R R Kabel Limited IPO

About the company:

R R Kabel Limited 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. It 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. It undertakes the manufacturing, marketing and sale of (i) the wires and cable products under its ‘RR Kabel’ brand, and (ii) a variety of consumer electrical products, including fans and lights under the ‘RR’ brand, which is licensed by the company. R R Kabel also manufactures, markets and sell fans and lights under the ‘Luminous Fans and Lights’ brand, which is licensed by them. The ‘RR Kabel’ brand has over 20 years of operating history, while the ‘RR’ and the ‘Luminous Fans and Lights’ brands, licensed by them, has over 7 years and over ten years of operating history, respectively. The company owns and operates two integrated manufacturing facilities which are located at Waghodia, Gujarat, and Silvassa, Dadra and Nagar Haveli and Daman and Diu in India, which primarily carry out manufacturing operations in respect of wire and cables and switches. Additionally, it owns and operates three integrated manufacturing facilities which are located at Roorkee, Uttarakhand, Bengaluru, Karnataka and Gagret, Himachal Pradesh in India, which carry out manufacturing operations in respect of FMEG products.

Objects of the Offer:

The company intends to utilize the net proceeds from the fresh issue towards the following objects:
- Repayment or prepayment, in full or in part, of borrowings availed by the company from banks and financial institutions
- General corporate purposes

Key Strengths and Opportunities:

- Scaled B2C business in the large and growing wires and cables industry: Wires and cables, primarily used for the distribution and transmission of electrical power, are an important constituent, representing nearly 40% of the consumer electrical industry in India. The total domestic market for the wires and cables industry is expected to grow at a CAGR of 13% until Fiscal 2027. R R Kabel Ltd. is well-positioned to capture a significant share of this growth due to its existing market share, brand recognition, diversified product portfolio, ability to innovate, scale of operations, sizeable and certified manufacturing facilities and infrastructure, quality and safety of its products and the reach of its distribution network.

- Extensive domestic and global distribution network: The distribution footprint encompasses both domestic sales and export sales. The company has an extensive pan-India distribution presence and as on June 30, 2023, it has 3,450 distributors, 3,656 dealers and 114,851 retailers. As part of its distribution strategy, it strives to provide end-users a seamless experience through several touchpoints. R R Kabel has also extended the business strategy to export markets and focuses on recurring B2C exports. In the calendar year 2022, it was one of the leading exporters of wires and cables from India, in terms of value, representing approximately 9% market share of the export market from India.

- Well-positioned for growth in FMEG segment: In Fiscal 2023, the total domestic market for the FMEG industry was estimated at Rs.1,063.50 billion, which is expected to grow at a CAGR of 8% until Fiscal 2027 to reach a market value of approximately Rs.1,465.00 billion. R R Kabel is well-positioned to capture a significant share of this growth, as a result of the omni-channel presence covering both physical and digital sales, distribution network, the product portfolio which extends across various price points and its ability to identify product gaps in the segment. It also has a wide portfolio of FMEG products including fans, lighting & switches and appliances such as room heaters, irons, water heaters and coolers.

- Experienced and committed professional management team: The company has a professional and experienced management team, consisting of Key Managerial Personnel and Senior Management Personnel with experience in the consumer electrical businesses. The leadership team is supported by experienced senior managers who have extensive industry knowledge and have been associated with the company as well as with leading multinational companies in India and outside India.

Risks:

- The costs of the raw materials that it uses in its manufacturing process are subject to volatility. Any increases or fluctuations in raw material prices may have a material adverse effect on the business, financial condition, results of operations and cash flows.

- The company usually keeps 20 - 25 days of inventory of raw materials. However, in Fiscal 2022, as a result of supply chain disruption caused by COVID-19, it experienced shortages and difficulties for one of its raw materials and any such shortage, delay or disruption in the supply of the raw materials may have a material adverse effect on its business, financial condition, results of operations and cash flows.

- The company derives its major revenues from the wires and cables segment. Any adverse changes in the conditions affecting the wires and cables market can adversely impact its business, financial condition, results of operations, cash flows and prospects.

- The company derived 23% of its revenue from operations from the export markets. Its distribution to the overseas market is dependent on a few distributors and any significant changes to the business arrangements with these distributors would impact the company

Financial Snapshot:

Conclusion:

R R Kabel Ltd. faces challenges with its EBITDA and PAT margins, which are currently in single digits, unlike most of its competitors who enjoy double-digit margins. Additionally, the company has been grappling with losses in its FMEG segment, which are on the rise. However, given the higher margins in the B2C segment and the focus on premiumisation by R R Kabel, there is potential for improvement in these areas to enhance its competitive position.
Its most comparable peer, Finolex Cables has a Price to Earning (PE) Ratio of 35x, while the company is coming at a valuation of nearly 61 times at the upper end of the price band. Compared to its peers, the valuation remains high.
However, the grey market premium of the company is around 20-25%. Hence, investors may apply this IPO purely for listing gains.

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