Gala Precision's IPO oversubscribed 40x on 2nd day! But check these risks before investing here

On the second day of the offer, Gala Precision Engineering's IPO was already oversubscribed by 43x in the retail investor's category and was fully subscribed to within minutes of opening yesterday.

The precision component manufacturer's products, including disc and strip strings and special fastening solutions, have massive applications in renewable energy, infrastructure, hydropower, and railways. While the IPO closes for subscription tomorrow, the company, which was looking to raise Rs 167.93 crore, has so far already garnered Rs 6,119.45 crore.

In case this euphoria happens to be your sole trigger to invest in Gala Precision's IPO, or you have a FOMO (fear of missing out) on a seemingly lucrative investment opportunity, its time to take a step back. A recent SEBI analysis of 144 mainboard IPOs which debuted on bourses between April 2021 and December 2023 notes that retail investors sold 54% of the shares they've been allotted within a week of the company's listing. Clearly, the focus is solely on earning short-term listing gains, and not on long-term wealth creation.

Hence, before investing in this, or any IPO, it is important to assess the risks involved, and expert's view on the same. This will help you can decide whether any new company's IPO is a no-go, a short-term or long-term investment opportunity. We decode the risks associated with Gala Precision, and what experts anticipate from this IPO for you.

Concentration of customers, suppliers
While the company supplies its technical springs and high tensile fasteners to Germany, Italy, Brazil, USA and more, Gala Precision does not have any exclusive or long-term arrangement with any of its suppliers. At present, the company procures raw materials from around 79 suppliers, from which the company purchases products. Moreover, it has a high dependency on its top 10 suppliers, which make up for more than 50% of its purchases during FY24.

Gala Precision demonstrates a similar, heavy reliance on its customers as well. The company has a client base of about 175 clients spread across 25 countries. Notwithstanding a lack of formal, exclusive agreement with its customers, which means that the existing customers have no obligations to place fresh orders with them, its top 10 customers drove in 47.48% of the company's total revenue in FY24. The trend has largely remained even, with these customers steering in 41.86% and 45.48% of the company's total revenue in FY23 and FY22, respectively.

Apart from this concentration in terms of suppliers and customers, the company also relies significantly on its spring technology business, which brought about 80% of Gala's total revenue in 2024. Naturally, any downturn or lack of demand for these products will have an adverse impact on the company's revenue. Between FY23 and FY24, the company's PAT (profit after tax) also dipped by about 8%, from Rs 24.21 crore in FY23 to Rs 22.33 crore in FY24.

Gala Precision also has an ongoing patent infringement suite worth about Rs 2 crore. An adverse outcome here could impact the company's finances in future. Also, the company's contingent liabilities reserve are of Rs 9 crore, out of which around Rs 3 crore have been earmarked for disputed income tax demands, which could present themselves in the near future.

Expert Opinion: Subscribe, but for the long term
Most experts, however, advise investors to approach the IPO from a medium to long term perspective, and not just for mere listing gains. Per Swastika Investmart, "the IPO's valuation aligns with industry benchmarks. Given current market trends and the increasing demand for precision components, GPEL is poised for a successful listing and sustained growth".

According to Anand Rathi Research, "the company has a varied product portfolio across multiple markets and have
built enduring relationships with their customers. The company's P/E ratio is 30.0 times based on its FY24 earnings,
with a market capitalization of ₹6,702 million after the issuance of equity shares and a market cap-to-sales ratio of 3.3 times its FY24 earnings. We believe that the issue is fairly priced, therefore we recommend “Subscribe – Long Term” rating to the IPO".

As MasterTrust Capital puts it, "The Indian market for CSS is expected to grow at a CAGR of 9.8% during FY24-27.
The company has positioned itself to take advantage of these trends and has developed a notable market share in both its segment, both domestic and global. The company is focusing on strengthening its core capabilities in precision engineering for increased sustainability, along with that, they are moving up their operations up the value chain from niche markets to large addressable markets. Investors looking to invest can invest in the IPO for the medium to long term".