• Also known as Rashi Peripherals Ltd.
• 07th Feb, IPO Opens 7-9th Feb
• Pricing range – ₹ 295-311/share
• Valuations: P/E 16.6, EV/EBITDA – 2.07, P/B 2.6 times
• Small Cap: ₹ 2,000 cr. Mkt cap
• Sector – Technology

Summary

• RP Tech distributes global technology brands in India. They specialize in ICT products and have a 9.5% market share in India sales. Part of the ICT global supply chain. The organization and structure set up looks good to handle the growth. At current pricing range, RP Tech looks fairly valued. We expect margin expansion after reduction in debt levels even as it grows rapidly in revenues. Once this happens, valuations will look reasonable.
• Risks: 1) Thin operating margins, high working capital and high debt 3) Supplier Concentration – top eight brands accounted for 82% of revenue 4) Indirect Tax contingent liabilities.
• Opinion: Medium rated. Aggressive Investors can SUBSCRIBE for short-term gains.

Here is a note on RP Tech IPO.

IPO highlights

• The IPO opens from 7-9th Feb 2024 in a Price Band of ₹ 295-311 per share
• It is a Fresh Issue of ₹ 600 cr. of 6.58 cr. shares, which is 36.6 % of the equity share capital.
• The promoters are Choudhary & Pansari families that own 89.65% which will fall to 63.41% post-IPO.
• The main objects of the IPO are 1) Repayment of debts of ₹ 326 cr. and 2) Funding working capital requirement ₹ 220 cr. 3) The remaining 50+ cr. is for general corporate purposes.
• The lot size is 48 shares and Face Value ₹ 5 per share
• The IPO share quotas are QIBs: Non-Institutional Investors: Retail is 50:15:35%.
• The unofficial/ grey market premium of RP Tech is ₹ 70 /share over IPO price. This is a positive.
• The IPO allotment is likely to be finalized on 12 Feb, refunds will be on 13 Feb, and also crediting of shares to eligible allottees. RP Tech shares will list on BSE and NSE, on 14 Feb.

Introduction

• RP Tech distributes global technology brands in India. They specialize in products related to Information and Communication Technology (ICT). It has value-added services such as pre-sales, technical support, marketing services, credit solutions and warranty management services.
• Revenue from operations grew at a CAGR of 26.32% from ₹ 5,930 cr. in FY’21 to ₹ 9,468 cr. in FY’23, PAT generated CAGR of -4.80% and EBITDA with CAGR of 11.38% over last three years.
• RP Tech is the national distributor for 53 global technology brands and has 50 branches, and 63 warehouses across India, with 8,657 distributors across 680 locations in 28 States and UTs.
• These 50 branches operated as sales & service centres and warehouses, and distributed and sold 10,508 SKUs and 34.38 million units in FY23. Exports are just 2.6% of the business, rest is domestic.
• It had 1,433 employees, including 549 in Sales & Marketing and 64 in the technical support team.
• The company has two business verticals –
• Personal computing, Enterprise and Cloud Solutions (PES): This includes personal computing devices, enterprise solutions, embedded designs/products and cloud computing.
• Lifestyle and IT essentials (LIT): This includes products such as (i) components such as graphics cards, central processing units (CPUs) and motherboards; (ii) storage and memory devices; (iii) lifestyle peripherals and accessories such as keyboards, mice, webcams, monitors, wearables, casting devices, fitness trackers and gaming accessories; (iv) power devices such as UPS and inverters; and (v) networking and mobility devices.
• The Fig 1.1 below shows the Revenue By Vertical; and Fig 1.2 the Market Share by Product

Fig 1.1 – Revenues by Vertical and Fig 1.2 Market Shares

• The company’s clients include ASUS Global., Dell International, HP India, Lenovo India, Logitech Asia Pacific, NVIDIA Corp, Intel Americas, Western Digital (UK), Schneider Electric IT Business, Eaton Power Quality Pvt. Ltd., ECS Industrial Computer Co. Ltd., Belkin Asia Pacific, TPV Technology India, LG Electronics India, and Toshiba Electronic Components, Taiwan Corporation, among others.
• RP Tech has a good relationship with marquee customers for a very long time.
• RP Tech differentiate itself by offering end-to-end services such as pre-sale activities, solutions design, technical support, marketing services, credit solutions and warranty management services.

