IPO Size: Rs. 424 cr

• 60% is Offer for Sale (OFS): 60% of OFS by 2 investors (16% combined stake to shrink to 4%) and 40% by promoter (83% holding to drop to 66% post IPO)
• 40% is Fresh Issue for (i) Rs. 54 cr working capital (ii) Rs. 65 cr for capex for digital studio, IT infra and experience and interview centre

Price band: Rs.270-288 per share  

M cap: Rs. 1,453 cr, implying 29% dilution

• Only 10% allocated for retail investors, as cash higher than net worth in FY21 and FY22

IPO Date: Mon 4^th Mar to Wed 6^th Mar 2024, Listing Tue 12^th Mar 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

India’s 5^th Largest Integrated Marketing Service Company

R K Swamy offers marketing services, with share of digital at ~80% of net annual revenue of Rs. 300 cr. Business is split into 3 verticals:

1. Integrated Marketing Communications: accounts for half the revenue
2. Customer Data Analytics: contributes about one-fourth revenue
3. Full-service Market Research: contributes about one-fourth revenue

Company operates under R K Swamy and Hansa brands, catering to BFSI, automobile, FMCG, consumer durables, retail and e-commerce sectors.

Working Capital Requirement to increase

Based on gross revenue of Rs. 631 cr in FY23, outstanding trade receivables of Rs. 205 cr are seen high, representing nearly 4 months. As per new industry norms, trade payables for digital platforms, which were hitherto more-or-less balanced by trade receivables, will need to be paid within 2 months. Thus, company’s working capital requirement will rise going forward, justifying needs for Rs. 54 cr allocation from fresh issue proceeds for working capital.  

Lower Margins in H1FY24

FY23 revenue (net of media and advertising cost) stood at Rs. 293 cr, with EBITDA of Rs. 63 cr leading to 21% EBITDA margin. As H1 accounts for ~40% of annual business, H1FY24 revenue stood at Rs. 141 cr, with EBITDA margin at 15%. On PAT of Rs. 8 cr in H1FY24, net margin shrunk to 6% from FY23’s 11%. EPS was reported at Rs. 7 and Rs. 2 for FY23 and H1FY24 respectively, on an equity of Rs.22 cr as of 30.9.23 (face value Rs. 5 each) post bonus.

Fully Valued

On FY24E PAT of about Rs. 21 cr, shares are being offered at a PE multiple of 60x, on current year earnings, which is more than fully valued, as R K Swamy’s margins are much lower than peers:  

Larger-sized digital marketer Affle India is quoting at a PE multiple of 58x, despite 16% net margin and 1,700 cr topline, while Latent View Analytics’ PE of 72x is justified by its 24% net margin on Rs. 600 cr topline, growing strongly sequentially. Thus, R K Swamy IPO valuation lack room for upside.