Staying away from IPOs and thoughts on ASK Automotive Ltd
Ask Automotive IPO looks like a clear case of benefitting from the euphoria in Indian primary markets
I have generally stayed away from investing in IPOs primarily due to the fact that
Insiders, who have much better information about their business, are exiting their stake
Limited financial information and track record in the public domain
Companies usually come with their IPO when their business is in a cyclical peak
With this, in my experience, the odds of financial success are very low in IPOs. I prefer to invest in these newly listed companies after 2-3 years once there is enough information and a financial track record in the public domain.
Companies that keep performing and delivering better results continue to get re-rated while the ones that do not, get correction in their valuations and street's expectations. StoveKraft Ltd is one such example where I didn’t invest at the time of the IPO which came in Jan 2021 but invested a few months back in April 2023 at 20% lower prices than its listing price.
Having said that, I keep a close watch on IPOs and on look out for the ones where business quality is good and ask valuation is not high. In this backdrop, I was recently told by one of my friends to look at Ask Automotives Ltd. This friend touted this company as a leader in the 2W auto ancillary space offered at decent valuations. This prompted me to delve deeper into the company's prospectus and my belief in IPOs shared above was further reinforced. I share my thoughts on ASK Automotives IPO below:
The company is a leader in its product segment which is braking products for 2Wheelers with an OEM market share of around 50%. However, the company product lineup has historically remained the same with little new product addition.
EV sales is only at 2% of revenue Vs 4% of 2Wheeler OEM volumes at the industry level. Many brokerage reports mention company presence in EVs as the next growth trigger. It is important to understand that 2W EVs are going to be sold at the expense of ICE 2Ws and hence this can't be considered a growth trigger.
There is no fresh money being infused into the company from IPO. The entire Rs 850Cr of IPO is OFS by promoters.
There is nothing great about the business as it is just a plain vanilla 2Wheeler auto ancillary supplier making low technology products at 9-10% EBITDA margins. The company's growth is linked to the cyclical 2Wheeler industry since 100% of revenue comes from this segment - no diversification built over the years. Their joint venture for CV brake products won't be meaningful.
A few large manufacturing premises of the company are on rented land which are owned by promoters - a red flag on a related party side.
The company has conveniently not disclosed the results of the 1H of FY24 and only reported financials till FY23.
Based on my estimates, IPO is offered at a valuation of 30x FY24 PAT which is even higher than what 2Wheeler OEMs such as Hero, Bajaj are trading at. I can't think of any possible point to justify these valuations.
To conclude, Ask Automotive's IPO looks like a clear case of benefitting from the euphoria in Indian primary markets. I will look at this company again when 2Wheeler volumes are in the down cycle.