The initial public offering (IPO) of RK Swamy Ltd, a player in the Indian advertising and marketing landscape, will close on March 6. Founded in 1973, RK Swamy has a track record of over 50 years in integrated marketing and related services. The IPO is attracting market attention as it will be the first pure-play marketing solutions company to go public, while close competitors – subsidiaries of/or joint ventures with international giants – are not listed on the stock exchange.
The total offering is valued at around ₹423 crore, of which ₹173 crore is new issue and ₹250 crore is offer for sale. Proceeds from the issue would be used for funding working capital requirements (₹54 crore), investments in IT infrastructure (₹33 crore), setting up of new Customer Experience Centers (CEC) and Computer Assisted Telephone Interview Centers (CATI) (₹22 crore). and capital expenditure on a digital video content production studio (DVCP Studio) (₹11 crore). The issue price is between ₹270 and ₹288 per share.
At the time of publication on the second day of the IPO, the offering was subscribed more than four times. Since March 6th is the last day, should you join in too? There are many positive aspects to the offering, including RK Swamy's track record, the endearing relationships he has built with many customers over decades, and the long-term growth prospects in the marketing solutions space as India enters a consumer boom in the next decade. However, the compensation lies in the high cyclicality of the business.
While growth has been good in recent years (see table) coinciding with an economic recovery in India, from a long-term investment perspective, the IPO priced at 46 times FY23 earnings may not provide sufficient margin of safety for the aforementioned cyclical Risk. While listing gains are likely to attract a lot of interest in the IPO, we recommend long-term investors not to subscribe for now. We recommend keeping an eye on the company while gaining clarity on how margins may perform in a downturn and thinking about investing at better valuations.
Another aspect to pay attention to – although it may not seem significant at the moment – is the potential risk of an emerging (albeit as yet unproven) threat from AI or any disruptions it may bring. Although the company has invested in technology and uses proprietary AI algorithms to provide solutions to its customers, it is necessary to monitor whether there may be unexpected disruptions caused by generative AI.
Business and prospects
RK Swamy is a leading integrated marketing services group in India, offering a single window solution for creative, media, data analytics and market research services. They ranked 8th among the country's integrated marketing communications services groups in terms of estimated operating revenue. Its business segments include: Integrated Marketing Communications (IMC, 49 percent of revenue in FY23); customer data analysis and marketing technology (CDAM, 27 percent) and full-service market research (FSMR, ~24 percent).
IMC includes advertising, creative and digital content, event and activation planning, and social media management. Services provided under CDAM include customer data analytics, customer experience delivery and management, online reputation management, campaign management/tracking, etc. FSMR offerings include consumer surveys, customer experience management and consumer intelligence. While IMC services are under parent company RK Swamy, two wholly owned subsidiaries, Hansa Consumer Equity and Hansa Research Group, offer CDAM and FSMR solutions respectively.
The company served 23,475 customers in the financial year. Some of their notable clients include ICICI Prudential Life Insurance, Aditya Birla Capital, Union Bank, Mahindra, TVS, Havells and Khazana. Srinivasan K Swamy and Narasimhan Krishnaswamy are the promoters of the company. Before the offer, the organizer group held 79 percent, after the offer this share drops to around 62 percent.
According to CRISIL, the marketing services market in India was valued at ₹1,93,600 crore in FY23 (CAGR of 5.6 per cent between FY19-23) and was expected to reach ₹3,50,000-3,75,000 crore by FY28 (CAGR of 12.5). -14.5% between FY23-28). Notably, the total market value of the segments in which RK Swamy operates is expected to increase from Rs 28,000-29,000 crore in FY23 to Rs 51,500-56,000 crore in FY28 (CAGR of 12-14% in FY23-28).
With over five decades of experience in the marketing services industry, RK Swamy is well positioned to benefit from strong industry growth. Their ability to attract and retain customers has been a key factor in their longevity. The average length of business relationships with its top 10 customers is about 19 years and that of its top 50 customers is about 11 years (as of FY23). Repeat customers contributed about 84% of FY23 revenue. In a highly fragmented industry with numerous agencies and service providers offering standard services, RK Swamy was able to maintain its market share at around 1%. Its diversified customer base has helped the company counteract the industry's intrinsic cyclicality. Additionally, the data insights they have gained over the years when it comes to the Indian market give them a distinct advantage.
However, one potential risk to note is that of the 475 customers served in FY23, the top ten customers contributed nearly 42 percent of operating revenue. Although the Company has long-standing relationships with its customers, the loss of key customers could significantly impact growth. Your sales depend on certain key industries. BFSI, Automobile and FMCG/Consumer/Retail were the highest contributing sectors with a share of 33%, 18% and 17% respectively. BFSI and automobile are cyclical industries and the company's success in these segments will also depend on the business cycle in these segments.
Finance and valuation
RK Swamy reported an operating revenue of ₹293 crore in FY23, registering a compound annual growth rate of 29.8 per cent over FY21-23. EBITDA/PAT margins improved by almost 530/870 basis points to 21/10 percent during this time. The company's leverage ratio stood at 0.36 for FY23, down from 0.93 in FY21. Improved profitability helped the RoE increase to 22.2 per cent in FY23 from 3.1 per cent in FY21 increase. In H1FY24, operating income stood at ₹141 crore, while EBITDA/PAT margins fell to 14.7 and 5.6 percent, respectively. The Company's business is seasonal in nature and typically experiences low revenue recognition in the first half of the year. Profitability in RK Swamy's IMC segment is broadly in line with its peers, while CDAM and FSMR operate at lower levels.
Post the offer, the stock is trading at 91 times full-year earnings for FY24, with a market capitalization at the high end of around ₹1,450 crore. However, to eliminate the impact of seasonality, the IPO is valued at a P/E ratio of 46x when valued based on FY23 earnings. According to management, it is estimated that 40 percent of sales occur in the first half of the financial year and 60 percent in the second half of the year. Therefore, profitability tends to be much better in the second half of the year due to operating leverage.
Globally, well-known competitors and global giants in this space – the Interpublic Group and the Omnicom Group – trade with a trailing P/E ratio of 11.4 and 12.3, respectively. While in India a certain premium is justified for such companies given the better growth prospects, investors interested in going public can wait and enter later once there is clarity on how margins/revenues perform in a downturn.
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