RR Kabel

Wired well

W&C player with strong B2C focus is leveraging its pan India distribution network and brand name to build its FMEG business

R R Kabel (RRKL) is one of the leading players in the Indian consumer electrical industry engaged in the business of selling Wires & Cables (including house wires, industrial wires, power cables and special cable) and fast-moving electrical goods (FMEG) including fans, lighting, switches and appliances.

The company sells its products under three brands: RR Kabel, RR and Luminous Fans & Lights. While W&Cs are marketed under the ‘RR Kabel‘, it sells a variety of consumer electrical products (including fans, lights) under ‘RR‘. It also sells fans & lights under the ‘Luminous Fans & Lights‘ brand.

The ‘RR Kabel‘ brand has over 20 years of operating history, while the ‘RR‘ and the ‘Luminous Fans and Lights‘ brands, which are licensed by the company, have over seven years and over 10 years of operating history, respectively.

The company sells its products through both business-to-business (B2B) or business-to-customer (B2C) channel, with the end use determining the channel of sale. It has an extensive pan-India distribution presence and, as on June 30, 2023, it had 3,450 distributors, 3,656 dealers and 114,851 retailers, on a non-exclusive basis. The company had one of the largest networks of electricians, comprising 271,264 electricians, across India as of March 31, 2023.

The products portfolio of the company in W&C is diverse. In house wires, it manufactures heat resistant wires, fire resistant wires and flame-retardant wires that found application in residential, commercial and public buildings and infra projects. In power cables, it manufactures both LT Cables as well as Medium & High Voltage cables for the power transmission and distribution market. In Industrial wires, it manufacturers single core flexible cables, control cables and submersible flat cables that finds application in power panels, control panels, switchgears, relay, instrumentation panels, control panels, production & assembly lines, industrial process automation, plant engineering, industrial machinery and robotic technology. In specialty cables, it manufacturers Data & Communication cables, instrumentation cables, solar cables, fire & security cables, silicon rubber cables, auto cables, battery cables, lift & elevator cables, appliance wiring material and power cord.

In the FMEG segment its appliance portfolio includes room heater, water heater, cooler and irons; its switches & switchgear portfolio comprises modular switches, MCBs and Distribution Box. In fans its product basket comprises ceiling fans, table/pedestal fans and exhaust fans. In lighting its product basket comprises bulbs, panels, streetlights, and downlights. As of June 30, 2023, it had 15 and 55 products under development for the W&Cs and FMEG segments, respectively. Of these 55 FMEG products under development, about 12 products have been launched to-date and none was launched in W&C. In FY2023 & Q1FY2024, about 89% of its revenue came from W&C and balance 11% from FMEG.

RRKL as of March 31, 2023 is the fifth largest player in the W&Cs market in India, with 5% market share. However, within the in-branded W&Cs market in India, it enjoys 7% market share which increased from 5% as end of March 31, 2015.

It exports a range of products from wires and cable products directly as well as through distributors in 63 countries in North America, APAC, Europe and the Middle East. It has long-standing relationships with 10 distributors in these markets who cover most of its exports. It exports most of its products under the brand ‘RR Kabel‘ and manufactures under private labels for select customers. Exports accounted for 26.94% of operational revenue for the quarter ended June 30, 2023, and about 99% is derived from distributors and balance 1% from OEMs.

The company has built a wide FMEG portfolio, both organic and inorganic. The company started manufacturing switches in FY2021. Earlier, in FY2020, it amalgamated the business of Ram Ratna Electricals, a group company to foray into FMEG. In the same fiscal, it acquired the Led Lights Business of Arraystorm to add professional lighting fixtures and LED lights to its portfolio thereby expanding its portfolio to cover office, industrial and warehouse spaces. In May 2022, it strengthened its FMEG portfolio with acquisition of home electrical business (HEB) of Luminous Power Technologies, which allowed it to expand into premium FMEG maket. In FY2020, the company launched a five-year long initiative ‘Project Lakshya’, comprising two phases beginning with an objective to organically and inorganically grow its fans and lights product portfolio, and thereafter integrating the HEB of ‘Luminous Fans and Lights’ brand.

The company primarily manufactures W&C and Switches from its integrated plants located at Waghodia (Gujarat) and Silvasa (D&N Haveli and D&D UT). It primarily manufactures FMEG products from its 3 integrated facilities located at Roorkee (Uttarakhand), Bengaluru (Karnataka) and Gagret (HP). Its manufacturing facilities meet 100% of the W&C requirement of the company and 37% of its FMEG products by value. It sources supplies from more than 25 original equipment manufacturers for 63% of its FMEG products, including wiring devices, switches, switchgear, wiring accessories, fans, and certain professional and trade lighting products.

Of the W&C installed capacity at Waghodia & Silvasa, the capacity utilization in FY2023 was 62% and 87%, respectively.

The company was promoted by T R Kabra, Shreegopal R Kabra, Mahndrakumar R Kabra, Kirtidevi S Kabra, Tribhuvanprasad Kabra HUF, Kabra ShreegopalRameshwarlal HUF and Mahendra Kumar Kabra HUF.

