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RR Kabel, the fifth-largest wire & cables company in India, is looking to raise 1963 Cr in the IPO. The IPO price band is ₹ 983 to ₹ 1035 and is open from 13th to 15th September 2023. Should you subscribe?
Short answer: No. This IPO is mainly an exit route for TPG, and the company gets less than 10% of the total proceeds. On top of that, its performance doesn’t quite match up to its peers, and the valuations look stretched.
RR Kabel, incorporated in 1995 and with its HQ in Mumbai, is one of the leading FMEG players comprising wires, cables, and other electrical goods. The company is a prominent player in North and Western India.
- It is one of the fastest-growing FMEG company with a 3-year revenue CAGR at 31%. However, this growth hasn’t translated to profits. We will discuss this later.
- The company is the 5th largest player in the wires & cables market with a domestic market share of 5% and an export market share of 9%.
- Wires & cables account for ~89% of the revenue, and the remaining comes from other FMEG products.
- The company has a stronghold in exports, contributing around 27% of the total revenue. Domestic revenue makes up the remaining 73%.
- It has 5 manufacturing facilities located in Gujarat, Uttarakhand, Karnataka, and Himachal Pradesh.
The Offer: IPO marks TPG’s exit
The company plans to raise 1963 Cr in the IPO, of which only 180 Cr is a fresh issue. The remaining 1783 Cr, being offered for sale, is primarily for the exit of the PE fund TPG and some partial sales from the promoters.
From the 180 Cr the company receives, most will be used to repay the debt.
Financial Overview: Balancing Growth & Brand building
The company had a decent revenue growth of 31% in the last three years. However, that didn’t translate to the bottom line, mainly on the back of huge ad spends. They are investing on brand building.
During the same period, the company grew its EBITDA & PAT at a rate of 12% & 11.8% CAGR respectively, below the growth of its peers.
RR Kabel spends a stupendous 15% of their revenue on advertising & marketing expenses, eating into its profits.
The margin profile is also sub-par compared with its closest peers like Polycab & Finolex Cables, who maintain an EBITDA margin of 11-13%. However, RR Kabel margins have been stuck around 7-8% in the last few years.
The company has a total debt of around 900 Cr, of which the majority is working capital and short-term debt. Post the IPO, the company will further reduce the debt to around 670 Cr.
The company has a high working capital cycle of around 75 days, which is the highest among its peers.
Excluding top-line growth, RR Kabel’s numbers are below par compared to its peers in all aspects. It doesn’t offer anything significantly better than its competitors.
*Click on the image to enlarge
The Good Stuff
- Exports account for approximately 27% of total revenue.
- B2C sales, which are high-margin products, constitute about 76% of revenue.
- The contribution from FMEG is expected to rise. Recent acquisitions, including Arraystorm and Luminous Home Electric business from Schneider, aim to bolster their FMEG product range.
Points to Ponder
- Significant marketing expenses are already a burden. As they plan to penetrate the South & East Indian markets, we might see sustained advertising spends, potentially affecting profit margins.
- There’s a lack of immediate growth catalysts, be it in terms of new product introductions or margin enhancements
- The valuation appears lofty, with a PE ratio of 61 for a company showing only low double-digit profit growth.
Captialmind View
Feels like we’ve been here before, right? Remember the Dodla Dairy IPO? Another TPG group’s exit in 2021. And just like Dodla, RR Kabel is also getting only 7% of that IPO money.
With an issue price of 1035 Cr, the company has a valuation of ~11700 Cr. It’s trading at around 32 times EV/EBITDA and 61 times PE.
The company still has some ground to cover to achieve top-tier operating efficiency and improve its margins.
- If you’re keen on riding this trend and are open to risk, consider subscribing to the IPO — but purely for potential listing gains. Be aware of the risks: the momentum might lose steam before the listing
- For the long-term, the company doesn’t have a unique edge, and the valuations aren’t particularly favorable
Additional Reads:
- Prudent Corporate: Capitalizing on SIP Surge
- Jio Financials: Does the demerger from Reliance have the value?
- ITC Hotels demerger explained
This article is for information only and should not be considered a recommendation to buy or sell any stocks.
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