IPO: RK Swamy

RK Swamy, a marketing services provider, launched its IPO (initial public offering) on March 4, 2024. Below is a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROCE are 14 and 19 per cent, respectively.
  
• Growth: Its revenue grew 30 per cent annually between FY21-23. Also, its profit after tax compounded 227 per cent annually during the same period.
  
• Valuation: The stock is valued at a P/E and P/B of 46.5 and 9.9 times, respectively, compared to its peers' median and average of 84.6 and 8.6 times, respectively.
  
• Overview: Rising demand for marketing services should help it scale up. In addition, higher adoption of customer data analytics solutions should provide new expansion opportunities. However, the industry's highly competitive and fragmented nature poses a threat.

About RK Swamy

RK Swamy is an Indian marketing services provider, offering a diverse array of services such as marketing communications, customer data analytics and market research. It has three primary revenue streams:

• Marketing and communications: 49 per cent of FY23 revenue
  
• Customer data analytics and martech: 27 per cent
  
• Market research: 24 per cent

Strengths of RK Swamy

Long-standing relationships with a diversified client base: It catered to around 380 clients in the six months ending September 30, 2023. Moreover, its top 10 clients have been associated with the company for at least 13 years.

Weaknesses of RK Swamy

• The marketing services industry is highly fragmented with several small players. Consequently, it is a highly competitive industry.
  
• It has struggled to collect cash from customers historically, resulting in high receivable days (102 days as of FY23) . In FY23, receivables accounted for 65 per cent of total assets and the debtors as a percentage of sales stood at 70 per cent.

Risk report

Company and business

• Are RK Swamy's earnings before tax more than Rs 50 crore in the last 12 months?
  No. Its earnings before tax for FY23 was Rs 43 crore.
• Will RK Swamy be able to scale up its business?
  Yes. Rising demand for marketing services should help it scale up. In addition, increasing adoption of customer data analytics should aid growth.
• Does RK Swamy have recognisable brands with client stickiness?
  Yes. In the six months ending September 30, 2023, repeat clients accounted for 94 per cent of revenue.
• Does the company have a credible moat?
  No. It is a highly fragmented and competitive industry.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over a 25 per cent stake in the company?
  Yes. Post IPO, the promoters' stake will increase to 66.1 per cent.
• Do the top three managers have over 15 years of combined leadership at RK Swamy?
  Yes. Srinivasan K Swamy, Chairman and MD, has been with the company since 1982.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
• Is RK Swamy free of promoter pledging of its shares?
  Yes, the company is free of promoters pledging its shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  No. Its three-year average ROE and ROCE are 14 and 19 per cent, respectively. Its ROE and ROCE were 5 and 6 per cent, respectively, in FY23.
• Was the company's operating cash flow positive during the last three years?
  Yes. It generated positive cash flows from operations in each of the last three years.
• Is the company's net debt-to-equity ratio less than one?
  No. Its net debt-to-equity ratio stood at 1.2 times as of September 2023.
• Is RK Swamy free from reliance on significant working capital for day-to-day affairs?
  No. The business has high receivable days (102 days as of FY23). However, Its cash conversion cycle is negative due to high accounts payables.
• Can the company operate its business without relying on external funding in the next three years?
  Yes. The company has been generating good cash flows from operations. Besides, it has low debt levels and is less capital-intensive. However, its cash flows are high due to stretched payables.
• Is RK Swamy free from meaningful contingent liabilities?
  No. As of September 30, 2023, contingent liabilities as a percentage of equity stood at around 4.6 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an earning yield of 2.8 per cent.
• Is the stock's price-to-earnings less than its peers' median level?
  No. It is valued at a price-to-earnings ratio of 46.5 times compared to peers' median level of 84.6 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. It is valued at a price-to-book ratio of 9.9 times compared to the peers' average of 8.6 times.

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

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