Evaluating R K Swamy Ltd IPO opportunity; Should you invest?

The company has a track record of serving prominent organizations, including Aditya Birla Sun Life AMC Ltd, Dr Reddy’s Laboratories Ltd, Havells India Ltd, Hindustan Petroleum Corporation Ltd, Oil and Natural Gas Corporation Ltd, and Royal Enfield

About the Issue:  

R K Swamy Ltd is launching its initial public offering (IPO) for equity shares valued at Rs 5 each. The IPO price range is set between Rs 270 and Rs 288 per equity share, resulting in a total issue size of Rs 423.56 crore at the upper price band.  

The IPO is scheduled to commence on March 04, 2024, and will conclude on March 06, 2024. The market lot size for the IPO is 50 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 650 shares or a total investment of Rs 1,87,200 assuming the upper price band.   

Objects of the Issue  

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Funding working capital requirements of the company

2. Funding capital expenditure to be incurred by the company for setting up a digital video content production studio

3. Funding investment in IT infrastructure development of the company, and the Material Subsidiaries, Hansa Research and Hansa Customer Equity

4. Funding setting up of new customer experience centres and computer-aided telephonic interview centres of the company

5. General corporate purposes

Promoter holding  

Srinivasan K Swamy (Sundar Swamy) and Narasimhan Krishnaswamy (Shekar Swamy) are the promoters of the company. The promoters and promoter group currently hold a pre-issue shareholding stake of 83.03 per cent in the company.   

Company profile  

It stands as a leading integrated marketing service group in India, providing a comprehensive solution encompassing creative, media, data analytics, and market research services under one roof. According to the CRISIL Report, it holds the 8th position in terms of estimated operating revenue among the integrated marketing communications service groups operating in India.

The company offers a wide array of services across interconnected and complementary business segments, including:

(i) Integrated Marketing Communications

(ii) Customer Data Analytics and Marketing Technology

(iii) Full-Service Market Research, which encompasses customer experience measurement and syndicated studies.

The company's solutions and services are delivered through 12 offices and 12 field locations spread across 12 cities, covering its three business segments. In Fiscal 2023 and the six months ending September 30, 2023, the company launched more than 818 and 438 creative campaigns, respectively, on behalf of its clients across a range of media platforms. Additionally, it conducted over 2.37 million and 1.44 million consumer interviews through quantitative, qualitative, and telephonic surveys.

The company has a track record of serving prominent organizations, including but not limited to Aditya Birla Sun Life AMC Ltd, Dr Reddy’s Laboratories Ltd, Havells India Ltd, Himalaya Wellness Company, Hindustan Petroleum Corporation Ltd, ICICI Prudential Life Insurance Company Ltd, Mahindra and Mahindra Ltd, Oil and Natural Gas Corporation Ltd, Royal Enfield, Shriram Finance Ltd, Tata Play Ltd, and Ultratech Cement Ltd, among others.

Financials  

The company has showcased sustained and robust growth over the past few years. In FY23, both revenue and net profit witnessed strong year-on-year growth, with a 25 per cent surge in revenue and 62 per cent rise in net profit compared to FY22.

The numbers for the initial half of FY24, however, were underwhelming compared to previous performances, and there's a possibility of a significant drop in net profit if the current trend persists. The management states that the company's business follows a seasonal pattern, typically experiencing lower revenue recognition in the first half but anticipates a surge in the second half of FY24. The company boasts a return on equity (RoE) and return on capital employed (RoCE) of 16 per cent and 6 per cent, respectively, for the fiscal year 2023.

Valuation and outlook  

The issue is priced with a P/BV ratio of 8.73 times, calculated using its Net Asset Value (NAV) of Rs 32.99 as of September 30, 2023. When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the fully diluted paid-up equity capital, the resulting PE ratio stands at 81.

Even though the company's performance is comparable to that of its listed peers, there are currently businesses that provide higher returns and more appealing valuations for investment. Hence, we advise investors to consider a cautious, moderate subscription to the offering, with a focus on a listing gain.