Stove Kraft, a leading kitchen and home solutions brand, is coming out with an IPO to raise Rs 412.65 crore with Rs 95 crore via fresh issue and offer for sale. The company is engaged in the manufacture and retail of a wide and diverse suite of kitchen solutions under the Pigeon and Gilma brands, and proposes to commence manufacturing of kitchen solutions under the BLACK + DECKER brand covering the entire range of value, semi-premium and premium kitchen solutions respectively.
Stove Kraft has 2 manufacturing facilities in India and as of H1FY21, they manufactured 79.75% of the Pigeon and Gilma branded products (in terms of number of units) at their well-equipped and backward integrated manufacturing facilities. The company has 651 distributors in more than 27 states and 5 union territories in India and 12 distributors for their exports.
Of the 3 brands, Pigeon is the largest revenue contributor for the company at 86.2% as of FY 2020 while Gilma contributed to 2.54% and BLACK + DECKER contributed to 2.70%. Pigeon branded products were among the leading brands for free standing hobs, cooktops, non-stick cookware, LPG gas stoves and induction cooktops. The Gilma portfolio comprises of chimneys, hobs and cooktops across price ranges and designs.
Strong Brand Image: The existing market presence and strength of the Pigeon brand has been instrumental in enabling Stove Kraft to successfully enter into home solutions vertical with products like LED products in 2016. Their tie-up with Stanley Black & Decker, Inc. and The Black and Decker Corporation will enable them to penetrate the premium segment of the kitchen appliances industry and contribute significantly in the recognition, demand and growth of their overall brand portfolio.
Strong Distribution Network: The manufacturing facilities in Bengaluru and Baddi are well connected with 9 strategically located C&F agents. The C&F agents and distributors are in turn connected with a dealer network comprising of over 45,475 retail outlets which are driven through a sales force of 566 personnel.
Backward Integration: The manufacturing facilities are backward integrated and have the ability to manufacture various components in house for their products.
Industry Leading Revenue Growth: Stove Kraft has reported a growth of 13 percent CAGR in revenues from FY 2018 to FY 2020. Over the same period, listed peers such as TTK Prestige and Hawkins Cookers have reported a CAGR growth of ~8 percent in their revenues. This indicates that the company is growing at a faster rate than the industry average.
High Indebtedness: The company carries a debt of Rs 326.9 crore on their books (long-term + short-term borrowings) as of FY 2020. The company aims to pay off Rs 76 crore worth of debt with IPO funds. Comparatively, TTK Prestige and Hawkins Cookers both have significantly less debt on their books at Rs 18.6 crore and Rs 28 crore, respectively. On a Debt/M-cap ratio, Stove Kraft stands at 17.8percent as compared to 0.2percent and 0.9percent. (Stove Kraft M-cap based on post-issue implied m-cap on upper price band).
Brand Risk: The trademark for marquee brand ‘Pigeon’ is the subject matter of litigation with Pigeon Appliances Pvt Ltd. If the company can’t retain their brand name, it can cause significant impact on Stove Kraft’s operations and financials. Since more than 85percent of their revenue comes from Pigeon, this litigation could prove to be a significant problem for the company.
Inconsistent Profitability: While their revenue has grown at 13percent CAGR over the last 3 years, their profit margins have not grown at the same pace. The company reported a net profit margin of just 0.1percent compared to its peers TTK Prestige whose NPM was 10.2percent and Hawkins whose NPM was 10.8percent for FY 2020. Low profitability indicates that the company is unable to convert revenues to profit as effectively as peers in the industry and such a huge difference in margins further indicates its inefficiency.
Foray Into Non-core Businesses: While the contribution of Stove Kraft’s non-core businesses is currently low, the management has stated that they do not have experience in this field and given the high amount of competition in this segment, any inappropriate capital allocation decisions can prove to be harmful.
Negative Net Worth: Stove Kraft has negative net worth on its balance sheet to the tune of Rs 29.9 crore. The negative equity issue arose due to issuance of CCDs. This is the biggest red flag for Stove Kraft.
Despite an industry leading growth of 13percent CAGR and sufficient capacity to meet higher demand, the company hasn’t been able to efficiently convert its revenue to profits. They have high debt, negative equity and a couple of other risks compared to its peers. On a valuation perspective too its trading at a post-listing PE of 395x compared to its industry average PE of 123x. Given the various risks, we recommend investors to avoid this IPO as an investment bet. As far as listing is concerned, one should take a judgement call given the market sentiment at that time since fundamentally it would be safer to avoid this IPO for now.