R K Swamy IPO Analysis: Is it Worth a Portfolio Spot?

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The initial public offer (IPO) of R K Swamy Ltd, which kicked off today, will close for subscription on Wednesday, March 06. The integrated marketing services provider is looking to raise Rs 423.56 crore through its IPO, which comprises a fresh issue of Rs 173 crore and an Offer for Sale (OFS) of up to Rs 250.56 crore by the selling shareholders. The firm has announced a price band of Rs 270 to Rs 288 per share for its IPO. Prospective investors can bid in lots, with each lot consisting of 50 shares. To apply for the IPO, the minimum investment is set at Rs 14,400 (calculated as 50 x 288). 

According to market observers, shares of R K Swamy Ltd are currently trading in the grey market at a premium of Rs 90, i.e. a grey market premium (GMP) of 31% above its issue price of Rs 288. The public offer is anticipated to debut on BSE and NSE on the 12th of March, 2024.

R K Swamy Anchor Round

Prior to issue opening, on March 01, R K Swamy Ltd successfully raised Rs 187 crore from anchor investors by allocating 65 lakh equity shares at Rs 288 per equity share. Some notable Foreign and Domestic Institutions that participated in the anchor round include Nippon Life India Trustee, LIC Mutual Fund, Aditya Birla Sun Life Insurance, Bajaj Allianz Life Insurance, JM Financial Mutual Fund, SBI General Life Insurance, Societe Generale, Citigroup Global Markets Mauritius Pvt Ltd - ODI, Goldman Sachs Singapore PTE - ODI and BNP Paribas Financial Markets - ODI, among others.

About R K Swamy Ltd

Founded in 1973, R K Swamy stands as a comprehensive integrated marketing services firm, specializing in a wide array of services including creative content creation, data analytics, and market research with a primary focus on digital marketing. It operates through three main divisions: R K Swamy Limited, Hansa Customer Equity, and Hansa Research Group.

Positioned as the eighth-largest by estimated operating revenue among integrated marketing communications service providers in India, R K Swamy serves a varied range of industry sectors. Notably, approximately 70% of its revenue is generated from the BFSI, FMCG/retail, and automotive sectors. Among its prominent clients are ICICI Lombard, Cera Sanitaryware, Dr Reddy’s Lab, EID Parry, Havells, M&M, and ONGC.

Strengths

  • Exceptional Financial Growth: R K Swamy has demonstrated remarkable growth in its financial performance, with a Compound Annual Growth Rate (CAGR) of 30% in revenue from operations from FY21 to FY23. This growth period also featured a notable 48% increase in EBITDA and a substantial 219% rise in net profit.
  • Strong Return Metrics: R K Swamy has seen a substantial improvement in its Return on Net Worth, escalating from 3.13% in FY21 to 22.20% in FY23. Similarly, its Return on Capital Employed rose from 8.58% in FY21 to 28.95% in FY23.
  • Deep-rooted Customer Relationships: Over the first six months ending September 30, 2023, R K Swamy served more than 380 clients, with over 475 clients served in FY23. It boasts long-term relationships with its clients, averaging approximately 19 years with its top 10 clients and about 11 years with its top 50 clients as of March 31, 2023.
  • Investor-Friendly Company: R K Swamy has maintained a strong dividend payout history, distributing dividends at rates of 11.50% in FY21, 40% in FY22, 50% in FY23, and 40% in the first half of FY24.

Key Concerns 

  • Underperformance in H1 FY24: The EBITDA for the first six months ending September 2023 was only Rs 20.97 crore, a significant drop from the Rs 62.90 crore reported for the entire fiscal year 2023. Net Profit for the same period was Rs 7.93 crore, compared to Rs 31.26 crore in FY23. However, the management notes that historically, the first half of the year contributes 35-40% of the annual revenue, with the majority (60-65%) generated in the second half.
  • Customer Dependency: A significant portion of R K Swamy’s income is generated from a small group of clients. Specifically, during the six-month period ending on September 30, 2023, and the full fiscal year of 2023, its top ten clients accounted for 49.65% and 41.89% of its revenue, respectively. Any loss or reduction in business from these key clients could severely affect the company's operational effectiveness, overall performance, and financial health.
  • Heavy Reliance on Subsidiaries: A significant portion of R K Swamy’s total revenue is derived from its two Subsidiaries. For instance, in H1 FY24, the firm derived 30.63% of its revenue from Hansa Customer Equity and another 25.37% from Hansa Research Group.
  • Operating Cash Flow Challenges: R K Swamy recorded negative cash flows from operations in the six months ending September 30, 2023, and has seen negative cash flows from both investing and financing activities over the past three fiscal years. Continuing negative cash flows could negatively affect its operational capabilities.

Final Verdict: Subscribe

R K Swamy boasts a scalable, asset-light business model, demonstrating consistent growth in revenue and profits over the last three years, alongside impressive return metrics. The firm benefits from durable relationships with key clients, with over 85% of business coming from repeat customers. This client loyalty is a significant advantage for R K Swamy.

From a valuation standpoint too, the IPO appears to offer fair value, sporting a Price-to-Earnings (P/E) ratio of 41x based on FY23 earnings. This valuation is lower than that of its closest listed competitors, leaving some room for re-rating. Additionally, the positive grey market premium (GMP) also predicts a favourable debut on the stock exchanges.

Given these factors and the fundamental strengths highlighted above, investors may consider subscribing to the IPO from a long-term perspective.

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