See no competition from Chinese manufacturers; order book from exports to expand: IKIO Lighting

IKIO Lighting IPO Fully Subscribed Within 5 hours of Subscription

Noida-based LED lighting solutions provider, IKIO Lighting, doesn’t see competition from China. In an exclusive conversation with Moneycontrol, the company’s management highlighted the stark contrast in labour costs between India and China, with India being four times cheaper―a factor that is a game-changer for the industry.

The company’s Chairman and Managing Director, Hardeep Singh, and Director Sanjeet Singh said the implementation of backward integration was instrumental in reducing costs and enhancing competitiveness, both domestically and globally. Though, neither provided any details on the growth of the company’s order book from exports, they expect the momentum to continue.

The company which derives 90 percent of its revenue from the lighting segment suggested that it was active in conventional lighting. These are lighting for recreational vehicles such as refrigerators and hardware, he said.

In a recent update, the company’s Rs 607-crore initial public offering (IPO) was fully subscribed to in the first five hours of being opened for sale. The IPO opened for subscription on June 6 and will close on June 8.

Edited excerpts from a free-wheeling conversation with Hardeep Singh, and Sanjeet Singh:

The IPO consists of a fresh issue of around Rs 350 odd crore and the remainder as an offer for sale (OFS). How does the company intend to utilise the proceeds?

Sanjeet Singh

Out of the IPO proceeds of Rs 350-odd crore, (which is the fresh issue) we have planned a capex of around Rs 235-odd crore. Of this, we are spending around Rs 105 crore on infrastructure. We have IKIO Solutions, which is a 100 percent subsidiary of IKIO Lighting. There we have five acres of land where we have planned three state-of-the-art manufacturing units, a total of five lakh square feet that is going to be built up. Out of this, two lakh square feet, that is, the first tower is ready. So, that Rs 105 crore we will be utilising for that and another Rs 98 crore we will spend on plant and machinery. So, there also we have different segments where we will be utilising those funds in fixture manufacturing, and for electronics. In the latter, there are different lines that we are expanding into.

The company generates 90 percent of its revenue from the lightning segment and around 50 percent of this from Philips. Tell us of your plans to diversify the concentration risk.

Sanjeet Singh

We already have multiple verticals. For instance, around 50 percent comes from Philips. That particular vertical is growing at a healthy rate. Year-on-year (YoY) we have been seeing growth in that vertical. Then we have added certain new verticals in the past five to six years. These are lighting and certain other verticals, non-lighting-related but totally different to what we've been doing in the past for the Philips high-end home decorative lighting space. These verticals are also growing at a very, very strong rate, and we are seeing a trend, where the concentration of revenue from one particular vertical is constantly coming down, although that is also constantly growing YoY. However, the other verticals here are growing at a much stronger pace.

How do you see the revenue mix stacking up from lightning and non-lightning segments for the next two financial years?

Sanjeet Singh

The only way that I can tell you is that both lighting and non-lighting are growing. And in lighting also, we have multiple verticals, multiple clients. Those verticals are also growing. The number of clients are also growing. So, it's a mixed bag that we have and a whole host of products and verticals that we are catering to which are very different from each other.

Hardeep Singh

These are lighting, as well as non-lighting, means these are not conventional lighting. These are lighting for electronics, refrigerators, hardware and RV components. So, the segments are totally different.

Cash flows from operations have been negative for FY21 and FY22. Also, there’s been a jump in inventory, which has been higher for the last three months, receivables for more than four months, and borrowings also to an extent. How do you see that, going forward?

Sanjeet Singh

I think, the receivables are around 61 days for the first nine months of FY23. On the cash flows, if you look at the past two years, the unprecedented situation of COVID-19 meant the lead times for semiconductors and electronic components, which we have to import since they're not made in India, went as high as one year, and in certain cases even two years. Compared to this, the generic lead times are four to six weeks.

So, even if you're short of a single component, the cost of which is minuscule compared to the overall product, you are still unable to manufacture that product. So what COVID-19 taught us was that we need to have multiple designs, multiple options. We were one of the very few companies in the manufacturing of electronics that was able to sustain or even grow during COVID-19 times -- some of our verticals were constantly growing. That was only because of the fact that being an Original Design Manufacturing (ODM) we were constantly able to achieve the designs and come up with alternate options if that particular component was not available. But that was one of the reasons why the cash flows got negative. However, if you look at the first nine months of FY23, the cash flows are again positive. And that will continue to sustain.

Hardeep Singh

And we encashed the inventory and stocks because others didn’t have inventory at that time.

Let's come to your order book, especially the export side of the business. How do you see growth shaping up there?

Hardeep Singh

We can foresee good growth in that segment. Because for the United States market, you need a lot of certifications for quality and standards. We have already accomplished those standards. Now, it is the time for the products to be launched in a different way.

Sanjeet Singh

We cannot share those numbers. But going forward, this momentum will continue.

What about the competitive landscape? Chinese players are the most cost-efficient on tariffs. The overall freight rates have been coming down. Do you think there is more room for competition from Chinese players in the coming months that could hit the financials of the company?

Hardeep Singh

Labour problems are coming up in a big way in China. Also, there’s a huge difference in the cost of labour in India and in China. India is four times cheaper than China. And the work culture now, because of our strength in manufacturing, we are maintaining all the factory standards like in China or Taiwan. So, we don't see any competition from China, because we have backward integration that plays a major role in our costs.