KRN Heat Exchanger and Refrigeration (KHERL), promoted by Santosh Kumar Yadav, manufactures fin and tube type heat exchangers for the Heat Ventilation Air Conditioning and Refrigeration Industry (“HVAC&R”). It acts as an OEM supplier for the HVAC industry in India, specializing in manufacturing heat exchangers used in commercial air-conditioning and packaging air conditioning products such as process cooling equipment, data cooling centers, railways/metros, and other commercial air conditioning units.

Its product range includes condenser coils, evaporator units, evaporator coils, header/copper parts, fluid and steam coils and sheet metal parts. The products of the company are well suited for wide range of applications in air conditioning (Room ACs, Cassette type HVAC, Fan Coil Unit FCU, Commercial HVAC, Data Centre Cooling, Precision Air Conditioning, Railway/Metro HVAC, Automotive HVAC, Defence Air Conditioning), refrigeration (Defence Air Conditioning, Water Coolers, Chest Freezers, Beverage Coolers, Vending Machines), process cooling (Civil and Construction) and heating and ventilation.

It manufactures heat exchangers of various shapes and sizes as per the requirements of the customers and/or demand in the market. The diameter of heat exchanger tubes it produce ranges from 5MM to 15.88 MM. Heat exchangers manufactured by it are made of non-ferrous metals primarily Copper and Aluminium.

To enhance the longevity and corrosion resistance of heat exchangers and their components, various types of coatings such as nano coating, and powder coating are applied to the surfaces of copper tubes, brazing joints, and fin sheets. By applying these advanced coatings to heat exchangers and their components, its products ensure that the heat exchanger operates efficiently over an extended period, reducing maintenance costs and enhancing overall performance. The protective barrier provided by these coatings ensures that the heat exchanger withstands harsh conditions and maintains its optimal functionality.

Product wise revenue mix for FY2024 was 37.49% from Evaporator Coils, 55.24% from Condenser Coils, 1.52% from Headers/copper parts, 0.05% from sheet metal parts and 5.7% from other operating revenue.

The company has a wide customer base covering various parts of India as well as across the world. It has served a total of 112 customers during the Financial Year 2022-23 wherein top 10 customers account for 75.94% of its revenue from operations. During FY 22-23, the company have sold its products in 17 states in India and exported products to 9 countries. Its prestigious customers include Daikin Air-conditioning India, Schnieder Electric IT Business India, Kirloskar Chillers, Blue Star, Climaventa Climate Technologies and Frigel Intelligent Cooling Systems India.

Of the FY2024 consolidated revenue domestic market contributes about 85.32% and exports balance 14.68% (of which UAE 8.39%, USA 3.45%, Italy 2.34% balance other countries).

The company as end of March 31, 2024, has two manufacturing facility at Neemrana (in Rajasthan) with an aggregate installed capacity to manufacture 566551 units of Evaporator coils and condenser coils; 618667 numbers of headers/copper parts and 556800 numbers of sheet metal parts. Capacity utilization stands above 84% in FY24.

Further KRN HVAC Products, a wholly owned subsidiary of the company is setting up a setting up a new manufacturing facility at Neemrana (in Alwar District of Rajasthan) at a project outlay of Rs 278.91 crore. KRN HVAC Products will focus on manufacturing certain types of heat exchangers that are currently not manufactured by the company such as Bar & Plate Heat Exchanger; Oil Cooling Unit with Blower & Moto and Roll Bond Evaporator. Apart from expanding its product portfolio with more value added products and benefits of forward integration, it facilitate the company to have greater control over the supply of HVAC industry products, enhancing customer reach and brand visibility. KRN HVAC expects its new plant to commence commercial production by April 2025.

The Issue and Object of the Issue

The IPO comprises fresh issue of equity shares of 15523000 equity share of Rs 10 face value.

Of the net proceeds from the fresh issue, about Rs 242.46 crore will be used towards investment in equity of KRN HVAC Products (a wholly owned subsidiary of the company) which is setting up a new manufacturing facility at Neemrana and the balance of net proceeds is used for general corporate purposes.

Strengths

Full-service capabilities across the product cycle including product design and development, material sourcing, designing, testing and measurement infrastructure, all under one roof to meet the requirement of its global customers.

Strong longstanding customer relationship.

Under penetration of air-conditioning and refrigeration products in the country provides strong growth opportunity for HVAC&R industry driving demand growth for the products of the company.

Weakness

Significant customer concentration as top 1, top 5 and top 10 customers contribute about 33.34%, 55.12% and 72.31% of the revenue in FY2024. So loss of market share by any key customers or losing a key client business by the company may adversely impact the business operations of the company.

The industry segment in which it operate being fragmented, the company face competition from other players. The company is not necessarily the exclusive supplier to its customers, and competitors may also supply products to them and any aggressive pricing or increased sourcing from competitors may also impact the operations of the company.

Cost of materials imported as a percentage of total cost of raw materials purchased (%) in FY2024 stood at 78.17% and thus the availability of raw material at adequate quantity at reasonable price is important for the profitable operations of the company.

Adverse change in government’s Export Import policy will impact the profitable operations of the company.

The demand for end user industry products such as RAC are seasonal in nature with demand typically peak during the first half of the calendar year and reduces in the second half of the calendar year.

Contingent liabilities not provided for as end of Mar 31, 2024 stood at Rs 21.8991 crore.

Valuation

Consolidated re-stated revenue stood higher by 25% to Rs 308.28 crore in FY 2024. But with the OPM contracting 90 bps to 19%, OP was up by 19% to Rs 58.45 crore. Eventually, Pat after MI stood higher by 21% to Rs 39.07 crore.

At the upper price band, the PE works out to 34.9 times of its FY24 EPS, the P/BV works out to 2.9 times and EV/Sales works out to 4.6 times.

There are no listed companies in India that engage in a business similar to that of the company. But players who supplies/contract manufacturers to OEMs in HVAC&R with manufacturing presence in heat exchangers such as PG Electroplast, Amber Enterprises and Epack Durables quote at a PE of 118.4 times, 125.9 times and 109.7 times of their FY2024 EPS, a P/BV of 15.4, 8.2, and 4.3 times and EV/Sales of 6, 2.7 and 3 times respectively.