IPO: ASK Automotive

ASK Automotive, the auto safety products manufacturing company, will be launching its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : The three-year average ROE and ROCE of ASK Automotive are 16.5 and 20.3 per cent, respectively. For FY23, the company's ROE and ROCE were 19.3 and 22.1 per cent, respectively.
  
• Growth : Its topline and PAT have grown at 28.6 and 14.3 per cent per annum, respectively, in FY21-FY23.
  
• Valuation : The stock will be priced at a P/E and P/B of 41.1 and 8.2 times, as compared to its peers' medians of 38.3 and 4.7 times, respectively.
  
• Overview : The company is poised to benefit from the increasing demand for two-wheelers (both ICE and EVs) in India, new government initiatives for the auto component sector, and a growing need for efficient automotive brake components.

About ASK Automotive

ASK Automotive is one of the leading auto ancillary companies in the country. It is the largest manufacturer of brake-shoe and advanced braking manufacturers in the country, with a market share of 50 per cent. The company supplies original equipment manufacturers (OEMs) as well as the aftermarket. Advanced braking is its primary revenue driver, with 42 per cent as of FY23, followed by aluminium lighting precision at 39 per cent. It is associated with all OEMs, such as Hero Motocorp , TVS , Bajaj Auto , and more.

Strengths of ASK Automotive

• Long-standing customer relationships with both Indian and global OEM players: The company has long-standing relationships with all top six two-wheeler OEM customers ranging from 16 years to 30 years.
  
• Largest manufacturer of brake shoe and advanced braking systems for two-wheeler OEMs: The Company commands approximately 50 per cent market share for two-wheeler OEMs in terms of volumes. This business has switching costs and client stickiness.

Weaknesses of ASK Automotive

• Its revenue depends on its top three customers : The top three clients contributed 60.83 per cent of revenue, with the single largest customer contributing 34.52 per cent in FY23.
  
• High Competition: The company faces high competition from competitors both domestically and internationally in relation to specific sectors. Competition in the two-wheeler industry (accounting for 91 per cent of the revenue) has intensified across all categories over the past few years due to capacity additions, expansion of dealer network, and model launches at competitive price points.

Risk report

Company and business

• Are ASK Automotive's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. The company's profit before tax for FY23 was Rs 123 crore.
• Will ASK Automotive be able to scale up its business?
  Yes. The increasing demand for two-wheelers (both ICE and EVs) in India, alongside new government initiatives for the auto component sector and a growing need for efficient automotive brake components, can help the company scale up its business.
• Does ASK Automotive have recognisable brands with client stickiness?
  Yes. The company has long-standing relationships with all top six two-wheeler OEM customers ranging from 16 years to 30 years.
• Does the company have a credible moat?
  No. While it does have a long-standing relationship with all OEM customers, the company faces competition from competitors both domestically and internationally.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over a 25 per cent stake in the company?
  Yes. Post-IPO, promoters' stake will be 85 per cent.
• Do the top three managers have over 15 years of combined leadership at ASK Automotive?
  Yes. Chairman and Managing Director Kuldip Singh Rathee has been with the company since its incorporation.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. However, we would like to point out that the company's Promoters were promoters and directors of a company, Som Datt Finance Corporation , whose equity shares were suspended from being traded due to non-compliance with the listing agreement. Som Datt Finance Corporation had made the application for delisting in 2007, subsequent to which it did not submit any documents related to annual or event-based compliances and also failed to make payments towards listing fees.
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
• Is ASK Automotive free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. The company's three-year average ROE and ROCE are 16.5 and 20.3 per cent, respectively. In FY23, the company's ROE and ROCE were 19.3 and 22.1 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company generated positive cash flows from operations in the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt-to-equity ratio stood at 0.58 times as of June 2023.
• Is ASK Automotive free from reliance on significant working capital for day-to-day affairs?
  Yes. The company's business affairs are less working capital intensive. As a result, it also has a low cash conversion cycle of 28 days.
• Can the company operate its business without relying on external funding in the next three years?
  Yes. The company has been consistently generating cash flows. Business is less capital intensive. Also, the company is able to consistently maintain an asset turnover ratio of more than 1.5 times and debt to equity of less than 1.
• Is ASK Automotive free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of equity stood at around 43 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer an earning yield of 3.2 per cent.
• Is the stock's price-to-earnings less than its peers' median level?
  No. The company will trade at a price-to-earnings ratio of 41.1 times compared to peers' median level of 38.3 times.
• Is the stock's price-to-book value less than its peers' average level?
  No. The company will trade at a price-to-book ratio of 8.2 times compared to peers' average of 4.9 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

Suggested read: Learning from IPOs