Carraro India is a technology-driven integrated supplier specializing in complex engineering products and solutions for OEMs. It designs, manufactures, and sells transmission systems (axles, transmissions, and drives) primarily for agricultural tractors and construction equipment.

Caters to different HP ranges off-highway vehicles, providing products for agricultural tractors, backhoe loaders, soil compactors, cranes, self-loading concrete mixers, and small motor graders.

In H1 FY25, Agricultural Tractors contributed 47% to revenue, Construction Vehicles 40%, and others 13%.

Additionally, it 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.

Carraro S.p.A., the promoter, is the parent company of the Carraro Group. The Carraro brand is owned by Carraro S.p.A. and is licensed to the company under a licensing agreement. On October 1, 2023, Carraro S.p.A. transferred the worldwide exclusive rights, title and interest in the IP rights of certain products customized for the Indian market to Carraro India and entered into an engineering service agreement to provide engineering support services on the maintenance of products and child parts.

Completed acquisition of CTIPL in June 2024, making it a subsidiary. Established in 2006, CTIPL is focused on R&D of axles, transmission systems, and other components for agricultural tractors and construction vehicles as a service provider to Carraro S.p.A.‘s global R&D center.

As of September 30, 2024, supplies to 38 manufacturers in India and exports to customers via Carraro Drive Tech Italia S.p.A. Its key customers include mainly India-based OEMs, including major domestic OEMs and international OEMs with subsidiaries or operations in India.

In H1 FY25, in terms of geography, India contributed 65.4% to revenue, and exports accounted for 34.6%.

Developed a network of 220 suppliers based in eight states in India and 58 suppliers internationally.

Owns and operates two manufacturing plants in Pune, Maharashtra, India. The driveline manufacturing plant occupies a plot area of approximately 84,000 square meters, while the gear manufacturing plant covers an area of approximately 78,000 square meters.

The driveline plant has technologies including casting, machining, assembly, prototyping, testing, and painting. The gears plant features machining and heat treatment technologies such as carburizing, induction, hardening, and nitriding.

In H1 FY25, the company produced 42,144 axles, 19,635 transmission systems, and 8,112 other components at its driveline manufacturing plant. Additionally, 9,03,999 gears, shafts, ring gears, and other related components were produced at its gear manufacturing plant.

In H1 FY25, the capacity utilization of the driveline manufacturing plant was 76.83%, and 71.42% for the gear manufacturing plant.

Intend to focus on the introduction of new products and product applications to increase market penetration and drive growth. Also working on expanding into new segments, including the self-loading concrete mixer and telehandler markets.

To meet diverse market demands, the focus is on enhancing the production capabilities of the manufacturing plants in Pune, Maharashtra, India, and increasing the share of localization to further improve efficiencies.

Offer and its objects

The IPO is a complete offer for sale, aggregating up to Rs 1250 crore, by Carraro International S.E.

The price band for the IPO is Rs 668 to Rs 704 per equity share of face value Rs 10 each.

The Offer proceeds will not be received directly, and the Selling Shareholders will receive all the proceeds based on the Shares they sell.

The promoters are Tomaso Carraro, Enrico Carraro, Carraro S.p.A. and Carraro International S.E. The promoters and promoter group hold an aggregate of 5,68,51,538 equity shares, aggregating to 100% of the pre-offer issued and paid-up equity share capital. Their post IPO shareholding is expected to be around 68.77%.

The issue, through the book-building process, will open on 20 December 2024 and will close on 20 December 2024.

Strengths

Leading sole supplier in the non-captive agricultural tractor transmission market and a market leader with a 60-65% share in the non-captive construction vehicle transmission market.

Built a vast network of local and international customers and suppliers over 27 years of presence in India. It has established long-term relationships with its top 10 customers, based on their revenue contribution as of September 30, 2024, who have continuously engaged for at least 15 years.

Benefits from strong synergy within the Carraro Group, leveraging its R&D capabilities and expertise to design market-driven products and optimize material procurement costs.

The local sourcing strategy helps reduce production costs, optimize supply chain logistics, and minimize lead times. For the six months ended September 30, 2024, 74.42% of its materials were sourced from domestic suppliers.

The acquisition of CTIPL enhanced its R&D capabilities by integrating design, R&D, and manufacturing processes.

Technologically advanced manufacturing plants with large production capacities and in-house gear production capabilities.

Extensive experience of promoters and senior management personnel.

Weaknesses

Faces significant customer concentration risk, with 33.27% of its revenue in the six months ended September 30, 2024, coming from its largest customer and 69.55% from its top five customers.

Depends partially on other entities in the Carraro Group for operations, such as the licensing of the Carraro brand, customer sourcing, procurement, R&D, and general support of operations. It incurred 33.89% of its total income from transactions with related parties in the six months ended September 30, 2024.

There is a potential conflict of interest, as some of its group companies are involved in similar businesses or segments within the automotive components industry.

Derived 34.6% of its revenue from exports in H1 FY25, which exposes it to risks associated with exchange rates, regulatory changes, and geopolitical factors.

The examination report on the Restated Consolidated Financial Information has emphasis of matter for the financial years ended March 31, 2024, 2023, and 2022. Furthermore, the audit reports on the audited financial statements contain certain adverse remarks and observations for the fiscal years 2024, 2023, and 2022.

The business requires a substantial amount of working capital to maintain its operations, which can strain financial resources and limit flexibility.

Valuation

In H1 FY25, consolidated net sales decreased 5% to Rs 914.62 crore as compared with H1 FY24. The OPM improved 434 bps to 10.17%, leading to a 66% increase in OP to Rs 92.98 crore. OI fell 20% to Rs 8.12 crore. Interest cost rose 7% to Rs 11.89 crore. Depreciation cost went up 6% to Rs 22.29 crore. PBT surged 97% to Rs 66.92 crore. Tax expenses were Rs 49.74 crore as compared with Rs 24.94 crore. Net profit soared 100% to Rs 49.73 crore.

Net sales increased 4% to Rs 1788.97 crore in FY2024 as compared with FY2023. The OPM improved 129 bps to 7.4%, leading to 27% increase in OP to Rs 132.41 crore. OI fell 13% to Rs 17.58 crore. Interest cost rose 14% to Rs 22.49 crore. Depreciation cost went up 9% to Rs 43.14 crore. PBT surged 29% to Rs 84.37 crore. Tax expenses were Rs 21.81 crore as compared with Rs 17.13 crore. Net profit soared 29% to Rs 62.54 crore.

The TTM EPS on post-issue equity works out to Rs 17. At the upper price band of Rs 704, P/E is 41.

Listed peers such as Escorts Kubota traded at TTM P/E of 31, Schaeffler India trades at TTM P/E of 57, Ramakrishna Forgings at TTM P/E of 45, and Sona BLW Precision Forgings at TTM P/E of 66 as on 19 December 2024. The OPM and ROE stood at 7.4% and 16.92% respectively, in FY2024. These were 12.26% and 11.43% for Escorts Kubota, 18.22% and 18.87% for Schaeffler India as of CY2023, 22.22% and 12.72% for Ramakrishna Forgings, and 28.33% and 18.82% for Sona BLW Precision Forgings, respectively.