The Initial Public Offering (IPO) of RK Swamy Ltd, a player in India’s advertising and marketing landscape, closes on March 6. Established in 1973, RK Swamy has an over 50-year track record in integrated marketing and allied services. The IPO is gaining market attention as it will be the first pureplay marketing solutions company to get listed, with close peers – subsidiaries of/or JVs with international behemoths – being unlisted.  

The total offer is worth around ₹423 crore, of which ₹173 crore is a fresh issue and ₹250 crore an offer-for-sale. The proceeds from the issue would be utilised for funding working capital requirements (₹54 crore), investment in IT infrastructure (₹33 crore), setting up of new customer experience centres (CEC) and computer aided telephonic interview centres (CATI) (₹22 crore), and capital expenditure on a digital video content production studio (DVCP Studio) (₹11 crore). The issue is priced in the range of ₹270 to ₹288 per share.

At the time of publishing on Day two of the IPO, the offer was subscribed over four times. March 6 being the last day, should you too go for it? The offer has many positives, including RK Swamy’s track record, its endearing relationships with many clients built over decades, and the long runway of growth in the marketing solutions space, as a consumerism boom plays out in India over the next decade. However, at the same time, the offset is the high cyclicality of the business.

While growth has been good in recent years (see table) coinciding with an economic upcycle in India, the IPO priced at 46 times FY23 earnings, may not offer adequate margins of safety from a long-term investing perspective for the cyclicality risk mentioned above. While listing gains are likely given good interest in the IPO, we recommend that long-term investors need not subscribe for now. We recommend keeping the company on the radar, while gaining clarity on how margins can fare in a downcycle, and consider investing at better valuations.

Another aspect to watch out for - while it may not appear significant now - is the potential risk from an emerging (although unproven yet) threat from AI or any disruptions it may bring about. Although the company has made investments in tech and uses proprietary AI algorithms to provide solutions to clients, whether there can be unexpected disruptions from generative AI needs to be monitored.

Business and prospects

RK Swamy is a leading integrated marketing services group in India, offering a single-window solution for creative, media, data analytics and market research services. They have been ranked 8th in terms of estimated operating revenue among the integrated marketing communications services groupsin the country. Their business segments include -- Integrated Marketing Communications (IMC, 49 per cent of FY23 revenue); Customer Data Analytics and Marketing Technology (CDAM, 27 per cent), and Full-Service Market Research (FSMR, ~24 per cent).

IMC encompasses advertising, creative and digital content, events and activation planning, and social media management. Services provided under CDAM include customer data analytics, delivery and management of customer experience, online reputation management, campaign management/ tracking, etc. FSMR offerings include consumer surveys, customer experience management and consumer intelligence. While IMC services are housed under the parent entity RK Swamy, two wholly-owned subsidiaries, Hansa Consumer Equity and Hansa Research Group, provide CDAM and FSMR solutions, respectively.

The company served 475 clients in FY23. Some of their notable clients include ICICI Prudential Life Insurance, Aditya Birla Capital, Union Bank, Mahindra, TVS, Havells and Khazana. Srinivasan K Swamy and Narasimhan Krishnaswamy are the promoters of the company. The promoter group holds 79 per cent pre-offer, which will drop to around 62 per cent after the offer.

According to CRISIL, the marketing services market in India was valued at ₹1,93,600 crore in FY23 (CAGR of 5.6 per cent between FY19-23) and would likely reach ₹3,50,000-3,75,000 crore by FY28 (CAGR of 12.5-14.5% between FY23-28). In particular, the total market value of the segments RK Swamy operates in are likely to grow from ₹28,000-29,000 crore in FY23 to reach ₹51,500 to 56,000 crore in FY28 (FY23-28 CAGR of 12-14%).

With over five decades’ experience in the marketing services industry, RK Swamy is well placed to capitalise on the strong industry growth. Their ability to acquire and retain clients has been a key determinant of their longevity. The average number of years of relationships with their top 10 clients is ~19 years, and the top 50 clients is ~11 years as of FY23. Repeat clients contributed ~84% of FY23 revenue. In a highly fragmented industry with numerous agencies and service providers offering standard services, RK Swamy has maintained its market share at around 1%. Its diversified customer base has helped the company counter the intrinsic cyclicality of the industry. Additionally, data insights related to the Indian market gained over the years puts them at a distinct advantage.

However, one potential risk to take note of is that of the 475 clients served in FY23, the top ten clients contributed nearly 42 per cent of its operating revenue. Even though the company has long-standing relationships with its clients, any loss of key clients could significantly impact growth. Their revenues are dependent on certain key industries. BFSI, Auto and FMCG/Consumer/Retail were the top contributing sectors with share of 33%, 18% and 17% respectively. BFSI and Auto are cyclical industries and the company’s fortunes from those segments will depend on the economic cycle playing out in those segments as well.

Financials and Valuation

RK Swamy reported revenue from operations of ₹293 crore in FY23, a CAGR of 29.8 per cent over FY21-23. EBITDA/PAT margins improved by nearly 530/870 bps to 21/10 per cent during this time. The company’s gearing ratio for FY23 stood at 0.36, down from 0.93 in FY21. Improved profitability helped increase RoE from 3.1 per cent in FY21 to 22.2 per cent in FY23. In H1FY24, operating revenue stood at ₹141 crore, while EBITDA/PAT margins declined to 14.7/5.6 per cent, respectively. The business of the company is seasonal in nature with typically low revenue recognition in the first half. Profitability in RK Swamy’s IMC segment is broadly in-line with its peers, while CDAM and FSMR operate at lower levels.

After the offer, the stock will trade at 91x annualised earnings for FY24, with the market cap on the upper band at around ₹1,450 crore. However, to weed out impact of seasonality, if one values it based on FY23 earnings, the IPO is valued at a PE of 46x. According to the management, on an approximate basis, the first half of the fiscal accounts for 40 per cent of revenue, and the second half 60 per cent. Hence, profitability tends to be much better in the second half given the benefit of operating leverage.

Globally, notable peers and global giants in the space -  Interpublic group, Omnicom group - trade at a trailing PE of 11.4 and 12.3 times respectively. While some premium for such businesses in India is warranted given better growth prospects here, investors interested in the IPO can wait and watch for now, and enter later, once there is clarity on how margins/ revenue fare in a downcycle.