IPO: R R Kabel

R R Kabel, a consumer electrical company, has come out with its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : R R Kabel's three-year average ROE and ROCE are 15.6 and 15.5 per cent, respectively. For the trailing 12 months ended June 2023, the company's ROE and ROCE were 17.9 and 20.1 per cent, respectively.
  
• Growth : Its topline and PAT has grown at 43.4 per cent and 18.4 per cent per annum between FY21-23.
  
• Valuation : The stock will be priced at a P/E and P/B of 47.4 and 7.0 times, respectively, as compared to its peer's median and average of 53.3 and 8.5 times, respectively.
  
• Overview : The company is poised to benefit from opportunities provided by continued growth of the real estate sector, rural electrification and increasing public and private investment in infrastructure.

About the company

R R Kabel is one of the leading companies in the Indian consumer electrical industry. It sells products across two segments: wires and cables (forms about 90 per cent of revenue), and fast-moving electrical goods such as fans and lighting (10 per cent). As of FY23, the company is the fifth largest player in the branded wires and cables market in India with a 7 per cent market share by value.

Strengths

• Extensive distribution network: R R Kabel has an extensive pan-India distribution presence with 3,450 distributors, 3,656 dealers and 1,14,851 retailers (as of June 2023). It also has one of the largest networks of electricians, covering 2,98,084 electricians across India (as of June 2023).
  
• Leading exporter: The company has approximately 9 per cent market share in exports of wires and cables.

Weaknesses

• Exposed to fluctuations in commodity prices: Copper and aluminium form about 82 per cent (as of FY23) of the company's cost of raw materials consumed. Fluctuations in prices, and uncertainty in supply of these metals could be detrimental to the business.
  
• Counterfeit products: Items marketed using the company's branding by unaffiliated parties can have a detrimental impact on the company's competitive position.

Risk report

Company and business

• Are R R Kabel's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. The company's profit before tax was Rs 331 crore in the 12 months ending June 2023.
• Will R R Kabel be able to scale up its business?
  Yes. According to a report by Technopak, the Indian consumer electrical industry is expected to grow at 10 per cent per annum till FY27. Moreover, the continued growth of the real estate sector, rural electrification and increasing public and private investment in infrastructure will provide opportunities to scale up.
• Does R R Kabel have recognisable brands with client stickiness?
  Yes. With a 7 per cent market share in branded wires and cables segment, and a growing network of electricians (from about 61,000 in March 2021 to nearly three lakh in June 2023), the company has a recognisable brand.
• Does the company have a credible moat?
  No. The company does not have any significant competitive advantage compared to its peers.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post-IPO, promoters' stake will be 62.8 per cent.
• Do the top three managers have more than 15 years of combined leadership at R R Kabel?
  Yes. Its Executive Chairman Tribhuvanprasad Rameshwarlal Kabra has been associated with the company since its inception.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is R R Kabel free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. The company's three-year average ROE and ROCE are 15.6 and 15.5 per cent, respectively. In FY23, the company's ROE and ROCE were 17.9 and 20.1 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flows from operation in FY21.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt-to-equity ratio, as of June 2023, stood at 0.12 times.
• Is R R Kabel free from reliance on huge working capital for day-to-day affairs?
  No. The company's business affairs are working capital intensive. They rely on short-term loans to fund these requirements.
• Can the company run its business without relying on external funding in the next three years?
  Yes. Rs 180 crore from the IPO proceeds will be used to repay debt. While it won't be paring down its entire debt burden, the company will be able to carry its business without relying on external funding in the next three years.
• Is R R Kabel free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of equity stood at 8 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 2.8 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The company will trade at a price-to-earnings ratio of 47.4 times compared to peers' median level of 53.3 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company will trade at a price-to-book ratio of 7 times which is lower than its peers' average of 8.5 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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