What you must know about R K Swamy IPO?

R K Swamy Ltd – About the company

R K Swamy Ltd was founded in the year 1973 and has just completed 50 years in operation. The company is engaged in the business of integrated marketing communications, customer data analysis, customer data mining, customer insights mapping, full-service market research and syndicated studies. R K Swamy Ltd is essentially a data-driven, integrated marketing services provider. It successfully leverages the digital and the physical interfaces to offer a full service and 360 degree solution to the clients. It has a very extensive repertoire to its credit of works done. In the fiscal year FY23 alone, R K Swamy Ltd published more than 818 creative campaigns on behalf of its clients across various media platforms. In addition, R K Swamy Ltd  also processed over 97.69 terabytes of data and conducted over 2.37 million consumer interviews via quantitative, qualitative and telephone surveys.

The company started off as a publicity and advertising agency, but has gradually embarked on the full gamut of digital marketing services that are in sync with the needs of modern growth stories. It had an impressive client roster. Among the industrials, some of its premium clients include Reddy Labs, EID Parry, Fujitsu, Gemini Edibles, Havells, IFB Industries, Mahindra & Mahindra, ONGC, Eicher Motors, Hawkins, HPCL, Himalaya Wellness, and Ultratech Cements. Among service industry players, its key clients include Birla Sun Life AMC, Cera, ICIC Prudential Life Insurance, Shriram Finance and Union Bank of India. Many of its publicity and marketing campaigns have been quite iconic in terms of its impact on the customer and the market, apart from the customer mindshare. R K Swamy Ltd currently employs over 2,391 personnel across tis across 12 offices and 12 field offices.

The fresh funds will be used for capex for the digital video content studio, working capital needs, funding IT infrastructure investments, and funding the setting up of new customer experience centres. Promoters currently hold 83.03% in the company, which will get diluted post the IPO. The IPO will be lead managed by SBI Capital Markets, IIFL Securities and Motilal Oswal Investment Advisors, while KFIN Technologies Ltd will be the IPO registrar.

Highlights of the R K Swamy IPO issue

Here are some of the key highlights to the public issue of R K Swamy IPO

• R K Swamy IPO will be open from March 04th, 2024 to March 06th, 2024; both days inclusive. The stock of R K Swamy Ltd has a face value of ₹5 per share and the price band for the book building IPO has been set in the range of ₹270 to ₹288 per share.
   
• R K Swamy IPO will be a combination of a fresh issue of shares and offer for sale (OFS) component. As you would be aware, a fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive. On the other hand, OFS is just a transfer of ownership.
   
• The fresh issue portion of the IPO of R K Swamy Ltd comprises the issue of 60,06,944 shares (60.07 lakh shares approximately), which at the upper price band of ₹288 per share will translate into a fresh issue size of ₹173.00 crore.
   
• The offer for sale (OFS) portion of the IPO of R K Swamy Ltd comprises the sale / offer of 87,00,000 shares (87.00 lakh shares), which at the upper price band of ₹288 per share will translate into an OFS size of ₹250.56 crore.
   
• Out of the OFS size of 87.00 lakh shares, two promoter shareholders (Srinivasan K Swamy and Narasimhan Krishnaswamy) will offer 17,88,093 shares each. In addition, among the investor shareholders; Evanston Pioneer Fund will offer 44,45,714 shares while Prem Marketing Ventures LLP will offer 6,78,100 shares.
   
• Thus, the total IPO of R K Swamy Ltd will comprise of a fresh issue and an OFS of 1,47,06,944 shares (147.07 lakh shares approximately) which at the upper end of the price band of ₹288 per share aggregates to total issue size of ₹423.56 crore.

Promoter holdings and investor allocation quota

The company was promoted by Srinivasan K Swamy (Sundar Swamy) and Narasimhan Krishnaswamy (Shekar Swamy). As per the terms of the offer, not less than 75% of the net offer is reserved for the qualified institutional buyers (QIBs), while not more than 10% of the net offer size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the gist of the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee and promoter quota, as indicated above. There is an employee quota of up to ₹7.50 crore that has been communicated by the company as the shares reserved for employees. The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the R K Swamy IPO

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of R K Swamy Ltd, the minimum lot size is 50 shares with upper band indicative value of ₹14,400. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of R K Swamy Ltd.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Key dates for R K Swamy IPO and how to apply?

The issue opens for subscription on 04th March 2024 and closes for subscription on 06th March 2024 (both days inclusive). The basis of allotment will be finalized on 07th March 2024 and the refunds will be initiated on 11th March 2024. In addition, the demat credits are expected to also happen on 11th March 2024 and the stock will list on 12th March 2024 on the NSE and the BSE. R K Swamy Ltd will test the appetite for such digital marketing stocks in India. The credits to the demat account to the extent of shares allotted will happen by the close of 11th March 2024 under ISIN (INE0NQ801033). Let us now turn to the practical issue of how to apply for the IPO of R K Swamy Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of R K Swamy Ltd

The table below captures the key financials of R K Swamy Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of R K Swamy Ltd which can be enumerated as under

1. In the last 3 years, revenue growth has been robust with the sales growing nearly 70% in the last 2 years. The growth has been evenly divided, but the profit traction is much better in the latest year, which is evident from the net profit margins of 10.68% in FY23.
    
2. The net profits have grown almost 10-fold in the last 2 years and that is evident in the net margins getting into double figures in the latest year. Also, the return on equity (ROE) at 69.11% and the return on assets (ROA) at 9.97% are very attractive in the latest year.
    
3. The company has a slightly lower sweating of assets at just below 1.0X on average in the latest year, but the consolation factor would be the ROA, which is not only robust in the latest year but also showing visible signs of growth.

Let us turn to the valuations part. On the latest year diluted EPS of ₹7.03, the upper band stock price of ₹288 gets discounted at a P/E ratio of 40-41 times. However, this sort of high P/E ratios are normal in the digital services industry and if you compare, despite the pedigree of the company, its P/E is lower than peers.

Here are some qualitative advantages that R K Swamy Ltd brings to the table.

• The company has an integrated marketing services approach, which is best suited to the current situation that needs to combine brick and mortar with click and mortar.
   
• The data analytics insights that the company brings to the table is on the back of rigorous models and that have been time tested over a long period of time.
   
• It has an absolutely blue chip client base across the length and breadth of India covering most of the large brands in each industry segment; in manufacturing and services.

The nature of the digital marketing analytics business is one of higher risk in the initial phase and then a replication model in later phases, once the roll out is completed. That is what the investors can bet on in the IPO. However, investors in the IPO must be prepared for higher levels of risk, the possibility of cyclical returns and a longer holding period. It is best suited to investors who are mentally prepared to wait for the long haul.