300 million tonnes of milk by 2023-24 and envisages the share of the organised sector in milk processing rising from the current 30 per cent to about 65 per cent. To meet this 65 per cent level by 2021-22 and 2023-24, hitech processing facilities would be required as the objective of National Dairy Plan is not only to increase the milk production but also to bridge the wide gap between milk production and processing. Statistics indicate an exponential demand for dairy equipment's in the coming years with completely automated dairy processing plants and processing lines for new products.

Pros and strengths

Precision engineering expertise: The company has comprehensive in-house capabilities of developing and manufacturing defence application products, dairy equipments and kitchen equipments. The company develops and manufactures a wide range of critical assemblies and precision components with close tolerances through its precision machining, assembly, and specialized fabrication facilities, for onward usage by its customers in the defence sectors and dairy sectors of India. All raw materials procured for manufacturing its products are sourced from trusted vendors and its quality control team applies stringent quality measurements at every manufacturing stage to ensure low rejection rate such that its finished product confirms to the exact requirement of its customers and successfully passes all validations and quality checks.

Strong R&D capabilities: In order to enhance the company’s product offerings, it has leveraged its adaptability and manufacturing agility by continually investing in the Research and Development activities of the company over the years. It has experienced and qualified team of Engineers who help it develop complex products and assembly. Its R&D capabilities have enabled it to keep abreast of technological developments in the precision manufacturing industry thereby allowing it to have a focused approach on consistently upgrading the technology and the processes used in the manufacture of its products. It place strong emphasis on R&D which has helped it develop a wide range of products in the defence and dairy sector. 

Long standing relationship with customers: While the bids for the projects in the defence sectors are invited by issuing tender enquiries, the qualification process for securing such tenders is extremely stringent as there is no scope for faults in such sectors. The company are registered as capable producers of defence stores with Directorate General of Quality Assurance and Directorate of Quality assurance (Naval). These registrations along with its past experience in the supply of its products, ability to meet specific technical requirements of its customers, reputation for quality and safety features present in its products, financial strength, and the price competitiveness of its offerings, has not only strengthened its position in the market but also has enabled it to establish and maintain relationships with its customers.

Risks and concerns

Depend on technical expertise and R&D initiatives: The company possess extensive technical knowledge about its products. It has gained such technical knowledge through its own experiences, R&D initiatives undertaken to develop its dairy and defence equipment products. While it is subject to strict confidentiality, non-disclosure and non-compete obligations under the respective agreements, if such technical knowledge is not protected it may lose its competitive edge. Even if all reasonable precautions, whether contractual or otherwise, are taken to protect the confidential and technical knowledge of its products and business, there is a risk that certain proprietary knowledge may be leaked, either inadvertently or wilfully, at various stages of the manufacturing process. Some members of its team have access to confidential design and product information and there can be no assurance that this information will remain confidential.

Significant working capital requirements: The company’s business requires significant working capital including in connection with its manufacturing operations, financing its inventory, providing bank guarantees, purchase of raw materials and its development of new products which may be adversely affected by changes in terms of credit and payment. It is required to maintain a high level of working capital because its business activities are characterised by long product development periods and production cycles. Delays in payment under on-going contracts or reduction of advance payments due to lower order intake or inventory and work in progress increases and/or accelerated payments to suppliers, fixed deposits to facilitate bank guarantees to its customers, could adversely affect its working capital, lower its cash flows and materially increase the amount of working capital to be funded.

Operate in competitive business environment: The manufacturing of company’s products for defence, dairy or kitchen equipment is competitive, and it experiences rapid technological developments and changes in customer requirements. It compete on the basis of its ability to fulfil its contractual obligations including the quality of products and the timely delivery of the products. Additionally, while these are important considerations, price is a major factor in most tender / bid awards and its business is subject to price competition. Its competitors may have substantially greater financial, management, research and marketing resources than it has as a result of which they may be able to utilise their resources and economies of scale to develop improved products, divert sales away from it by winning broader contracts or hire its employees by offering more lucrative compensation packages. Further if import of dairy or defence equipment products manufactured by it are liberalised by the Government of India or if there is a change in FDI Policy of Government of India inviting bids from foreign investors with better specifications or reduced prices, it may adversely affect its competitive edge.

Outlook

Krishna Defence & Allied Industries offer a wide range of products used in Defence industry for Indian Armed Forces, Dairy Equipment products to facilitate procurement, processing, distribution of milk, Kitchen Equipment Products to serve midday meals in large organizations and have also forayed into manufacturing of homeland security products to be used in defence industry for Indian Armed Forces. Its core competencies include product prototype, design, and development, functional testing, validation, field testing, followed by verification, as well as Annual Maintenance Contracts, Service tele-support, and physical support to maintain the uptime of equipment.  It has comprehensive in-house capabilities of developing and manufacturing defence application products, dairy equipments and kitchen equipments. On the concern side, the company’s operations are impacted by the availability and cost of raw materials utilised in its manufacturing process. Any change in cost and availability of such raw materials for any reason, including change in the approved suppliers, change in law or applicable governmental policies, would adversely affect its business, financial condition, results of operations and prospects. Besides, the company’s business is dependent upon its ability to manage its manufacturing facilities, which are subject to various operating risks, including those beyond its control, such as the breakdown and failure of equipment or industrial accidents and severe climate conditions and natural disasters.

The issue has been offered in a price band of Rs 37-39 per equity share. The aggregate size of the offer is around Rs 11.28 crore to Rs 11.89 crore based on lower and upper price band respectively. On the performance front, total income for the financial year 2019-20 stood at Rs 2,572.37 lakh whereas in Financial Year 2018-19 the same stood at Rs 5,890.85 lakh representing a decrease of 56.33% due to drop in sales because of impact of COVID-19 pandemic. The Restated Profit after tax for the financial year 2019-20 was Rs 74.61 lakh as compared to Restated Profit after Tax of Rs 206.44 lakh during the financial year 2018-19. The company seek to leverage its capabilities, including its manufacturing facilities and quality control practices, to further expand its product portfolio in the existing segments and also enter new business segments. It intends to continue expanding its international operations to enhance its global presence in the sectors it cater to. It seek to identify markets where it can provide cost and operational advantages to its clients and distinguish itself from other competitors. It aim to continue to maintain its focus on cost management, including in-house integrated manufacturing capabilities across its business to deliver growth as well as to achieve economies of scale.