RK Swamy: Key factors to consider before subscribing
The initial public offering (IPO) of RK Swamy Ltd that opened on March 4 will close on March 6. The total offer is worth around ₹423 crore, out of which ₹173 crore is fresh issue and ₹250 crore is an offer for sale.
The proceeds from the issue shall be utilised for funding working capital requirements (₹54 crore), investment in IT infrastructure (₹33 crore), setting up of new customer experience centres (CEC) and computer aided telephonic interview centres (CATI) (₹22 crore), capital expenditure for setting up a digital video content production studio (DVCP Studio) (₹11 crore) and general corporate expenses.
The price band for the issue has been set in the range of ₹270 to ₹288.
BUSINESS
Incorporated in 1973, RK Swamy Limited is a leading integrated marketing services groups in India, offering a singlewindow solution for creative, media, data analytics and market research services.
They have been ranked 8th in terms of estimated operating revenue among the integrated marketing communications services groups operating in India.
Their business segments include (i) Integrated Marketing Communications (IMC, 49 per cent of FY23 revenue from operations) comprising advertising, media, brand activation, digital, content and strategy; (ii) Customer Data Analytics and Marketing Technology (CDAM, ~27 per cent), and (iii) FullService Market Research (FSMR, ~24 per cent).
The company served 475 clients in FY23. Some of their notable clients include ICICI Prudential Life Insurance, Aditya Birla capital, Union Bank, Mahindra, TVS, Havells, Khazana etc.
Srinivasan K Swamy and
Narasimhan Krishnaswamy are the promoters of the company. The promoter group held 79 per cent preoffer which will drop to around 62 per cent after the offer.
KEY STRENGTHS
According to Crisil, the value of the marketing services market in India stood at ₹1,93,600 crore in FY23 (CAGR of 5.6 per cent between FY1923) and will likely reach ₹3,50,0003,75,000 crore by FY28 (CAGR of 12.514.5 per cent between FY2328). In particular, the total market value of the segments RK Swamy operates in, is likely to reach ₹51,500 to ₹56,000 crore in FY28 (FY2328 CAGR of 1214 per cent).
With over five decades’ experience in the marketing services industry, RK Swamy is well placed to capitalise on the strong industry growth.
Their ability to acquire and retain clients has been a key determinant of their longevity. The average number of years of relationships with their top 10 clients is 19 years and the top 50 clients is 11 years as of FY23.
Repeat clients contributed 84 per cent of FY23 revenue. Additionally, data insights related to the Indian market gained over the years putting them at a distinct advantage.
RISKS
Out of the 475 clients served in FY23, the top ten clients contributed nearly 42 per cent of its operating revenue. Even though the company has longstanding relationships with its clients, any loss of key clients could significantly impact growth.
Their revenues are highly dependent on certain key industries. BFSI, Auto and FMCG/Consumer/Retail were the top contributing sectors with shares of 33 per cent, 18 per cent and 17 per cent, respectively. Any decrease in demand for marketing services in these industry verticals could adversely affect their financial performance. The business is seasonal in nature so fluctuations in earnings and high working capital requirements may affect operations. Further, marketing services as business is cyclical in nature which may result in volatility in revenue, profitability and earnings over economic cycles.
VALUATION
RK Swamy reported revenue from operations of ₹293 crore in FY23, a CAGR of 29.8 per cent over FY2123. EBITDA/ PAT margins improved by nearly 530/870bps to 21/10 per cent during this time.
The company’s gearing ratio for FY23 stood at 0.36, down from 0.93 in FY21. Improved profitability helped in increasing RoE from 3.1 per cent in FY21 to 22.2 per cent in FY23. In HIFY24, operating revenue stood at ₹141 crore while EBITDA/PAT margins declined to 14.7 per cent/5.6 per cent respectively. The business of the company is seasonal in nature with typically low revenue recognition in first half.
After the offer, the stock will trade at 91x annualised earnings for FY24 with the market cap on the upper band at around ₹1,450 crore. However, to weed out impact of seasonality, if one values it based on FY23 earnings, the IPO is valued at a PE of 46x.
Globally, notable peers including Interpublic group, Omnicom group and Dentsu trade at 1113x one year forward earnings. While some premium for such businesses in India is warranted given better growth prospects here, investors interested in the IPO must consider risks from cyclical nature of business.