CFF Fluid Control coming with an IPO to raise Rs 85.80 crore

CFF Fluid Control

• CFF Fluid Control is coming out with an initial public offering (IPO) of 52,00,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 165 per equity share.
• The issue will open for subscription on May 30, 2023 and will close on June 2, 2023.
• The shares will be listed on SME Platform of BSE.
• The share is priced 16.5 times higher to its face value of Rs 10.
• Book running lead manager to the issue is Aryaman Financial Services.
• Compliance Officer for the issue is Sonika Mehta.

Profile of the company

CFF Fluid Control was established to provide cutting-edge technology and engineering solutions for the defence industry in India. Immediately after inception, a TOT agreement with Coyard SAS France led to the introduction of new-age fluid control and other mechanical equipment on the under-construction Submarine program of the Indian Navy. The company is primarily in the business of manufacturing and servicing of shipboard machinery, critical component systems and test facilities for submarines & surface ships for The Indian Navy. Further it also design, manufacture and service Mechanical Equipments and systems for industries like Nuclear and Clean Energy.

Its facilities are situated at Khopoli from where it design, manufacture and service fluid control systems, distributor and air panels, Weapons and Control Systems, Steering gear, Propulsion Systems, High Pressure Air Systems, Hydraulics Systems, Breathing and Diving Air Systems and Integrated Platform Management Systems for submarines and surface ships for the Indian Navy and its OEMs. The facility has all the relevant state of the art machinery and testing facilities. Its Facility is approved by Indian Navy, MDL & Naval Group (France) and has ISO 9001:2015 certification for quality management systems. 

Proceed is being used for:

• Funding working capital requirements
• Repayment of loans
• Purchase of machinery and equipment
• Acquire technology of Towed Wire Antenna (TWA)
• General corporate purpose

Industry overview

Naval systems are inherently technology intensive and require substantial investment of time, money and resources. The Indian industry, including the private sector, therefore, needs to play its role in meeting needs of the Indian Navy. India is one of the strongest military forces in the world and holds a place of strategic importance for the Indian government. The top three largest market segments of the Indian defence sector are military fixed wing, naval vessels and surface combatants, and missiles and missile defence systems. Military rotorcraft, submarines, artillery, tactical communications, electronic warfare, and military land vehicles are some of the other well-known segments.

According to the global power index, the Indian defence sector ranks fourth in terms of firepower with a score of 0.0979 (with 0.0 being the perfect score). The Indian government has set the defence production target at $25.00 billion by 2025 (including $5 billion from exports by 2025). India is one of the world’s biggest defence spenders with a total outlay of Rs 5.25 lakh crore ($66 billion), accounting for 13.31% of the total budget and indicating an increase over the budget estimates of 2021-22 by Rs 46,970 crore ($5.9 billion).

The Indian government is focusing on innovative solutions to empower the country’s defence and security via ‘Innovations for Defence Excellence (iDEX)’, which has provided a platform for start-ups to connect to the defence establishments and develop new technologies/products in the next five years (2021-2026). Working through partnerincubators, iDEX has been able to attract the start-up community to participate in the Defence India Start-up Challenge (DISC) programme.

Pros and strengths

Technical Capabilities, registrations and empanelments: It has the necessary certifications and registrations with various clients with whom regular business is undertaken. These include Defence PSU shipyards such as Mazagaon Dockyard and Shipbuilders Limited (MDL), Naval Dockyards at Mumbai, Visakhapatnam, and Karwar. It is also in the process of registration with Garden Reach Shipbuilders and Engineers (GRSE), Hindustan Shipyard (HSL), Cochin Shipyard Limited (CSL).

Focus on Navy Defence Sector: Defence Industry has its own procedure, rules and regulations for its business activity as it is connected directly to national safety and reputation of the country. GoI has come up with the mission to turn India into a manufacturing hub. When it comes to defence sector there is no room for failure. It needs to tackle with the stringent technical standards required by the equipment to survive extreme conditions. The manufacturing process requires in depth understanding the requirement, prototyping process, high-skilled manpower who specializes on different materials. Maintaining confidentiality in regards to design and delivery is the key necessity. Time horizon of around 3years is required to empanel and get on board with the customer. Only after surviving all the conditions, it gets approved as a vendor for that specific equipment designed and manufactured by it. All the supplies, then will delivered by it during the life period of submarine.

