IKIO Lighting

Focus on premium lighting

Manufacturer of Led Lights and other specialized products for leading brands such as Phillips

IKIO Lighting is a manufacturer of Light Emitting Diode (LED) lighting in India. It also manufactures refrigeration lights; ABS piping; fan regulators and switches as well as Led spare parts and others.

The company is primarily an Original Design Manufacturer (ODM) and designs, develops, manufactures and supplies products to customers who then further distribute these products under their own brands. They also work with their customers to develop, manufacture and supply products that are designed by their customers. It plans to continue expand its ODM business to new international markets. Equipment and systems produced by the company are used in various industries, including residential, industrial, and commercial lighting.

In 9mFY2023 about 91.27% of the revenue came from LEDlighting, 1.96% from refrigerator Lights, 6.76% from others (fan regulator/switches, LED spares and others). The company got about 15% of revenue from exports in 9mFY2023.

The largest customer of IKIO Lightning is Signify Innovations India (formerly known as Philips Electronics India) which, in FY 2022, had a 50% market share in India‘s functional decorative lighting category (including LED spotlights, LED downlights and cove lights) and a 10% market share in India‘s true-blue decorative lighting segment (including chandeliers, wall lights, pendants, outdoor lights). It manufactures and sells interior refrigerator lighting solutions (lights, drivers and controllers) to commercial refrigeration equipment suppliers such as western refrigeration. In addition, the company is also in negotiations with some of its existing customers to supply its LED home lighting products to their international supply chain.

The company typically enters period purchase orders for a specific range of products with its customers, which are valid for three years and renewed thereafter. Within this period, products are manufactured and sold on a purchase order basis.

Its LED lighting offering focuses on the premium segment and includes lighting, fittings, fixtures, accessories, and components. It also provides lighting solutions (lights, drivers and controls) to commercial refrigeration equipment suppliers under its refrigeration lights segment. In addition, it manufactures ABS piping, which is an alternative to PVC that is primarily used by its US customers for plumbing applications in the RVs that they fit out.

The company as on December 31, 2022, had total annual installed capacity of LED Lights of 20.63 million pieces.

The Issue and objects

The offer consists of a fresh issueof equity shares worth up toRs 350 crore and an offer-for-sale (OFS) of up to 9,000,000 equity shares by promoter shareholders [ 6000000 equity shares by Hardeep Singh & 3000000 equity shares by Surmeet Kaur]. Post the issue the two selling promoters together have 72.46% stake in the company.

Of the net proceeds from fresh issue about Rs 50 crore will be used for repayment/ prepayment, in full or part, of certain borrowings availed by the company and its subsidiaries on consolidated basis; Rs 212.311 crore towards investment in IKIO Solutions (a wholly owned subsidiary), for setting up a new facility at Noida (in Uttar Pradesh) for carrying out electronic manufacturing services; and General corporate purposes.

IKIO Solution’s new plant at Noida is expected to commence commercial production by Jan 2024.

Strength

Offers comprehensive LED lighting solutions to customers, i.e., manufacturing of their products as well as its own product designs (ODM). Further, it manufactured about 1189 LED lighting products in 9mFY2023 up from about 660 products in FY2020. It currently manufactures more than 753 SKUs for its largest customer, Signify (Philips) in India.

A diversified customer base across industry sectors and geographies. In 9mFY2023 it supplies products to approximately 900 domestic and 16 international customers. Its customer base includes Signify, Western Refrigeration, Panasonic Life Solutions India, and Novateur Electrical & Digital Systems.

Enjoys a wallet share of approximately 45% with Signify Innovations India, the single largest customer of the company, for LED solutions.

Innovation and applied engineering: The R&D department has the capabilities to independently develop ODM designs and verify and develop OEM designs received from customers and convert such designs into deliverable products by improving the designs, recommending suitable raw materials and testing of trial products. For instance, its R&D team worked on approximately 450 new products (SKUs) in the last three fiscal years.

Products are categorized as LED lighting, refrigeration lights, ABS (acrylonitrile butadiene styrene) piping and other products.

Weakness

Derive substantial portion of its revenue in 9mFY2023/FY2022 at 70.04%/91.23% from a single customer, i.e., Signify Innovations India the erstwhile Philips India, and over 85% of its revenue is derived from its top twenty customers on a restated basis. Thus, any loss of business from Philips India or Philips India losing market share impacts the performance of the company.

Availability of principal raw materials such as diodes, resistors, printed circuit boards, semiconductor materials, plastic and polymers, aluminium dye cast and extruded aluminium, various metals, electrical and electronic components on time or at fair price is crucial. Non- availability of certain electronic inputs/components on time or at satisfactory terms may lead to impact on production or increase in inventory to mitigate this risk.

Further, about 49.82%/48.44% of its total raw materials in 9mFY23/FY23 are imported with 90% of imported raw materials coming from China, any change in EXIM policy or sharp volatility in freight rates may impact the availability and cost of the RM.

Have experienced negative cash flow from operating activities in FY 2022 and FY 2021.

Operates in ahighly competitive and rapidly evolving industry that is characterized by frequent introductions of new lighting solutions, piping products, applications and technologies.

Valuation

Consolidated sales (restated) for FY2022 were up by 38% to Rs 219.90 crore. The OPM contracted by 70 bps to 18.3% and thus the growth of operating profit moderated to 33% to Rs 40.15 crore. After accounting for higher other income, lowerinterest and lower depreciation, PBT was up 37% to Rs 37.99 crore. Eventually, PAT was up by 36% to Rs 34.58 crore with taxation stand lower.

The company did not own 100% of the equity shareholding of its subsidiaries prior to September 12, 2022, and the Restated Consolidated Financial Information does not include financial information for subsidiaries prior to their acquisitions by the company. Accordingly, the restated consolidated financial information, as of, and for 9mFY2023, FY2022, FY2021 and FY2020 are not comparable to any future financial results that we may prepare.

The sales and PAT for 9mFY2023 were Rs 240.72 crore and Rs 34.58 crore. On annualisation, the growth in sales and PAT for FY23 was 46% and 65%. The annualized EPS on post Issue equity (on the upper price band) was Rs 5.9. Thus, the upper band of offer price discounts the annualized FY2023 EPS by about 48.3 times.

There is no strict comparable peer with business that is completely mirroring to that of the company. However, Dixon Technologies and Elin Electronics, that has some presence in LED Lighting quotes at 65.2 times and 26 times of their FY2023 consolidated EPS. The company also quoted Syrma SGS and Amber Enterprises, which are not an apt comparison considering the business segment they are in quotes at 57.3 and 46.8 times of their FY2023 consolidated EPS.