Fig 1.3 Locations

Fig 1.4 – Distribution and 1.5 – Shareholding pattern

• RP Tech distributes products through several channels or networks – General Trade (81%), e-commerce 13% and Modern trade 6%. Above Fig 1.4 shows the distribution network and channels.
• See shareholding pattern pre-IPO in Fig 1.5.
• Below Fig 1.6 – Strong Customer Relationships in years with prominent brands.

Fig 1.6 Clients

• Fig 1.7 – Key leaders:
• (L- R) Himanshu Kumar Shah CFO, Krishna Kumar Choudhary, Chairman, Kapal Pansari MD, Sureshkumar Pansari, Vice-Chairman and Rajesh Goenka, CEO.

News, Updates and Strategies

• In a pre-IPO placement, ace investor Madhusudan Kela’s wife Madhuri Kela invested ₹ 50 cr. and Volrado Venture Partners Fund-III-BETA, a venture capital fund, invested ₹ 100 cr. and were allotted 48.23 lakh equity shares at an issue price of ₹ 311 apiece.
• A day before the IPO, the firm made allotments to Anchor investors. It allotted 57.88 lakh shares to 18 funds at ₹ 311 per share, at the upper limit. The anchor investors who participated in the bidding process include prominent foreign and domestic institutions such as White Oak Capital, Ashoka India, ICICI Prudential MF, Volrado Venture Partners Fund, and Bajaj Alliance Life Insurance Company. Other notable participants in the bidding round were Aditya Birla Sun Life Insurance Company, SBI General Insurance Company, Singularity Growth Opportunity Fund, and Authum Investment and Infra.
• Out of the total allocation of 57.88 lakh equity shares, domestic mutual funds were allotted 19.61 lakh equity shares through a total of 8 schemes, amounting to ₹ 61 crore.

Industry Outlook of ICT in India

• India has a young population, and is a developing nation, so it has a faster growing market than developed nations such as USA, UK, and Canada in terms of retail consumption. They are better exposed to media and technology, which presents an opportunity for domestic consumption in the form of branded products and organized retail.
• Govt. of India has an initiative of Make in India and is also promoting Electronic Mfg. Clusters throughout the country to provide world-class infrastructure and facilities.
• The GoI is aiming to increase the production of electronic items to USD 300 billion by Fiscal 2026. The domestic consumption of products is expected to increase from USD 75 billion in Fiscal 2022 to USD 150- 180 billion by Fiscal 2026.
• India’s ICT Industry size is about 1 lakh cr. now and is expected to reach ₹ 1,08,700 cr. by 2025.

Fig 2 – ICT Industry Size

• Govt. of India’s Production-linked Incentive (“PLI”) scheme provides Incentives to boost domestic mfg. and attract large investments in IT Hardware value chain with target segments of laptops, tablets, all-in-one PCs, and servers, and boost the export market for the same. In electronic/technology products and telecom and network products, the approved financial outlay over the five years period is ₹ 12,200 cr.
• We estimate that RP Tech has a Market Share of 9.5% of the Indian ICT distribution market.

Financials of RP Tech

• RP Tech revenues, EBITDA and PAT over the years are in Fig 3a. Revenue, EBITDA & PAT grew by 26.36%, 11.38% and (4.80) % respectively.
• Increase in interest costs is hurting their PAT.
• In below Fig 3b Cash Flow we can see that the Free Cash Flow FCF is negative. The firm has made many investments in inventories, assets and payables that have made FCF negative.
• EBITDA Margin is constant over 2.8-3.5% and PAT around 1.30-2.29% variation due to externalities. This is average industry margins.
• Considering ₹ 326 cr. will used from IPO proceeds for repayment of Debt, the firm’s debt to equity will reduce from current pre-IPO 1.82 to 1.30 post IPO.

