Gala Precision Engineering (GPEL), promoted by Kirit Vishanji Gala and Smeet K Gala, is a precision component manufacturer of technical springs such asDSS (disc springs andstrip springs) including WLW (wedge lock washers) and CSS (coil springs and spiral springs). It customizes high tensile fasteners such as studs, anchor bolts, cross bolts, hex bolts, and nuts (special fastening solution or SFS).

GPEL commenced operations in 1989 with manufacturing of disc and strip springs. It has since diversified to include coil and spiral springs in 2015 and special fastening solution in 2018. Products are used in sectors like renewable energy including wind turbine and hydro power plants, various industrial sectors such as electrical, off-highway equipment, infrastructure and general engineering, mobility segments such as automotive and railways. The company caters to original equipment manufacturers (OEMs) and channel partners.

The DSS and WLW products find application in yaw brakes, thrust bearing mechanismin renewables (wind turbines and hydroelectric power plants), transmission linesin industrials(electricals, heavy machinery and off-highway vehicles) and couplers and brakes in mobility (automobiles and railways). CSS products find application in actuators in industrials as well as transmission and brakes and seating in mobility. The SFS products find application in foundation, tower and electro-mechanical equipment in renewables (wind, solar and HE), bridges in industrials (heavy machinery, electricals and OHE) and railway tracks and bridges in mobility.

Technical springs and high tensile fasteners are supplied to more than 175 customers in 25 countries across four continents including Germany, Denmark, China, Italy, Brazil, USA, Sweden, and Switzerland. Exports contributed 37.53% of total sales, with balance 62.47% from domestic market in FY 2024.

Disc springs confirm to German DIN 2093 standards, bearing series, and customized specifications featuring variety of raw materials and surface coating options. Strip springs are customized for high fatigue applications. Wedge lock washers are marketed as Gallock.

GPEL’s Indian disc springs market share is about 10%. There is significant presence in the DSS market for the renewable industry, with about 70% share in the domestic market and about 3% share in the global market. It enjoys about 15% market share in the domestic SFS market for wind turbines.

GPEL has widened the offerings of fastening solutions for the wind segment, developed high tensile fasteners as import substitute for leading global wind turbines manufacturers in India and increased the wallet share by expanding product range and subsequently adding more OEMs including exports.

Industrial comprised about 40.49%, renewables 30.98%, and mobility 28.53% of the revenue in FY 2024.

GPEL entered a related product category, retractor springs. These springs are critical for the safety of the passenger.

Of the operational revenue, about 80.11% was contributed by the technical springs business and 19.34% by SFS in FY 2024. The balance 0.54% was by surface engineering solutions business (GPEL sold intangible assets of the surface engineering solutions business to SM Systems Private Limited through a sale agreement dated May 30, 2022).

Currently, GPEL has two manufacturing facilities at Wada in the Palghar District of Maharashtra. The aggregate annual production capacity is 246.46 million units of springs and washers and 0.42 million fasteners. The capacity utilization of the DSS, CSS and SFS facility was 84.84%, 77.88% and 69.64%, respectively, as of 31 March 2024. Further, the company is setting up a 10.07 million units per annum manufacturing facility in Vallam-Vadagal, Sipcot, Sriperumbuddur, Tamil Nadu, for developing various high tensile fasteners to add to the existing product portfolio and new products like bolts.Phase I of this unit is expected to commence commercial production by October 2024 and Phase II by November 2025. GPEL intends to increase the manufacturing capacity of DSS and CSS products at its existing manufacturing facilities at Wada, Palghar, Maharashtra. The project is proposed to be entirely funded from the net proceeds.

Over the past five years the product development and innovation centre at Wada developed more than 200 products for different technical springs and high tensile fasteners.

