New Portfolio Entry: Krishca Strapping Solutions

Buy Price: 235.5

Reasons for buying:

1. The company is a leading manufacturer and wholesaler of High Tensile Steel Straps, Strapping Seals, and Strapping Tools.
2. The entire industry has just 5 players with Krishca’s current market share at 7.5%. The company serves marquee customers like JSW, POSCO etc.
3. The company’s production line is automated, lead-free, and lowest cost.
4. Their integrated quality management system is as per ISO 9001:2015 standards.
5. They are exploring feasibility of welding wires business and entering the packaging contracts business. The packaging contracts are from 1-5 years leading to more stability in revenues.
6. They will soon launch in Middle east to serve the US markets due to favorable taxation agreements.
7. The major entry barrier in this industry is getting approvals. Private players take 1 year to give approval and PSU’s can take 3-4 years + additional conditions as steel straps are a critical item.
8. The incentive for big giants like JSW steel to make strapping in-house is less because as a % of their cost it’s very less.
9. The company uses an induction-based furnace while competitors use a muffle based furnace. So, the energy cost is almost 50% lesser than competitors.
10. There is a BIS certification required for any steel strapping manufacturer to supply in India. Only one non-domestic company has BIS. None of the Chinese players have BIS certification. Even if they do manage to get certified, they face an additional import duty of 10%.
11. The company is debt free and is doubling strapping capacity by December 2023.

Risks:

1. The stock is fair to overvalued. I bought it at a PE of 30. If PAT guidance of 30% for FY24 comes true, then it is available for a cheap to fair price.
2. The promoter is young and aggressive but lacks industry experience. Will be keenly tracking his capital allocation decisions.
3. If new capacity commercialization timeline gets delayed, then PAT will be lesser for the year impacting valuation.
4. Krishca’s return ratios are excellent. Sooner or later, incumbent players will take notice and announce capex. We need to be watchful of this and see how Krishca reacts as and when competition shapes up.