IKIO Lighting Limited IPO

About the company:

IKIO Lighting Limited is an Indian manufacturer of LED lighting solutions, with a strong focus on sustainability and low-energy products to support India's sustainability goals. It has a fully integrated manufacturing infrastructure, capable of producing ingenious LED lighting products. The product portfolio can be categorized as LED lighting, refrigeration lights, ABS piping & other products. IKIO’s LED lighting offerings target the premium segment, while also providing lighting solutions for commercial refrigeration equipment suppliers. Additionally, it manufactures ABS piping as an eco-friendly alternative to PVC piping, primarily used by its US customers in plumbing applications for recreational vehicles (RVs). With four manufacturing facilities, it has an annual installed capacity of 2.06 crore LED lights and 2.18 crore fans and switches as of December 31, 2022. It has a diversified customer base, spanning various industries and geographies, with Signify Innovations India Ltd (formerly Philips Electronics India Ltd) being its largest customer.

IPO Details:

The objective of the fresh issue:

The company intends to utilize the net proceeds received from the fresh issue towards:

1. Repayment/prepayment, in full or part, of certain borrowings availed by the company and its subsidiaries on a consolidated basis.

2. Investment in the wholly owned Subsidiary, IKIO Solutions Private Limited, for setting up a new facility at Noida, Uttar Pradesh.

3. General corporate purposes.

Segment Contribution as of 31^st December 2022:

Key Strengths and Business Strategies:

1. The demand for LED lighting solutions in India will be driven by a rise in smart city projects and infrastructure development, increasing use & demand for smart, automation, and energy-efficient lighting.

2. IKIO has a history of high customer retention. These long-term customer relationships have helped them to expand their product offerings and build an international customer base, primarily in the United States.

3. To address the global semiconductor shortage, the company’s R&D team designed re-engineered solutions to adapt available raw materials and components for specific products. This strategic approach ensures a consistent supply of products to customers without disruption.

4. IKIO has developed in-house capabilities to manufacture all mechanical components except for the diodes and resistors.

5. LED lighting market is expected to grow by a CAGR of 12% from FY 23 to FY 26. The company intends to construct a new manufacturing facility out of the net proceeds with the objective to capture this estimated market growth.

Financial Snapshot:

The below table shows the restated financial information of IKIO Lighting Limited.

Risks:

1. As of 31st December 2022, its top 20 customers accounted for 91% of restated revenue from operations. It derives a substantial portion of its revenue from a single customer, Signify Innovations India Ltd (Phillips India). Loss of key customers could have a material adverse effect on its business operations & financial conditions.

2. Also, it derives a substantial portion of its revenues from LED lighting products. Any reduction in orders from this product line could have a material adverse effect on its business operations & financial conditions.

3. If the company is not able to deploy R&D to successfully develop new products in a timely and cost-effective manner, it will face difficulties in sustaining a competitive environment which could have an adverse effect on the business operations.

4. The market it caters to is subject to cyclical demand and vulnerable to an economic downturn, which makes it difficult to project long-term performance.

5. IKIO relies on imported components from vendors in China, Singapore, Hong Kong, and Taiwan. For the nine months ended 31^st December 2022, imported raw materials account for 56% of the total raw materials. Any shortfall in the supply of imported components may adversely affect the pricing and supply of IKIO’s products.

Conclusion:

The company demonstrates strong financial performance with impressive EBITDA margin, PAT margin, ROE, and ROCE compared to competitors like Dixon and Amber. The positive sentiment and rally seen in consumer durables during the past month further enhance the positive outlook for the company’s future growth. IKIO Lighting possesses unique moats that provide a competitive edge over its peers. It comes at an earnings valuation of 54x at the upper price band considering EPS as of 31^st December 2022. While the PE of its listed peers Dixon Technologies, Amber Enterprises India, and Syrma SGS Technology as on 05^th June 2023 is 92x, 47x, and 51x respectively. This presents a favorable opportunity for the investors as the company offers an attractive valuation compared to industry peers. Considering these factors, we recommend a SUBSCRIBE rating for IKIO Lighting IPO, as the company exhibits potential for sustained growth and profitability.