Indo Farm Equipment IPO Opens Today: Should You Subscribe?

The final month of 2024 brings one last IPO to the market: Indo Farm Equipment Ltd., a Himachal Pradesh-based manufacturer of tractors and pick-and-carry cranes. With a price band of Rs 204–215 per share, the company aims to raise up to Rs 260 crore. But should you subscribe? Here's a detailed look at what analysts have to say.

Indo Farm Equipment manufactures a wide range of tractors and cranes. It boasts an integrated manufacturing setup that handles the majority of its component production in-house. The company also operates its own NBFC arm, Barota Finance Ltd., to support tractor financing.

Here's the positives of the company, as per the brokerage reports:

• Integrated Manufacturing: With an ISO-certified facility in Baddi, Indo Farm produces critical components like gearboxes and hydraulic winches in-house, ensuring cost efficiency and quality control.

• Diverse Product Lineup: The company offers tractors catering to both domestic and export markets, alongside versatile cranes designed for infrastructure and construction.

• Growing Crane Business: Indo Farm has identified significant potential in its pick-and-carry crane segment, which has seen a 45% compound annual growth rate over the last three years. The company plans to increase its crane production capacity from 1,280 units to 4,880 units annually by fiscal 2026.

• NBFC Arm: Barota Finance provides seamless financing solutions, enhancing accessibility for buyers and supporting sales growth.

• Export Market: Indo Farm exports to over 25 countries, including the UK, Brazil, and Saudi Arabia, reflecting its growing international presence.

The brokerages also present a set of challenges that have the potential to obstruct growth:

• Cyclical Tractor Sales: Tractor demand is inherently cyclical, with competition from established players like Escorts Kubota.

• Valuation Concerns: At a price to earnings ratio of 66 times, the IPO appears expensive compared to industry peers such as Escorts Kubota (with a P/E ratio of 34 times).

• High Inventory Levels: The company's working capital cycle of 282 days could potentially lead to margin pressures.

According to Anand Rathi, Indo Farm presents a long-term investment opportunity due to its diversified product portfolio, capacity expansion plans, and experienced management team.

Key highlights:

• Valuation: While the issue is fully priced at a P/E of 65 times, Anand Rathi believes the company's debt repayment, strengthening of its NBFC arm, and crane segment growth will drive long-term value.

• Growth Potential: The pick-and-carry crane market is expected to grow by 5–6% annually, offering Indo Farm a chance to gain early mover advantage.

DRChoksey Finserv Pvt.'s report takes a more cautious approach, assigning the IPO a 'neutral' rating. Here's what the brokerage says:

• High Valuation: The P/E ratio of 66 times is a major red flag, especially given the company's challenges in managing working capital and improving margins.

• Growth Areas: While the crane segment is promising, competition in the tractor market and cyclicality pose significant risks.

• Uncertainties: High inventory levels could lead to losses during liquidation, adding pressure on financial performance.

Investors should weigh Indo Farm's strengths—integrated manufacturing, a growing crane business, and NBFC support—against its challenges like high valuations, cyclicality, and competition.

If you are a long-term investor with patience to ride out the cyclicality of the tractor business, Anand Rathi's 'subscribe for long term' recommendation might resonate with you.

For those prioritising immediate returns or wary of high valuations, DR Choksey's 'neutral' rating suggests waiting for better opportunities.