IKIO Lighting coming up with IPO to raise upto Rs 626 crore

IKIO Lighting

• IKIO Lighting is coming out with a 100% book building; initial public offering (IPO) of 2,19,62,962 shares of Rs 10 each in a price band Rs 270-285 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on June 6, 2023 and will close on June 8, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 27.00 times of its face value on the lower side and 28.50 times on the higher side.
• Book running lead manager to the issue is Motilal Oswal Investment Advisors.
• Compliance Officer for the issue is Sandeep Kumar Agarwal. 

Profile of the company

The company is an Indian manufacturer of light emitting diode (LED) lighting solutions. It is focused on sustainability and providing low energy LED products to help India meet its sustainability goals. It is primarily an original design manufacturer (ODM) and design, develop, manufacture and supply products to customers who then further distribute these products under their own brands. It also works with its customers to develop, manufacture and supply products that are designed by its customers. Its products are categorised as (i) LED lighting; (ii) refrigeration lights; (iii) ABS (acrylonitrile butadiene styrene) piping; and (iv) other products. Its LED lighting offerings focus on the premium segment and include lighting, fittings, fixtures, accessories and components. 

The company provides lighting solutions (lights, drivers and controls) to commercial refrigeration equipment suppliers under its refrigeration light segment. It also manufactures an alternative to polyvinyl chloride (PVC) piping called ABS piping that is primarily used by its US customers for plumbing applications in the recreational vehicles (RVs) that they fit out. In addition, it manufactures and assembles other products including fan regulators that are designed by its clients; light strips, moulding, and other components and spares. Its equipment and systems are used in various industries and products, including residential, industrial and commercial lighting. 

The company’s manufacturing operations are a key driver of its business. It has four manufacturing facilities with one located in the SIDCUL Haridwar industrial park in Uttarakhand and three in Noida in the National Capital Region. In line with its focus to provide end-to-end product solutions and to develop better control on its supply chain and improve its margins, it has backward integrated its major manufacturing processes. It has developed in-house capabilities so that it manufactures all mechanical components in-house.

Proceed is being used for:

• Repayment/ prepayment, in full or part, of certain borrowings availed by the Company and its Subsidiaries on consolidated basis.
• Investment in the company’s wholly owned Subsidiary, IKIO Solutions Private Limited, for setting up a new facility at Noida, Uttar Pradesh.
• General corporate purposes.

Industry overview

Electronics is one of the fastest growing industries in the country. The total electronics market (which includes domestic electronics production and imports of electronic finished goods) in India is valued at Rs 9263 billion ($124 billion) in Fiscal 2022 and is expected to grow at a CAGR of 17.9% to reach Rs 17,902 billion ($240 billion) in Fiscal 2026. Domestic production accounted for approximately 69% of the total Indian electronics market in Fiscal 2022, valued at Rs 6,376 billion ($86 billion), and is expected to grow at a CAGR of 24.2% to reach Rs 15,159 billion ($203 billion) in Fiscal 2026, owing to various government initiatives to boost domestic electronics manufacturing industry. Also, the global landscape of electronic design and manufacturing is changing significantly, and revised cost structures have shifted the attention of multinational companies to India. At present, the Indian government is attempting to enhance manufacturing capabilities across multiple electronics sectors and to make the Indian electronics sector globally competitive. India is positioned as a destination for high-quality design work as well as a cost-competitive alternative. 

The Indian LED lighting market has seen an increase due to population growth and subsequently rapid urbanization in the last decade. With a growing rate of electricity use, demand for an environmentally sustainable and cost-effective lighting solution is also gaining momentum. Thus, LED lighting has begun to dominate the general lighting market of India tremendously in recent years. The incandescent bulbs, halogens and CFL lights have dominated the lighting market for centuries now but over the last decade LED lights have become very popular in the Indian lighting industry. These LED lights were first introduced to the Indian market in 1993. Since the LED light bulbs have been invented, there has been a drastic change in the industries of lighting technology. Many have adopted the new LED lights over the traditional incandescent and fluorescent lights. This is because LEDs give more light, have lesser environmental impact and last longer as compared to incandescent bulbs. User-segments such as the government and commercial segments have been witnessing exponential growth. The street lighting segment is also expected to be the biggest application for the next few years. Lately, energy-efficiency initiatives are gaining momentum in India. 

Pros and strengths

Poised to capture growth of LED market: With a proven operational and financial track record, the company is well-positioned to capitalize on opportunities provided by the tailwinds in the LED lighting market driven in part by governmental policies for energy saving and environment protection and importantly, the increasing awareness and adoption of LED lighting versus incandescent lighting. Further, LED lighting is central to reducing environmental impacts in both the residential, commercial and industrial sectors. Its comprehensive LED lighting offering allows it to offer its customers attractive manufacturing solutions for their products as well as its own product designs as part of its ODM business model. Its number of LED lighting products manufactured has grown by 41.82% from 660 in Fiscal 2020 to 936 in Fiscal 2022, and it is continuously expanding its portfolio.  

Diverse product basket with focus on high-margin areas: The company offers its products in four segments: (i) LED lighting; (ii) refrigeration lights; (iii) ABS piping; and (iv) other product. This wide range of products helps it captures a larger wallet share of its customers. 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 currently manufactures more than 753 SKUs for its largest customer, Signify (Philips) in India. In addition, it is in negotiations with some of its existing customers to supply its LED home lighting products to their international supply chain. 

Strong focus on R&D: The company’s R&D department focuses on product designing, tools and mould designing, electronic circuit designing and prototype designing. Its R&D department independently develops ODM designs and verifies and develops OEM designs received from customers and converts such designs into deliverable products by improving the designs, recommending suitable raw materials and testing of trial products. The R&D team also aims to provide solutions through automation to improve manufacturing efficiency on the existing products, reduce production costs and assists its customers by providing design and engineering support. It focuses on activities to support its customers including concept sketching, design refinement, generating optional features and testing. This enables it to address its consumers’ diverse needs, introduce new and innovative products in the market, enhance existing products with emerging technologies, and optimize costs across its products through value analysis and value engineering. 

