IPO Size: Rs. 1,964 cr 

• Rs. 1,784 cr is Offer For Sale (OFS), mainly by PE investor TPG (trimming 17% holding to 6%, clocking 31% IRR in 5 years), promoter (66% to drop to 63%) and listed group company Ram Ratan Wires (completely exiting its 1.23% holding).
• Rs. 180 cr is Fresh Issue to repay Rs. 136 cr debt and become net debt free  

Price band: Rs. 983-1,035 per share

M cap: Rs.11,676 cr, implying 17% dilution

IPO Date: Wed 13^th Sep to Fri 15^th Sep 2023, Listing Tue 26^th Sep 2023

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

5^th Largest Wire and Cable Manufacturer in India

R R Kabel enjoys 5% value market share of the Rs.65,000 cr Indian wires and cables market and 7% organized share. Nearly 1/4th of its Rs. 5,600 cr revenue is derived from exports (to UAE, UK, Myanmar, USA and Austria), commanding 9% export market share. It has a deep domestic distribution network, having doubled reach to 3 lakh electricians in the past 15 months, and serving 1.1 lakh retailers through 7,100 dealers and distributors.

Growth Visibility Remains

Between FY20-23, revenue has grown at 31% CAGR, and volume growth visibility remains high, due to:

1. Rs. 345 cr capex has been undertaken between Mar 2021 to June 2023
2. 15 new products under development in wires and cables segment and 55 under fast moving electric goods (FMEG)
3. Industry tailwinds like rising demand from data centres, government capex, clean energy EV charging infrastructure and residential renovation demand.  

Margins Significantly Lower than Peers

While past 3 year revenue CAGR has been 31%, profit before tax (PBT) growth rate was lower, at 18% CAGR, as R R Kabel’s gross margin of 18% trails other wires and cable manufacturers’ gross margins (25% for Polycab and KEI, 21% for Finolex Cables). This gives the company less pricing power, as visible in FY23 results, wherein revenue rose 28% YoY but PBT declined 10% YoY on account of sharp rise in copper and aluminium prices.

Lower gross margin also significantly lowers net margin - R R Kabel’s net margin was barely 3.4% in FY23, with Rs. 70 cr operating loss in FMEG segment adding to margin pressure. In Q1FY24, while gross margin remained stagnant at 18%, company’s net margin improved to 4.7%, yet lower than peers. It clocked Rs. 74 cr PAT on Rs.1,600 cr topline in Q1FY24, while KEI Industries reported Rs. 121 cr PAT on Rs. 1,800 cr topline (6.8% margin) and Polycab reported 10.2% net margin on Rs. 3,900 cr topline in Q1FY24.

Fully Valued IPO

Based on EPS of Rs. 17 and Rs. 6.7 for FY23 and Q1FY24 respectively, estimated EPS for FY24E is close to Rs. 29, resulting in a PE multiple of about 36x, making the IPO fully valued in the short term:

• Polycab’s FY23 net margin of 9% not only higher than R R Kabel’s FY23 EBITDA margin of 6.3% in FY23 but also Q1FY24 8% EBITDA. Polycab also commands 3x market share, yet rules at FY24E PE multiple of 45x.
• KEI Industries is ruling at FY24E PE multiple of 40x with a bigger revenue of Rs. 7,000 cr and higher margins - 25% gross and 7% net.
• Finolex Cable, with Rs. 4,500 cr revenue, 21% gross margin and 10% effective net margin of cables business, is ruling at a lower PE multiple of only 33x.

While volume growth visibility remains, scope of margin expansion is not much. Thus, no money has been left on the table considering company’s smaller size and thinner margins vis-à-vis peers.

Infact, there is 4.5% premium, based on last transaction price a month ago, when selling investor TPG sold shares worth Rs. 385 cr, at Rs. 990 per share. Piggybacking a larger and more profitable peer or pricing IPO to perfection does not leave a good taste for incoming investors.