RR Kabel, the TPG-backed wire and cable manufacturer, expects to continue clocking higher revenue growth compared to the industry average due to its business-to-consumer (B2C) model, which enables it to sell to consumers, and its focus on growing domestic markets.
RR Kabel’s managing director Shreegopal Rameshwarlal Kabra, in a pre-initial public offering (IPO) interview with Moneycontrol, said, “The company primarily operates in the B2C sector, comprising about 74-75 percent of our business. In contrast, our peers may lean more towards the B2B side, with about 30 percent B2C and 70 percent B2B.”
Even with the projection of higher revenue growth versus peers, the company commands a relatively lower Price to Earnings (PE) multiple. It has seen lower margin growth compared to peers like Havells India, Polycab, KEI Industries, among others.
Revenue growth to outperform peers
RR Kabel is the fastest-growing consumer electrical company among its peers in India, with a compounded annual growth rate (CAGR) of 43.4 percent between fiscal years 2020-21 and 2022-23. The company’s chief financial officer Rajesh Jain expects to continue to outperform the industry and replicate the same growth rate over the next three years.
The Indian consumer electrical industry was estimated at Rs 1,81,150 crore in FY2023, and is expected to grow at a CAGR of 10 percent until FY2027 to reach a market value of Rs 2,66,500 crore, as per the company’s red herring prospectus.
Aggressive sales push weighs on margins
RR Kabel has lower EBITDA margins as compared to its peers, as the company reaches out to capture more market share. The margins for the industry are in double digits, while those for RR Kabel are in single digits.
"Approximately 25 percent of the company’s exports yield lower profit margins compared to the domestic market,” Kabra said. However, he claimed the company’s competitive advantage lies in this export-domestic blend.
The management also sought to justify the company’s increased advertisement spending — nearly double that of their peers — as a strategic manoeuvre to expedite market share acquisition and facilitate rapid growth.
RR Kabel is the fifth largest player in the wires and cables market in India, with approximately 5 percent market share by value as of March 31, 2023.
Size disadvantage:
Further, the management said that the company is at a disadvantage in domestic operations due to its smaller size, compared to peers. Due to this, RR Kabel is often compelled to provide extended credit term of up to 30 days to distributors, which compromises its ability to establish competitive pricing for cables. Competitors boast of strong cable portfolios and readily available stocks.
Stock valuation profile:
Given the lower margin profile, RR Kabel stock is at a lower valuation compared to peers. The company’s price to earnings (PE) stands at 39 times as compared to peers’ valuations in the range of 50-70 times the FY23 earnings.
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