IKIO Lighting IPO review (May apply)

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Review By Dilip Davda on June 3, 2023

•    ILL dominates in LED lighting solutions and other specialized products. 
•    It has posted growth in its top and bottom lines for the reported periods. 
•    Based on its earnings, prima facie, the issue appears fully priced. 
•    It enjoys a lion's market share in some of its products. 
•    Well-informed investors may consider parking funds for the medium to long term.

PREFACE:
The management of ILL claims to be the niche player with a virtual monopoly in certain products and enjoys the largest market share. However, it is worthwhile to note that the management and the Lead Manager insisted to consider Proforma Consolidated financial data for valuation purposes and not the restated consolidated data. It appears that the pricing of the IPO is done on the said basis as it allowed it to go for fancy pricing. 

ABOUT COMPANY:
Ikio Lighting Ltd. (ILL) is an Indian manufacturer of light-emitting diode ("LED") lighting solutions. It is focused on sustainability and providing low-energy LED products to help India meet its sustainability goals. The company is primarily an original design manufacturer ("ODM") and design, develop, manufacture and supplies products to customers who then further distribute these products under their own brands. ILL also work with customers to develop, manufacture and supply products that are designed by customers. 

Its products are categorized as (i) LED lighting; (ii) refrigeration lights; (iii) ABS (acrylonitrile butadiene styrene) piping; and (iv) other products. ILL's LED lighting offerings focus on the premium segment and include lighting, fittings, fixtures, accessories and components. It provides lighting solutions (lights, drivers and controls) to commercial refrigeration equipment suppliers under its refrigeration light segment. It also manufactures an alternative to polyvinyl chloride ("PVC") piping called ABS piping which is primarily used by ILL's US customers for plumbing applications in the recreational vehicles ("RVs") that they fit out. 

In addition, ILL manufactures and assembles other products including fan regulators that are designed by clients; light strips, moulding, and other components and spares. Its equipment and systems are used in various industries and products, including residential, industrial and commercial lighting. Its largest customer is Signify Innovations India Limited, erstwhile Philips Electronics India Limited ("Signify (Philips)"), which according to Frost & Sullivan in Fiscal 2022 had a 50% market share in India's functional decorative lighting category (including LED spotlights, LED downlights and cove lights) and a 10% market share in India's true-blue decorative lighting segment (including chandeliers, wall lights, pendants, outdoor lights). (Source: F&S Report, March 2023). 

In addition to Signify (Philips), it has a diversified customer base across all other product segments across industry sectors and geographies which include Western Refrigeration Private Limited, Panasonic Life Solutions India Private Limited and Novateur Electrical & Digital Systems Private Limited. ILL has a history of high customer retention. 

ILL enjoyed relationships of over three years with seven out of the top ten customers. In addition, it is building an international customer base, primarily in the United States. The company has four manufacturing facilities with one located in the SIDCUL Haridwar industrial park in Uttarakhand and three in Noida in the National Capital Region. As of February 28, 2023, it had 1470 employees and 19 contract labourers.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book-building route IPO having a combo of fresh equity shares issue worth Rs. 350 cr. (approx. 12280684 shares at the upper price band) and an Offer for Sale (OFS) of 9000000 shares (approx. Rs. 256.50 cr. at the upper cap of the price band). Thus the overall IPO size is Rs. 606.50 cr. (approx. 21280684 shares) at the upper price band. The company has announced a price band of Rs. 270 - Rs. 285 per share having a face value of Rs. 10 each. The issue opens for subscription on June 06, 2023, and will close on June 08, 2023. The minimum application to be made is for 52 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 27.54% of the post-IPO paid-up capital of the company. 

From the net proceeds of the fresh equity shares issue, it will utilize Rs. 50.00 cr. for repayment/prepayment of certain borrowings, Rs. 212.31 cr. for investment in its wholly owned subsidiary IKIO Solutions, and the balance for general corporate purposes. 

The company has allocated note of more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. Motilal Oswal Investment Advisors Pvt. Ltd. is the sole lead Book Running Lead Manager (BRLM) and KFin Technologies Ltd. is the registrar of the issue. 

After issuing initial equity shares at par, the company issued bonus shares in the ratio of 499 for 1 in July 2021, and in the ratio of 8 for 5 in September 2022. The average cost of acquisition of shares by the promoters is Rs. 0.01 per share. 

Post-IPO, ILL's current paid-up equity capital of Rs. 65.00 cr. will stand enhanced to Rs. 77.28 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 2202.50 cr. 

FINANCIAL PERFORMANCE:
On the basis of restated financial statement (on a consolidated basis), for the last three fiscals, IIL has posted a turnover/net profit of Rs. 140.73 cr. / Rs. 15.99 cr. (FY20), Rs. 160.04 cr. / Rs. 20.66 cr. (FY21), and Rs. 220.72 cr. / Rs. 28.13 cr. (FY22). For 9M of FY23 ended on December 31, 2022, it earned a net profit of Rs. 34.65 cr. on a turnover of Rs. 243.18 cr. 

On the basis of the Proforma financial statement (on a consolidated basis considering subsidiaries), for the last three fiscals, IIL has posted a turnover/net profit of Rs. 221.83 cr. / Rs. 21.41 cr. (FY20), Rs. 214.57 cr. / Rs. 29.06 cr. (FY21), and Rs. 334.00 cr. / Rs. 50.75 cr. (FY22). For 9M of FY23 ended on December 31, 2022, it earned a net profit of Rs. 51.43 cr. on a turnover of Rs. 332.79 cr.  

Based on Proforma consolidated financial data, while its PAT margins are up from 9.65% of FY20 to 15.43% for 9M of FY22, its ROCE and ROE margins are down from 37.61% and 59.63% to 25.62% and 36.46% respectively for the corresponding periods. Its net debt/EBITDA ratio is up from 1.30 to 1.94 for the said periods. Thus for 9M of FY23, it has posted super bottom lines on restated as well as on a proforma consolidated basis. 

According to the management, Phillips is their biggest customer and ILL has a virtual monopoly in certain categories of the products and has thus created a niche place and enjoys good margins. With its plan afoot, it hopes to maintain the trends going forward. 

For the last three fiscals, on a proforma consolidated basis, IIL has reported an average EPS of Rs. 5.91 and an average RoNW of 48.42%. The issue is priced at a P/BV of 13.15 based on its NAV (proforma basis) of Rs. 21.67 as of December 31, 2022, and at a P/BV of 4.80 based on its post-IPO NAV of Rs. 59.38 per share (at the upper cap). 

If we annualize FY23 super earnings and attribute it to the fully diluted post-IPO paid-up capital of the company, then the asking price is at a P/E of 32.13 (on the basis of proforma consolidated basis) and 47.66 (based on consolidated restated numbers). 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. The board of directors adopted a formal dividend distribution policy on September 14, 2022, and post-listing, it may follow the same and pay the dividend based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, IIL has surprisingly shown Dixon Tech, Amber Enterprises, Syrma SGS, and Elin Electronics as their listed peers. They are currently trading at a P/E of 111.84, 150.33, 124.34, and 32.88 (as of June 02, 2023). However, they are not truly comparable on an apple-to-apple basis. The peers comparison in this case appears to be an eyewash. 

MERCHANT BANKER'S TRACK RECORD:
This is the 8th mandate from Motilal Oswal Investment in the last four fiscals (including the ongoing one). Out of the last 7 listings, 1 opened at a discount, 1 at par and the rest with premiums ranging from 0.42 % to 103.11% on the day of listing. 

IKIO Lighting IPO FAQs