About Kross Limited

Kross Limited is a diversified player focused on manufacturing and supply of trailer axle and suspension assembly and a wide range of forged and precision machined high performance safety critical parts for medium and heavy commercial vehicles (“M&HCV”) and farm equipment segments. They are widely recognized as one of the prominent manufacturers of trailer axles and suspension assembly in India. In 2019, they commenced manufacture and sale of trailer axle and suspension assemblies and have witnessed robust growth between Fiscal 2021 and Fiscal 2024. They have become one of the fastest growing player in the organised trailer axle manufacturing industry competing with major trailer axle manufacturers. With over three decades of experience, they rely on their product development capabilities to design and deliver proprietary products such as trailer axle and suspension assembly. They are one of the few players domestically, with the competency to manufacture trailer axles and suspension assembly in-house.

They supply their products to a diversified client base which includes large original equipment manufacturers (“OEMs”) manufacturing M&HCV and tractors, tier one suppliers to the OEMs in the M&HCV segment domestic dealers and fabricators for their trailer axle and suspension business. In the past they have been recognized by customers for the high-quality of the products supplied by them, which is one of the factors that has helped them establish long term relationships with several large domestic and global OEMs, including, Ashok Leyland Limited, a leading Indian automobile OEM and a Indian farm equipment OEM, each of whom they have been associated with for a period of more than 18 years and Tata International DLT Private Limited with whom they have been associated since 2019. Due to their track record and diverse product portfolio, they have also been able to attract new customers such as Leax Falun AB and a Japan based OEM manufacturing commercial vehicles. They have also commenced their bulk exports to Leax Falun AB, a Sweden based company manufacturing propeller shafts for commercial vehicle OEMs, in August 2023 with supplies of Universal Joint Crosses and are in stages of validation for other critical parts.

They operate out of five manufacturing facilities in Jamshedpur, Jharkhand, equipped with (i) forging presses and upsetters equipped with induction billet heaters, (ii) foundry with a high pressure mould line, (iii) high-precision machining equipment such as turning centres, vertical and horizontal milling centres, grinding, broaching, hobbing, shaping and robotic welding, (iv) in-house cathodic electro-disposition plant (“CED Plant”), powder coating, spray painting and (v) heat treatment furnaces and induction hardening equipment. They currently manufacture a large variety of components and have the capacity to manufacture forged parts of up to 40 kg input weight. 

INDIAN CV INDUSTRY
Between fiscals 2018 and 2024, domestic CV sales logged a CAGR of 2.1%. The CV industry exhibited a noteworthy recovery in fiscal year 2023, achieving a remarkable growth rate of 35% over fiscal 2022, albeit on a low base, and reaching 96% of the pre-pandemic levels observed in fiscal year 2019. This resurgence can be attributed to pent-up replacement demand, improved transporter profitability, and the pick-up in capex that had been hampered during the preceding 2-3 years due to economic stagnation and the disruptive impact of the pandemic. 

In fiscals 2018 and 2019 witnessed strong recovery as compared to 2016-17 and a healthy 18-20% growth, supported by the government’s focus on road and housing infrastructure development. In fiscal 2020, the industry witnessed a sharp de-growth of 28% on a high base of fiscal 2019, due to inventory adjustment on account of the transition to BS-VI emission norms. In fiscal 2020, demand for buses was impacted due to safety regulations (emergency exit doors, fire detection and suppression, escape hatches and emergency lighting). 

The pandemic brought the entire economy to a grinding halt when a nationwide lockdown was declared to contain its spread, thus affecting the profitability and sustainability of transporters due to lack of availability of freight demand. The industry, however, gained momentum afterwards as consumption demand and industry activity started gaining pace.

The commercial vehicle (CV) sales for fiscal year 2024 witnessed almost flat industry over fiscal 2023. This trajectory is underpinned by increased government spending and replacement demand. In FY2023, the CV industry exhibited remarkable recovery with a growth rate of 34% over fiscal 2022, reaching 96% of pre-pandemic levels. 

The Medium and Heavy Commercial Vehicle (MHCV) segment witnessed a stable performance in the fiscal year 2024. In the fiscal year 2024, the bus sales sector witnessed substantial growth of 27% over fiscal 2023. This growth is anticipated to be bolstered by robust replacement demand; wherein older buses will be replaced with newer ones.

In fiscal year 2024, the MHCV segment exhibited a de-growth of 3% over the fiscal year 2023. In fiscal year 2023, MHCV sales recorded a growth of 40%, this recovery brought MHCV sales to approximately 90% of the level recorded in fiscal year 2019, a notable milestone. The resurgence in economic activities across various sectors played a pivotal role in driving this recovery. Tractor trailers were the fastest-growing category in the MHCV segment, witnessing a growth of 71% CAGR between fiscals 2021 and 2024, followed by the MCV haulage and MAV haulage segments at 50% CAGR and 32% CAGR, respectively. Tippers grew at 14% CAGR, whereas ICVs clocked 1% growth during the same period. 