Fig 3a – Financials

Fig 3b Cash Flow

Benchmarking

We benchmark RP Tech against listed ICT distribution and mfg. firms, See Fig 3c below.

Fig 3c – Benchmarking

• P/E currently at 15.74 looks priced overpriced. Its EV/EBITDA is 2.07, which looks reasonable. Thus the valuations of RP Tech looks mixed.
• The 3 year Sales and Profits growth look low. There was a massive sales growth for RP Tech in FY21 and FY22 during covid, and that is now normalizing.
• D/E ratio is high, but post IPO, debt should fall as a main object of IPO is to reduce debt.
• Margins are on par with competitors.
• Return on Equity and RoCE are fair and in line with industry.
• Putting this together, we sense that RP Tech will return to steady industry plus growth now, and improve its financial parameters in the next 1-2 years.
• The strong business relationships, wide distribution network and digital growth of the economy will reflect well on RP Tech.

Positives for RP Tech

• Strong technical expertise of firm across a range of ICT products for sales, service and support.
• Long term relationship with marquee global tech clients to ensure availability of products.
• Reputation as Leading and fastest growing Indian distribution partner for ICT products.
• Repeat orders constitute 70-80% of business, this showcases the stickiness and moat of RP Tech.
• Diversified portfolio offering with 10,000+ SKU’s and value-added solutions.
• Pan-India and multi-channel distribution footprint backed by dedicated in-house infrastructure.

Risks and Negatives

• High dependency on various vendors, who are global technology brands, revenues generated from distribution of products mfg. by top eight global technology brands amounted to 82% of revenue from operations. Any delay or failure on part of such global technology brands to supply products may materially and adversely affect business, profitability and reputation.
• Good relationships with Channel Partners and enterprise customers is important as if any of these parties change the terms of their arrangements business could be materially and adversely affected.
• RP Tech is operating on thin margins, an increase in debt or interest rates can affect the financials. There has been an increase in Debt to equity from 1.23 in FY21 to 1.82 in six month ended Sep’23.
• Reduction in EBITDA margin from 3.63% in FY21 to 2.83% in FY 23 was due to higher interest rates.
• Continued negative cash flows can affect the financials of the business. RP Tech will certainly have to stabilize their working capital needs while handling growth.
• Risk of liability claims. Failure to maintain quality of customer service and deal with customer complaints could materially and adversely affect business and operating results.
• RP Tech has Contingent Liabilities of ₹ 592 cr. (RHP), of which for Indirect Tax is ₹ 281 cr.
• A Subsidiary ZNet Technologies Pvt. Ltd., has incurred losses in the last three Fiscals. There is no visibility on profitability.

Overall Opinion and Recommendation

• India has a large and growing software and Tech industry, and it is an exports leader. Many global firms are setting up Global Competence Centers here. Within India too, technology is permeating the population through devices and internet, at work and leisure.
• RP Tech is an important player in the ICT industry. It has a strong grip and 9.5% market share in sales. We expect growth at RP Tech to be strong. RP Tech have strengths of stickiness of customer with 70-80% of business from repeat orders and strong relationship with brands. Company management and board looks solid with rich experience in this field.
• RP Tech is well set and a solid growth prospect in future.
• However the firm is just settling down from 2-3 years of an unusual post covid business situation. Financials are in a recovery process and may take a few quarters to stabilize. This IPO helps to rest some of the debt. The recovery process needs to continue by controlling the working capital.
• We expect reduction in debt to equity after IPO even as it grows rapidly in revenue and offerings. Once this happens, RP Tech valuations will rise and this IPO entry price will look reasonable.
• Risks: 1) Thin operating margins, high working capital and high debt 3) Supplier Concentration – top eight brands accounted for 82% of revenue 4) Indirect Tax contingent liabilities.
• Opinion: Medium rated. Aggressive Investors can SUBSCRIBE for short-term gains.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or financial interests in RP tech or any group company. Punit Jain intends to apply for this IPO. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from a RIA Registered Investment Advisor. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. Registration granted by SEBI, and certification from NISM in no way guarantee performance of the RA or provide any assurance of returns to investors. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at [email protected]. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand name –