Should you subscribe to IKIO Lighting IPO? Here's what brokerages suggest

The three-day initial public offering (IPO) of Ikio Lighting will open for subscription on Tuesday, June 6. Shares of the lighting solutions provider will be available in the range of Rs 270-Rs 285 per share and investors can bid minimum of 52 shares in a lot and multiple thereof.
 

According to IPO watch, shares of Ikio Lighting enjoyed a premium of Rs 90 apiece in grey markets, translating to a likely listing price of Rs 375 on the upper price band. 
 

The Noida-based company is likely to debut bourses on June 16, and join listed peers Dixon Technologies, Amber Enterprises, Syrma SGS, and Elin Electronics.
 

The company primarily focuses on designing, developing, manufacturing, and supplying LED products. These are then marketed by customers under their brands. 
 

With a 50 per cent market share in India’s functional decorative lighting, Signify Innovations India, is its largest customer. The company has four manufacturing plants - three in Noida, and one in Haridwar. 
 

Issue-wise, around 50 per cent of the offer is reserved for qualified institutional buyers (QIBs), 35 per cent for retail investors, and the rest 15 per cent for non-institutional investors (NIIs).
 

The company plans to raise around Rs 607 crore at the upper price band. The net proceeds of the offer, thereby, will be used to repay borrowings, invest in subsidiary Ikio Solutions, and other general corporate purposes.
 

Financially, the company's consolidated revenue saw 25 per cent compounded annual growth rate (CAGR) over fiscal year 2020-2022, while it stood at Rs 240 crore in 9MFY23. Earnings before interest, tax, depreciation, and amortisation (Ebitda) margin, meanwhile, rose 21 per cent at the end of 9MFY23. 
 

Key risks: Since Signify is the company's largest customer, analysts warn that the former's market-share loss could curtail the latter’s offtake. That apart, delay in continuous customer on-boarding could curb growth prospects.
 

Meanwhile, here's what brokerages recommend for Ikio Lighting IPO:
 

Anand Rathi | Subscribe

Analysts believe that the company's ability to offer end-to-end solutions and its backward-integrated manufacturing have resulted in a strong business model with healthy RoEs despite operating on a smaller base than its peers, which cater mainly to the mass-market needs of leading brands. They said that the stock trades at 54x 9MFY23 earnings-per-share (EPS) of Rs 5.3 at the upper price band. 
 

ICICI Securities | Unrated

 The brokerage firm said that at the upper price band of Rs 285, the stock is priced at 32x FY23 annualised EPS of Rs 8.8/share. While analysts highlighted government incentives, China +1 strategy to drive the growth of LED lighting EMS (electronic manufacturing service) industry; the company's dependency on single product category and high dependency on imports for supply of raw materials can act as key risks.
 

Choice Equity | Subscribe

Analysts assert that the company's peers operating in the EMS sector does not have similar business operations to it, and are considered only for valuation benchmarking. Ikio is demanding a P/E multiple of 43.6x (to its restated FY22 EPS of Rs. 6.5), compared to the peer average of 94.6x, they said. Based on FY23E earnings, the demanded P/E of 32.7x is at discount to peer’s prevailing trailing twelve months P/E multiple of 43.2x. 
 

Sushil Finance | Subscribe

The company intends to use the IPO proceeds to extend its capital expenditure plan. With such a strong foothold of the company and revenue generation capacity, analysts believe that the company does have a certain level of potential. Keeping in mind the dynamics of the industry, analysts suggest investors may consider investing in the IPO, with marginal upside expectation.