The bus sales sector witnessed an extraordinary CAGR of 75% during fiscal 2021-2024 period and in fiscal 2024, it witnessed a growth of 27% over fiscal 2023. However, it is essential to contextualize this growth as it was achieved on a low base, indicating a significant decline in bus sales during the previous fiscal year (fiscal 2023). The sharp growth in fiscal 2024 was primarily propelled by the resumption of schools and offices, along with a robust recovery in the tourism sector, contributing to a strong rebound in bus sales.

In recent years, the CV industry has evolved significantly under the influence of several factors. Sweeping changes have impacted not only the industry, but major players, particularly transporters who form the backbone of the sector. Some of the key events are listed below: 

Demonetisation, the withdrawal of high-denomination currency notes in 2016, materially impacted the CV industry by prompting a shift towards digital transactions, which increased transparency and accountability in the sector. 

Introduction of the GST in 2017 revolutionised the way goods were transported across state borders. It streamlined logistics operations by removing state-level taxes and entry barriers, reducing transit time and costs. 

The adoption of BS-VI emission norms in 2020 pushed the CV industry towards producing cleaner and more environmentally friendly vehicles. While it posed initial challenges due to the need for technological upgrades, it has since encouraged innovation and the development of greener transportation solutions. 

The enforcement of stringent safety regulations has been a crucial aspect of the CV industry's evolution, leading to the incorporation of advanced safety features in CVs, reducing the risk of accidents and improving road safety. 

The pandemic-induced lockdowns, supply-chain disruptions and decrease in demand for transportation services disrupted business operations. However, it also accelerated the adoption of digital solutions, remote monitoring and contactless delivery methods, making the CV industry more resilient. 

These changes have influenced the profitability and sustainability of transporters, who play a pivotal role in the CV industry. Though challenges did arise from these transformative events, such as the initial investment required for BS-VI compliance or the pandemic-induced disruptions, they have also opened up new opportunities for growth and efficiency. 

One particularly significant change over the past few years is the evolving preference among transporters for larger trucks, driven by their superior cost economics, as detailed below. 

Shifting preferences: Historically, a diverse range of vehicle sizes catered to varied transportation needs. However, now transporters increasingly favour larger trucks over smaller ones. The shift in preference is underpinned by several compelling factors.

Cost efficiency: Larger trucks are more cost efficient. They can carry more goods in a single trip, leading to lower fuel consumption per unit of cargo transported and significantly reduced labour costs, as fewer drivers are required to move the same volume of goods. The economies of scale associated with bigger trucks have made them an attractive choice for transporters looking to maximise their profit margins. 

Versatility: Larger trucks are often designed to be versatile, capable of transporting a wide variety of cargo types, from perishable goods to heavy machinery. This allows transporters to diversify their services, tap into multiple markets and adapt to changing customer demands more effectively.

Competitive advantage: Transporters recognise that operating larger trucks can provide a competitive edge. The ability to handle larger volumes of cargo can lead to stronger negotiations with shippers and better utilisation of resources, ultimately contributing to a more profitable business model.

Transformation in market dynamics is notably reflected in the sales volume of trucks, characterised by the increasing prominence of higher tonnage segments that have steadily expanded their market share. Growth has, in turn, led to a gradual erosion of the market share of smaller tonnage vehicles.

The CV market is expected see a constant rise in vehicle tonnage, which is expected to significantly change the industry’s landscape. Market dynamics are changing significantly as the industry's average payload rises, especially increasing intensity of trailer axles for CV trucks. 

The driving force behind this transformation is the escalating demand for higher tonnage vehicles. Heavy-duty trucks, weighing 42-tonne or 48-tonne, are becoming more commonplace on the roads. Unlike their lighter counterparts, these massive vehicles require a greater number of parts and components to operate. This fundamental shift translates into a notable increase in production costs for these CV trucks. To put this into perspective, a typical 19-tonne or 28-tonne truck may consist of 2-3 axles, while a 42-tonne or 48-tonne truck can have as many as five axles. 

The CV industry recovered spectacularly in fiscal 2023, with a 34% growth rate and 0.6% in fiscal 2024, reaching 96% of pre-pandemic levels of fiscal 2019. Increased government spending, robust replacement demand, and strong end-user sectors such as construction and mining are expected to support growth. 

Light commercial vehicle goods (LCV) sales de-grew by -3% in fiscal 2024, supported by sustained replacement demand with rising competition from electric three-wheelers, especially in the sub one tonne segment restricting further expansion. In fiscal 2023, LCV sales recorded impressive growth of 23%, rebounding to 99% of prepandemic levels. The surge in sales can be attributed to robust replacement demand, especially in the sub-onetonne category, which was deferred due to economic challenges and the pandemic. 

