Verdict: Deserves a Look

IPO Snapshot

Stove Kraft is launching a Rs. 413 crore IPO between Mon 25^th Jan 2021 to Thur 28^th Jan, 81% of which is OFS by promoter and PE investor Sequoia and Rs. 95 crore fresh issue for debt repayment, in the price band of Rs. 384-385 per share. Issue represents 32% of post issue capital and is expected to list by 5^th Feb.

Cookware and Kitchen Appliances Maker

About 80% of company’s Rs. 670 crore annual revenue is generated from cookers, cookware and kitchen appliances, sold under flagship brand Pigeon, 5-6% from Pigeon branded LEDs, 5-6% from Gilma branded chimney hobs and 2% from brand licensing of Black + Decker household appliances. Distribution comprises 45,000 retail outlets, 65 exclusive Gilma showrooms and a strong online presence, accounting for ~30% of revenue.

Financials at an Inflection Point

In FY14, company’s Rs. 510 crore revenue comprised Rs. 240 crore from co-branded government business, where margins were slim, which has been consciously reduced to Rs. 20 crore in FY20, improving revenue mix and reducing losses. On FY20 revenue of Rs. 670 crore, company reported turnaround in performance, with Rs. 3 crore PAT, despite March sales being impacted due to lockdown. In H1FY21, as discretionary expenses such as advertising and travel were curtailed and operating leverage kicked in, PAT for the first half increased to Rs. 29 crore (from Rs. 4 crore YoY) on revenue of Rs. 329 crore, leading to 9% net margin. Brought forward losses kept H1FY21 tax liability at nil which should continue till H1FY22. On current net worth of Rs. 156 crore (post CCD conversion), H1FY21 EPS is Rs. 11.6 with 18% RoE.

Going by some of the Q3FY21 results announced so far, Stove Kraft’s Q3 revenues should sustain the H1FY21 traction on healthy festive demand. Over the medium term, after accounting for higher expenses and full tax rates, sustainable net margins should range around 6-7%, as interest expense will reduce, due to Rs. 76 crore repayment out of total Rs. 115 crore debt. Thus, financials seem to have reached an inflection point during covid, thanks to higher demand for home/ kitchen appliances.

Valuation Multiples at Discount to Peers

At Rs. 385, company’s market cap will be Rs. 1,253 crore, leading to PE multiple of 20x and sales multiple of less than 2x, based on FY21E earnings, which are at a significant discount to listed peers TTK Prestige as well as Hawkins:

Stove Kraft’s Rs. 1,253 crore market cap will be less than half of Hawkins’ Rs. 3,000 crore, despite similar topline and margins only slightly superior. Stove Kraft’s PE and sales multiple are similar to Butterfly, on comparable topline but slimmer margins, making the former attractive. While TTK and Hawkins are both cash rich companies, Stove Kraft’s post repayment debt of Rs. 40 crore is backed by working capital, thus not a worry. While one can wait for some more track record of financial performance, we believe Stove Kraft warrants a look given attractive valuation, strong brand name in the growing consumption sector, with tailwinds of higher rural income and nuclearisation of Indian families.

Conclusion:

Company’s financials have improved and operational turnaround looks sustainable. Attractive valuation multiples supported by consumption tailwinds make this IPO a good bet.

Grey Market Premium (GMP) of Stove Kraft: Grey Market Premium of Stove Kraft is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.