All eyes on Stove Kraft’s IPO as it opens for bidding: Repel or Pull?

The Stove Kraft’s initial public offering (IPO) opened for subscription on Monday, January 25. According to analysts the company’s brand value, margins and return on capital are lower than its peers and, even its profitability has improved due to its cost-cutting measures of late but such a trend is not sustainable. They are largely neutral on the issue and only aggressive investors with high-risk appetite are advised to participate in the IPO.

Stove Kraft has already raised Rs 185 crore on January 22 through anchor investors and now it is looking to raise approximately Rs 412 crore through the IPO.

The IPO comprises sale up to 6,90,700 equity shares by promoter Rajendra Gandhi and 59,300 shares by promoter Sunita Rajendra Gandhi, 14,92,080 shares by Sequoia Capital India Growth Investment Holdings I, and up to 60,07,920 shares by SCI Growth Investments II.

The IPO consists of the mint issue of Rs 95 crore and a probable sale of 82.50 lakh equity shares by promoters and investors

ICICI direct said that the kitchen appliance maker has reported a revenue growth of 13 per cent compounded annually over FY18-20. The company had a low operating margin profile over FY18-FY20 with Ebitda margin in the range of 2-5 per cent.

“During H1FY21, the company reported improved performance with an Ebitda margin of 13.7 per cent and net profit of Rs 28 crore on account of a significant reduction in operating expenses. Sustainability of improved profitability performance remains a critical factor. At Rs 385, the stock is available at 1.9 times FY20 market cap-to-sales ratio,” the brokerage said.

The IPO is priced at 34.5 times PE on a trailing basis while peers TTK Prestige and Hawkins Cookers are currently trading at 61 times and 47.5 times respectively. Angel Broking said the company has priced its issue at 301.5 times on FY20 basis.

“Due to cost-cutting measures, the company margins improved in the H1FY21 which is not sustainable. Costs such as travelling, advertisement reduced in H1FY21 due to Covid-19 are going to come back once business comes back to normalcy,” the brokerage said. It noted that the company’s brand value, margins and return on capital are lower than its peers and would not get such premium valuations as peers. It has a ‘neutral’ rating on the issue.

Analysts said the trademark for their marquee brand ‘Pigeon’ is the subject matter of litigation. Besides, the company sources its raw materials from third parties with whom they do not have long term contracts.

Stove Kraft owns brands such as Pigeon and Gilma and generates 65 per cent of its revenues from urban areas. As of September 30, 2020, Stove Kraft was manufacturing 79.75 per cent of their Pigeon and Gilma branded products at backward integrated manufacturing facilities at Bengaluru (Karnataka) and Baddi (Himachal Pradesh).

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