The Issue and objects

The offer consists of a fresh issueof equity shares worth up toRs 180 crore and an offer-for-sale (OFS) of up to 17236808 equity shares of Rs 5 face value by promoter shareholders, other selling shareholders and Investor Selling shareholders.

Of the OFS about 2970451 equity shares [754417 equity shares each by Mahendrakumar R Kabra, Hemand M Kabra and Sumeet M Kabra as well as 707200 equity shares by Kabel Buildcon Solution] were by Promoter Selling Shareholders; 1364480 equity shares by Ram Ratna Wires (other selling shareholders) and 12901877 equity shares by TPG Asia VII SF (the investor selling shareholders).

Post the issue while the Ram Ratna Wires (the OSS) will have zero stake, the TPG Asia VII SF (the ISS) will be having 4.99% stake.

Of the net proceeds from fresh issue, about Rs 136 crore will be used for repayment and prepayment, in full or part, of certain borrowings availed by the company and balance is for general corporate purposes.

Total borrowing as end of June 2023 stood at Rs 403.765 crore.

Strength

Brands with strong customer recognition, diversified product portfolio and wide market reach through its strong distribution network built over 20 years of market presence in the Indian consumer electrical industry.

Strong B2C presence with about 71% of its W&C operating revenue and 97% of its FMEG operating revenue came from B2C channel in fiscal ended March 31, 2023.

One of the leading exporters of wires and cables from India representing approximately 9% market share (in value terms) of the total W&C exports from India in FY2022.

Technologically advanced and integrated precision manufacturing facilities

Global shift from China-based manufacturing to China plus one strategy resulting in a share gain for Indian manufacturers of W&C in the global market.

Weakness

The company has licensed ‘Luminous Fans and Lights‘ brand for its premium FMEG products. The company has only limited and exclusive license to use the ‘Luminous Fans and Lights‘ brand for fan and light products for an initial period of two years since May 2022 (the time of acquisition) subject to extension of six months at a time for a maximum of four times. The brand rights include a right to use 61 registered trademarks. However, the aim is to develop and establish the ‘RR Signature‘ brand for its premium FMEG products in replacement of the ‘Luminous Fans and Lights‘ brand by FY 2024. So, any shortfall in building the RR Signature as a strong brand in time may result in a loss of market share in the premium FMEG segment. Similarly, it has been granted a non-exclusive license to use certain trademarks namely ‘RR‘and ‘Ram Ratna Group‘ for a period of 14 years from April 29, 2015, by Ram Ratna Research and Holdings Private Limited.

The costs of the raw materials, i.e., Copper, Aluminium, and galvanized iron,are subject to volatility having influence on the profitability of the company.

The overseas distribution network of the company is dependent on a few distributors and significant changes to its business arrangements with these distributors may impact the business.

Have pursued inorganic growth opportunities in the past to grow its FMEG business and may do so in future as well. So, any difficulties integrating acquired businesses and brandsmay result in incurring significant costs and may impact the business.

Competitive intensity in both cables and wires and FMEGs.

Has acquired and agreed to acquire land in the last five years from entities related to Promoters and Directors and may undertake such transactions in the future. Agreed to purchase land measuring 34358 sq m at Silvasa for Rs 13.571 crore and land measuring 20353 sq m at Karad (D&N Haveli) for Rs 8.04 crore from Ram Ratna Wires. Similarly, agreed to purchase land measuring 4149 sq m in Waghodia from MEW Electricals for Rs 0.85 crore. Both Ram Ratan Wires and MEW Electricals are group companies.

Demand for W&Cs and FMEG industry are seasonal in nature.

Valuation

Consolidated sales (restated) for FY2023 were up by 28% to Rs 5599.20 crore. The OPM contracted by 90 bps to 5.8% and thus the growth of operating profit moderated to stand at 6% to Rs 322.32 crore. After accounting for lower other income, higher interest, and higher depreciation, PBT was lower by 9% to Rs 255.05 crore. Eventually, net profit was down by 11% to Rs 189.87 crore.

For the quarter ended Jun 2023, the sales were up 29% to Rs 1597.31 crore and the OPM expanded by 390 bps to 7.1% and thus the OP jumped up by sharp 183% to Rs 112.95 crore. Eventually the net profit more than doubled (up 310%) to Rs 74.35 crore.

Sales and PAT for the TTM period ended June 30, 2023,were Rs 5960.60 crore and Rs 246.08 crore. Thus, the TTM EPS (on expanded equity as on upper price band) was Rs 54.5. And the upper price band discounts the TTM EPS by about 19 times.

In comparison, Polycab India, Finolex Cables and Havells India quote at a PE of 53.2 times, 32.5 times and 81.2 times of their consolidated EPS for the TTM period ended June 2023, respectively. V-guard Industries and CG Consumer quotes at a PE of 68.2 times and 43.6 times their consolidated EPS for the TTM period ended June 2023, respectively. Similarly Cords Cables quotes at a PE of 17.2 times its consolidated EPS for the TTM period ended June 2023.