Established infrastructure with backward integration: The company has developed the proficiency to produce many of the components used in its manufacturing processes with its in-house tool room capabilities that has modern machines, moulds and tools. Except for the diodes and resistors used in its LED lighting products, all mechanical components are manufactured by its. Its manufacturing infrastructure is a key driver of its business. It has four manufacturing facilities with one located in the SIDCUL Haridwar industrial park in Uttarakhand and three in Noida in the National Capital Region. Its manufacturing facilities are equipped with machinery and equipment like assembly lines, automatic surface-mounted machines, automatic metal cutting and shaping machines and automatic powder coating for fixtures. In line with its focus to provide end-to-end product solutions and to develop better control on its supply chain and improve its margins, it has backward integrated its major manufacturing processes. It has developed in-house capabilities so that it manufacture all mechanical components inhouse (save diodes and resistors).

Risks and concerns

Dependent on LED lighting product: The company is dependent on its LED lighting product category. While it has expanded its product lines to include ABS pipes, refrigerator lights and other products, it expects that in the future its LED lighting product category will continue to comprise a significant percentage of its operating revenue. Consequently, if it is unable to maintain or expand its sales volumes in the LED lighting category for any reason, maintain its relationship with its key customers in this product line and/or diversify its LED lighting customer base, it may experience material fluctuations or decline in its revenue and reduction in its operating margins, as a result of which its business, results of operations and financial condition could be materially and adversely affected. 

Do not receive firm, long-term volume purchase commitments from customers: The company typically enters into a period purchase orders for a specific range of products with its customers which is valid for three years and renewed thereafter. Within this period, products are manufactured and sold on a purchase order basis. Its purchase orders with its key customers typically include the terms and conditions including the return policy are set forth in the purchase orders and master agreements. Customer orders usually specify shipping arrangements and packing material and are subject to, among other things, regulatory requirements, various import duties and other government clearances in the case of exports. Based on these arrangements, its customers provide it with purchase orders which typically include precise terms for lead time for delivery of products, delivery schedule in terms of quantities for certain months. There is no guarantee that despite having contractual arrangement with its customers, that it is assured of generating revenues in the future as they are not under any obligations to outsource their manufacturing requirements to it.

Rely on number of third party suppliers for key components: The company relies on a number of suppliers for its raw materials, components and stock-in-trade which are an integral part of its products as well as suppliers for its customer support services. While it has not historically encountered problems with availability, and its global sourcing team has mitigated these risks by increasing inventory for some of these materials, this does not mean that it will continue to have timely access to adequate supplies of essential materials and components in the future or that supplies of these materials and components will be available on satisfactory terms when needed. Given its reliance on its suppliers, if any one of its suppliers is unable to deliver its raw materials, components or customer support services in a timely manner, or at all, or meet its design or quality specifications, it may be unable to meet its product and service delivery timelines.

Operate in competitive environment: The market wherein the company operates is competitive, rapidly evolving and is characterized by frequent introductions of new piping products, lighting solutions, applications and technologies. It expects competition to persist and intensify in the future as the market wherein it operates is constantly evolving and growing with new and existing competitors devote considerable resources to introducing and enhancing products. Accordingly, its ability to grow its business in accordance with its strategy will depend on its ability to introduce new products, adapt to new technologies, respond to pricing strategies by competitors, redevelop its brand, execute agreements with technology partners, improve its manufacturing capabilities and technology and develop intellectual property.

Outlook

IKIO Lighting is an Indian manufacturer of light-emitting diode (LED) lighting solutions. In its journey of over seven years, the entity focused on providing sustainability and low-energy LED products to help India meet its sustainability goals. The product portfolio of IKIO can be categorized as LED lighting, Refrigeration lights, ABS (acrylonitrile butadiene styrene) piping and other products. The company is primarily an Original Design Manufacturer (ODM). They design, develop, manufacture and supply products to customers. Thereon, the customers further distribute the products under their own brands. Alongside, they also work with the customers to develop, manufacture and supply products as designed by the customers. The company's LED lighting offerings focus on the premium segment and include lighting, fittings, fixtures, accessories, and components. The products are designed and created to cater to the distinct requirements and expectations of the customers. On the concern side, the company does not receive firm and long-term volume purchase commitments from customers. Besides, the company relies on imported components from vendors in China, Singapore, Hong Kong and Taiwan. Any shortfall in the supply of its imported components and raw materials or an increase in its component or raw material costs, or other input costs, may adversely affect the pricing and supply of products and have an adverse effect on business, results of operations and financial condition.

The company is coming out with an IPO of 2,19,62,962 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 270-285 per equity share. The aggregate size of the offer is around Rs 592.99 crore to Rs 625.94 crore based on lower and upper price band respectively. On the financial front, the company’s total income on a restated basis increased by 37.92% to Rs 2,207.19 million for Fiscal 2022 from Rs 1,600.39 million for Fiscal 2021, primarily due to a 37.72% increase in revenue from operations. Its profit after tax on a restated basis increased by 36.10% to Rs 280.10 million for Fiscal 2022 from Rs 205.80 million for Fiscal 2021. Going forward, the company plans to continue expand its ODM business to new international markets. It intends to focus its expansion on North American markets and gradually expand to the European and South East Asian markets. In its opinion, these markets offer it the ability to market its premium LED offerings. It intends to achieve this expansion by employing dedicated sales and marketing teams whose primary focus will be on business development in international markets, particularly, in its focus geographies.