GPEL is competing domestically with International Industrials Springs and internationally with Mubea, Schnorr and Christian Bauer. It faces competition from Stumpp Schuele andSomappa Springs Pvt. Ltd., NHK Springs India, and Muhr und Bender KG in the CSS category. The company is mainly competing with Randack Fasteners, Sundram Fasteners and Hiten Fasteners in the Indian SFS market. The competition is with Cooper & Turner, Roseholmand August Freidberg in the global market.

The Issue and objects

The offer consists of fresh issueof equity shares of 2558416 and an offer for sale (OFS) of 616000 equity shares of Rs 10 face value. Of the OFS component, the equity shares sold by promoters are 514400 shares [385200 shares by Taramati V Gala, 79200 by Kirit V Gala HUF and 50000 by Nayna Gala]. Sales by investor shareholders are 101600 shares [40000 shares by Satish Kotwani, 23600 by Hemalata D Shah, 28000 by Dhiraj N Shaha, and 10000 by Rupa S Mehta].

Of the net proceeds from fresh issue, about Rs 37 crore will be used for setting up a new facility at Vallam-Vadagal in Tamilnadu, Rs 11.069 crore will be used for funding capital expenditure forpurchase of equipment and machinery at the existing plant at Wada in Maharashtra, Rs 45.43 crore towards repayment and prepayment in full or part of certain borrowing, and the balance is for general corporate purposes.

Total borrowing stood at Rs 55.028 crore end of March 2024.

Strengths

Established manufacturer of precision engineering components, with a diversified product portfolio and a diverse market

OEMs’ lengthy and stringent vendor qualification process for supply of each componentfor technical springs and high tensile fasteners creates significant entry barrier.

Well-equipped manufacturing facilities along with in-house design and other capabilities offer scale, flexibility, comprehensive and customized solutions.

Long-standing customer relationships with both Indian and global OEMs and Tier 1 players, ranging from four years to more than 15 years.

Weakness

Of the total revenue from operations in FY2024, the top 3, 5, and 10 customers accounted for 24.33%, 32.46%, and 47.48%, respectively. This reflects significant customer concentration.

Involved in a patent infringement suit filed by Nord-Lock AB. An adverse outcome in this proceeding can affect the business, financial condition and growth strategy.

Changes in exim regulations or duty structure as well as any exchange rate fluctuations will impact the performance.

There have been certain instances of delays in the payment of ESIC, PF, LWF and other statutory dues in the past.

Trade receivableswere Rs 46.968 crore in FY 2024. This is 23.19% of the revenue from operations.

Valuation

Consolidated sales (restated) for FY2024 were up by 22% to Rs 202.55 crore over FY 2023. The OPM expanded by 260 bps to 19.1%. Thus, the growth of OPstood higher at 42% to Rs 38.76 crore. OI grew 13% to Rs 1.83 crore. PBIDT was up 40% to Rs 40.59 crore. With interest and depreciation as percentage of sales standing lower, PBT was up 56% to Rs 27.59 crore. But with Rs 12.07 crore swings in EO expense to Rs 2.31 crore, the PBT after EO was down by 8% to Rs 25.28 crore on an inflated base. Eventually, net profitdeclined by 8% to Rs 22.33 crore.

Thus, the FY2024 EPS (on expanded equity) was Rs 19.2. And the upper price band discounts the FY2024 EPS by about 27.6 times. P/BV stands at 2.8 times and EV/sales stands at 3.6 times.

There are no listed DSS and CSS players for comparison. Sundaram Fasteners and Sterling Tools are larger fastener players as compared with the company in terms of sales. Sundaram Fasteners and Sterling Tools quote at a P/E of 54.1 times and 33.8 times, respectively. Rolex Rings and Harsha Engineering, manufacturing bearing rings and bearing cages, respectively, quote at a PE of 37.4 times and 43.6 times. SKF India, the bearing major, quotes at a P/E of 47 times. Ratnaveer Precision trades at 32.9 times. NRB Bearings and Menon Bearings quote at a P/E of 38.7 times and 29.9 times.