Over the long-term horizon, domestic CV sales are projected to record a 4.5-6.5% CAGR between fiscals 2024 and 2029, led by a 5-7% CAGR in the LCV segment, 3-5% CAGR in the M&HCV segment and 5-7% CAGR in the bus segment.

The commercial vehicle (CV) sales for fiscal year 2025 are expected to grow marginally by 0-2%. Increased public spending and strong replacement demand support this trajectory. This upward trend is expected to be aided by important end-user industries, especially mining and construction, which are expected to maintain their robust demand.

MHCVs set to thrive in the coming five years
The MHCV industry is expected to grow significantly, with a compound annual growth rate (CAGR) of approximately 2-4% projected from fiscal year 2024 to fiscal year 2029. 

Long-term MHCV sales are likely to be driven by several factors, including the country's improving industrial activity, consistent agricultural output, and the government's continued emphasis on infrastructure development. However, volume growth may be limited due to efficiencies gained from the implementation of the Goods and Services Tax (GST), the development of improved road infrastructure, and the commissioning of the dedicated goods corridor (DFC). Nonetheless, the industry remains on a promising growth trajectory in the coming years. 

Over the next five years (fiscal 2024-2029), industry GVA is expected to be robust, driven by the government's emphasis on "Make in India." Furthermore, infrastructure improvements and higher-than-expected corporate spending are expected to support the capex cycle after fiscal 2024.

Tractor industry: Review and outlook
In fiscal 2023, tractor sales grew 12.2% on-year to an all-time high of ~945,000 units. Healthy crop prices, sound reservoir levels owing to above-normal monsoon, higher MSPs announced by the government and better rabi acreage, all led to positive farmer sentiment. Healthy festival demand because of various schemes and discounts supported the retail growth momentum. 

In fiscal 2024, domestic tractor sales dropped by 7.4% on-year to ~875,724 units, on account of lower reservoir levels and negative farmer sentiments. Negative farmer sentiments also impacted the festive demand, with sales in the festive months September, October, and November for fiscal 2024 - being lower by 5.8% on-year as compared to the same period last fiscal. 

A large part of domestic tractor sales is driven by replacement demand. The typical holding period for a tractor is 6-9 years. Most of the tractors in the country is replaced within 7-8 years. Of the domestic demand, 50-60% constitute replacement demand. In states with high penetration of tractors, such as Punjab and Haryana, the replacement demand accounts for 70-80% of total sales. On the other hand, states with lower farmer incomes than that in Punjab and Haryana have a lengthier replacement cycle (higher age tractors) vs industry average.

KROSS LIMITED COMPETITIVE STRENGTHS
1. Long standing relationship with large OEMs and their tier one suppliers, domestic dealers and fabricators for their trailer axle and suspension business complemented by a diversified network of dealers for their trailer axle and suspension assembly business
2. They are widely recognized as one of the prominent manufacturers of trailer axles and suspension assemblies in India and one of the few players domestically with the competency to manufacture trailer axles and suspension assembly in-house
3. Diversified product portfolio with a focus on continuous value addition
4. Integrated manufacturing operations coupled with in-house product and process design capabilities which offer scale, flexibility and comprehensive solutions
5. Experienced Promoters supported by a management and execution team with proven track record
6. Track record of sustained growth and robust financial performance in the last three financial years

KROSS LIMITED STRATEGIES
1. Expand capacities at their existing manufacturing facilities to increase manufacturing scale for their existing products and creation of new products
2. Create manufacturing capabilities in axle beam extrusion and backward integration capabilities into the seamless tube
3. Expand our geographical reach through growing exports
4. Continuing focus on reduce operating costs and improving operational efficiency
5. Improve their financial profile

KROSS LIMITED RISK FACTORS & CONCERNS
1. Customer concentration risk – Their top five customers contributed a significant portion (more than 66.00% in each of the previous three Fiscals) of their revenues.
2. End-user industry risk – Demand for their products is linked to growth and trends in sales of vehicles by their customers.
3. Product concentration risk – They derive a portion of their revenue from the sale of trailer axle and suspension assemblies for medium and heavy commercial vehicles (“M&HCV”).
4. Manufacturing facility geographical concentration – Their manufacturing facilities are located in the same geographical location and any disruptions in their manufacturing process due to local and regional factors could have an adverse effect on their business, financial condition and results of operations.
5. Raw material price risk – Change in availability and cost of steel, their primary raw material may adversely affect their business, financial condition, results of operations and prospects.
6. Raw material sourcing risk – They depend on a limited number of third parties for the supply of raw materials and failure by their suppliers to meet their obligations may cause change in availability and cost of raw materials which may adversely affect their business, financial condition, results of operations and prospects.
7. Raw material price risk – Change in availability and cost of steel, their primary raw material may adversely affect their business, financial condition, results of operations and prospects.