About the company

CFF Fluid Control is an emerging player in India's defense sector, specializing in the design, manufacturing, and servicing of fluid control systems for submarines and surface ships. The company holds a unique position as an Original Equipment Manufacturer (OEM) servicing submarines throughout their 30-year lifespan, capitalizing on the ongoing growth in India's naval modernization program. CFF Fluid Control has a strong focus on supplying essential parts and spare parts for submarines. The company's technical expertise is bolstered by a partnership with Coyal, a French company specializing in mechanical product technology. The company recently received a purchase order from Material Organisation, Mumbai worth INR 9.58 Cr for Spare P75 Project, to be delivered by December 2024 and a contract from Mazagon Dock Shipbuilders worth INR 46.46 Cr.

FY24 Financial Performance

• Total Revenue at INR 107 Cr. v/s INR 71.1 Cr. in FY23 (+50.5% YoY)

• EBITDA at INR 30.9 Cr. v/s INR 18.9 Cr. in FY23 (+63.5% YoY)

• EBITDA Margins at 28.8% v/s 26.5% in FY23 (+231 Bps YoY)

• PAT at INR 17.1 Cr. v/s INR 10.1 Cr. in FY23 (+69.3% YoY)

Promoters' Analysis

Mr. Sunil Menon(Age 56) - Managing director:

• Founder Promoter of CFF Fluid Control

• Holds 36.6% stake in the company

• Completed his Diploma in Hotel Management, Catering and Nutrition from Board of Technical Education Delhi 

• 30 years+ experience in defence and engineering sectors

Mr. Gautam Makkar (Age 53) - Chairman and Non-Executive Director

• Founder Promoter of CFF Fluid Control

• Holds 22.37% stake in the company

• Completed his Bachelor of Electrical Engineering from Poona University in the year 1991.

• 25 years+ of experience in sourcing and providing solutions to defence, power and marine industry.

Business and Upcoming Projects

Government-Backed Projects: Recent government approvals for the construction of 9 submarines (3 under P75AS and 6 under P75I) guarantee substantial orders for CFF Fluid Control's equipment.

Expanding Product Portfolio: The company is actively pursuing bids for a wide range of other defense projects, including:

• P17B (frigates)

• Offshore Patrol Vessels (OPVs)

• Mine Countermeasure Vessels (MCMVs)

• Fleet Support Vessels

• Fast Attack Crafts

• Advanced Towed Array Sonar Vessels (ATVPs)

• Aircraft Carriers

• National Hospital Ships

• Multipurpose Vessels

• Fast Patrol Vessels

Key Drivers and Investment Thesis

• Advanced Manufacturing Facility: CFF Fluid Control operates a 6,000 sq. mtr. facility in Khopoli, equipped with state-of-the-art machinery and testing facilities. The facility is approved by the Indian Navy and MDL, ensuring adherence to stringent quality standards. The company is currently seeking investment to upgrade its infrastructure to accommodate the increasing order backlog of INR 9,004 lacs.

• Towed Array Sonar (TWA) Production: The company has finalized an agreement for domestic manufacturing of TWA systems in India, acquiring Transfer of Technology (TOT) from partners like Nereides. CFF fluid control also tied up with a german firm AtlasElektronik for the local production & supply of 12 towed sonars for the Indian navy.

• Strategic Partnerships: The company has secured framework agreements with collaborators for the 'Scorpene' class submarines with foreign OEMs specializing in weapons, sensors, and unmanned underwater and surface vessels. These partnerships will bolster the company's technological prowess and expand its product portfolio.

• Reputed Player in the Indian Naval Space: CFF Fluid Control's contributions extend to servicing of equipment exclusively tailored for renowned submarines across various classes, including SSK Class, Kalveri Class Submarine, and Kilo Class Submarine.

• Operational Efficiencies: CFF Fluid has steadily increased their operational efficiencies over the past 4 years. The operating margins increased from 19% in FY21 to 29% in FY24, up 1000 bps.

Valuation and Recommendation

We forecast INR 31.7 EPS for FY27. While the current PE multiple for CFF Fluid is ~90x, we conservatively value it at 35x FY27 EPS, a target price of INR 1108.

As the valuations of the defence space are elevated, we recommended to “Accumulate” CFF Fluid on any correction of 10-15% on the basis of unique placement in the Indian Navy segment and good management track record.

Disclaimer:

Mool Capital Limited is a SEBI Registered Research Analyst having registration no. INH000012449. This report has been prepared by Mool Capital Pvt. Ltd. and is solely for information of the recipient only. The report must not be used as a singular basis of any investment decision. The views herein are of a general nature and do not consider the risk appetite or the particular circumstances of an individual investor; readers are requested to take professional advice before investing. This document is not, and should not, be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report should not be construed as an invitation or solicitation to do business with Mool Capital. Mool Capital and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.