Long standing strategic Partnerships: CFF has established longstanding strategic partnerships with foreign Manufacturers. The partnerships are carefully chosen to bring technology which is not available in India and is the need for the Indian Defence Industry. Its key tie-ups are with M/s Nereides of Franceand M/s Minerva Issartel of France. Nereides, French Company is engaged in the manufacturing of Towed Wire Antenna. It has agreement for technology transfer, process development manufacture of Towed Wire Antennae for Indian Navy and also export to foreign countries. Minerva Issartel is in business of design and manufacture of complex parts for energy, transport and defence industries. It has agreed to work jointly to support Minerva Issartel products and services in the Indian market, including Nuclear industry and for the P75 Project.

Risks and concerns

Majority of revenue from contracts with Indian Navy: In the Financial year 2021-22, its revenue from Defence sector comprised of 89.43% of its Total Revenue from Operations. It is heavily dependent on Indian Navy for its business revenue, contracts and cash flows. Its business substantially relies on delivering the components required in shipbuilding and submarines of Indian Navy. Components like valves, ball, gear box, hydraulic systems, nuclear sampling systems, titanium air bottles, towed wire antennasystems etc are manufactured using technology specially designed for defence sector and delivered as per order book to Indian Navy. It cannot assures that it can maintain the historical levels of business from these clients/ OEMs or that it will be able to replace these clients/ OEMs in case it lose any of them. 

Highly dependent on Key Managerial Persons: its success also depends upon the continued services of its promoters and Key Managerial Persons and its ability to retain them. They are actively involved in marketing of the Company, timely execution of the orders and ensures that the quality control standards. Its Promoters, along with the group key managerial personnel, has over the years build relations with clients, government agencies and other persons who are connected with it. The loss of their services could impair its ability to implement its strategy, and its business, financial condition, results of operations and prospects may be materially and adversely affected. 

Dependent on few suppliers: The company is dependent on a few suppliers for procuring the raw materials for manufacturing of its products and it do not currently has long term contracts or exclusive supply arrangements with any of its vendors. For the financial year ended March 31, 2022, its top five suppliers accounted for around 97.28%. It considers that the quality of raw materials, the transparent pricing, location advantage, etc. are also some of the major reasons the company prefers to procure these raw materials from these suppliers. Any failure of the supplier to deliver these raw materials in the necessary quantities or to adhere to delivery schedules or specified quality standards and technical specifications would adversely affect its business operations and its ability to deliver orders on time and at the desired level of quality. As a result, it may lose customers and incur liabilities for failure to execute orders, which could have a material adverse effect on its business financial condition and results of operations.

Outlook

CFF Fluid Control was established to provide cutting-edge technology and engineering solutions for the defence industry in India. The company is primarily in the business of manufacturing and servicing of shipboard machinery, critical component systems and test facilities for submarines & surface ships for The Indian Navy. On the concern side, the company is dependent on a few suppliers for procuring the raw materials for manufacturing of its products and it do not currently have long term contracts or exclusive supply arrangements with any of its vendors. Moreover, it is heavily dependent on Indian Navy for its business revenue, contracts and cash flows. 

The company is coming out with a IPO of 52,00,000 equity shares of Rs 10 each at a fixed price of Rs 165 per share to mobilize Rs 85.80 crore. On performance front, the company’s total income increased by 218.13% from Rs 1,481.27 lakh in fiscal 2021 to Rs 4,712.39 lakh in fiscal 2022. The increase in the year 2022 was due to increase in the delivery of products as compared to last year. The company’s Profit after Tax increased by 3068.73%, from Rs 24.60 lakh in fiscal 2021 to Rs 779.51 lakh in fiscal 2022. 

Going forward, the company is planning to invest in plant and machinery from various domestic and international vendors. For the availability and quick delivery with reasonable quotation it needs to have liquid funds. The company is trying to cater the needs of defence as well as nuclear and clean energy. For sustaining its expansion and timely delivery of customer’s order it will incur capital expenditure in its business at its manufacturing facility.