R R Kabel IPO review (Apply)

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Review By Dilip Davda on September 9, 2023

•    RKL is one of the leading Indian Consumer Electricals goods manufacturers.
•    It derives 97% of revenue from the FMEG segment.
•    While it posted growth in its top line, it marked pressure on margins for FY23.
•    Based on annualized FY24 earnings, the issue appears fully priced. 
•    Investors may park funds for the medium to long-term rewards in this long race horse.

ABOUT COMPANY:
RR Kabel Ltd. (RKL) is one of the leading companies in the Indian consumer electrical industry (comprising wires and cables and fast-moving electrical goods ("FMEG")), with an operating history of over 20 years in India. The Indian consumer electrical industry was estimated at Rs. 1,811.50 billion in Fiscal 2023 and is expected to grow at a compounded annual growth rate ("CAGR") of 10% until Fiscal 2027 to reach a market value of approximately Rs. 2,665.00 billion. (Source: Technopak Report) 

RKL is one of the leading companies in the Indian consumer electrical industry on account of the following:

• It is the fastest-growing consumer electrical company among peers in India, growing at a CAGR of 43.4% between Fiscal 2021 and Fiscal 2023;

• It is the fifth largest player in the wires and cables market in India, representing approximately 5% market share by value as of March 31, 2023;

• It is the fifth largest player in branded wires and cables market in India, representing approximately 7% market share by value as of March 31, 2023, as compared to approximately 5% market share by value as of March 31, 2015;

• RKL had the highest revenue contribution from the business-to-consumer ("B2C") sales channel in wires and cables with approximately 74% of revenue coming from the B2C sales channel as of March 31, 2023;

• In the calendar year 2022, the company was one of the leading exporters of wires and cables from India, in terms of value, representing approximately 9% market share of the exports market from India; 

• It has one of the largest networks of electricians, covering 271,264 electricians across India, as of March 31, 2023;

In Fiscal 2023, its revenue contribution from the FMEG segment is approximately 11%, which is the highest among peers. This has continued to remain the highest at 11% among peers even in the three months ended June 30, 2023. 

• The company has one of the highest numbers of distributors servicing the extensive retail footprint in the consumer electrical industry as of March 31, 2023, and has increased its retailer outlets by 3.5 times from 30,570 in Fiscal 2021 to 106,626 in Fiscal 2023, pursuant to undertaking several initiatives; and

• Its products have 35 international product certifications, which is one of the highest in number among peers in the Indian consumer electrical industry as of March 31, 2023.

The company sells products across two broad segments - (i) wires and cables including house wires, industrial wires, power cables and special cables; and (ii) FMEG including fans, lighting, switches and appliances. In the three months ended June 30, 2023, (i) 71% of its revenue from operations from the wires and cables segment (of which all of the revenue from operations from house wires products); and (ii) 97% of revenue from operations from FMEG segment, are from the B2C channel. Its product's end use determines whether the sale is through a business-to-business ("B2B") or B2C channel. According to Technopak, B2C sales provide a higher gross margin as compared to B2B sales.

RKL undertakes the manufacturing, marketing and sale of (i) wires and cable products under the 'RR Kabel' brand, and (ii) a variety of consumer electrical products, including fans and lights under the 'RR' brand. It also manufactures, markets and sells fans and lights under the 'Luminous Fans and Lights' brand. Its 'RR Kabel' brand has over 20 years of operating history, while the 'RR' and the 'Luminous Fans and Lights' brands have over 7 years and over 10 years of operating history, respectively.

The company has an extensive Pan-India distribution presence and as of June 30, 2023, it had 3,450 distributors, 3,656 dealers and 114,851 retailers, on a non-exclusive basis. As of June 30, 2023, it had 789 employees in the sales and marketing team, who manage and coordinate with distributors, dealers and retailers. The company also has a presence on recognized e-commerce platforms. As of June 30, 2023, it had 21 warehouses across 17 states and union territories in India. As of June 30, 2023, it had 3108 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo IPO of fresh equity shares issue worth Rs. 180.00 cr. (approx. 1739136 shares at the upper cap) and an Offer for Sale (OFS) of 17236808 shares (worth Rs. 1784.01 cr. at the upper cap). It has announced a price band of Rs. 983 - Rs. 1035 per share of Rs. 5 face value. Thus the overall size of the IPO will be around 18975944 shares for mobilizing around Rs. 1964.01 cr. at the upper cap. The issue opens for subscription on September 13, 2023, and will close on September 15, 2023. The minimum application to be made is for 14 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 16.82% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 136.00 cr. for repayment/prepayment of borrowings in full or part, and the rest for general corporate purposes.

The company has reserved equity shares worth Rs. 10.80 cr. for eligible employees and offering them a discount of Rs. 98 per share. From the rest portion, it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

Axis Capital Ltd., Citigroup Global Markets India Pvt. Ltd., HSBC Securities and Capital Markets (India) Pvt. Ltd., and JM Financial Ltd. are the joint Book Running Lead Managers (BRLMs) to the issue and Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par value, the company issued/converted further equity shares in the price range of Rs. 7.50 - Rs. 150.00 (on the basis of Rs. 5 FV) between March 2004 and August 2023. It has also issued bonus shares in the ratio of 3 for 10 in November 2007, and 1 for 1 in March 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.62, Rs. 1.62, Rs. 1.65, Rs. 2.46, Rs. 3.36, Rs. 3.77, Rs. 5.42, Rs. 5.82, Rs. 7.05, Rs. 7.12, Rs. 7.68, and Rs. 270.08 per share.

Post-IPO, RKL's current paid-up equity capital of Rs. 55.53 cr. (111068856 shares) will stand enhanced to Rs. 56.40 cr. (112807992 shares). Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 11675.63 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, RKL has (on a consolidated basis) posted a total income/net profit of Rs. 2745.94 cr. / Rs. 135.40 cr. (FY21), Rs. 4432.22 cr. / Rs. 213.94 cr. (FY22), and Rs. 5633.64 cr. / Rs. 189.87 cr. (FY23). For Q1 of FY24 ended on June 30, 2023, it earned a net profit of Rs. 74.35 cr. on a total income of Rs. 1613.60 cr.

The company has reported an average EPS of Rs. 16.97 (fully diluted) and an average RoNW of 14.78% for the last three fiscals. The issue is priced at a P/BV of 7.69 based on its NAV of Rs. 134.57 as of June 30, 2023, and at a P/BV of 6.97 based on post-IPO NAV of Rs. 148.44 per share (at the upper cap). 

If we attribute FY24 annualized earnings to the post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 39.26. Thus the issue appears fully priced.

The company has posted PAT margins of 4.93% (FY21), 4.83% (FY22), 3.337% (FY23), and 4.61% (Q1-FY24), and RoCE of 13.59%, 17.41%, 15.57% and 5.95% for the corresponding periods, respectively. 

DIVIDEND POLICY:
The company has declared dividends of 100% (FY22), 180% (FY23) and 90% (FY24) so far. It will continue to follow a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, RKL has shown Havells India, Polycab India, KEI Ind., Finolex Cables, V-Guard Ind., Crompton Greaves Consumer, and Bajaj Electricals as their listed peers. They are trading at a P/E of 81.15, 53.49, 45.87, 32.22, 76.72, 43.63, and 59.38 (September 08, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The four BRLMs associated with the offer have handled 61 public issues in the past three years out of which 20 issues closed below the offer price on the listing date.

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