Stove Kraft coming with an IPO to raise Rs 412.63 crore

Stove Kraft

• Stove Kraft is coming out with a 100% book building; initial public offering (IPO) of Rs 10 each in a price band Rs 384 - 385 per equity share.
• Not more than 75% 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 10% for the retail investors.
• The issue will open for subscription on January 25, 2021 and will close on January 28, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 38.40 times of its face value on the lower side and 38.50 times on the higher side.
• Book running lead managers to the issue are Edelweiss Financial Services and JM Financial.
• Compliance Officer for the issue is Shashidhar SK.

Profile of the company

The company was incorporated as Stove Kraft Private Limited on June 28, 1999 with a certificate of incorporation issued by the Registrar of Companies, Bangalore, Karnataka (RoC) as a private limited company under the Companies Act, 1956. Subsequently, the company was converted into a public limited company pursuant to a special resolution passed by its Shareholders at the extraordinary general meeting held on May 28, 2018 and the name of the company was changed to Stove Kraft Limited. A fresh certificate of incorporation consequent upon change of name was issued by the RoC on August 13, 2018.

Stove Kraft is a kitchen solutions and an emerging home solutions brand. It is one of the leading brands for kitchen appliances in India, and are one of the dominant players for pressure cookers and amongst the market leaders in the sale of free standing hobs and cooktops. It is engaged in the manufacture and retail of a wide and diverse suite of kitchen solutions under its Pigeon and Gilma brands, and propose to commence manufacturing of kitchen solutions under the BLACK + DECKER brand, covering the entire range of value, semi-premium and premium kitchen solutions, respectively. The company’s kitchen solutions comprise of cookware and cooking appliances across its brands, and its home solutions comprise various household utilities, including consumer lighting, which not only enables it to be a one stop shop for kitchen and home solutions, but also offer products at different pricing points to meet diverse customer requirements and aspirations.

The company’s flagship brands, Pigeon and Gilma, have enjoyed a market presence of over 15 years and enjoy a high brand recall amongst customers for quality and value for money. Pigeon has been listed as one of the “India’s Most Admired Brands 2016” by White Page International. As a result of its co-branding initiatives over eight years with LPG companies such as Indian Oil Corporation Limited and Hindustan Petroleum Corporation Limited to utilize their sale and distribution channels, its Pigeon brand has enjoyed a wide customer outreach and continues to have a high brand recall value. The company manufactures and retail a wide and diverse range of affordable (value segment), quality products under its Pigeon brand, including, inter alia, cookware, cooking appliances and household utilities (including consumer lighting). It currently offers a wide range of products such as chimney, hobs and cooktops under the Gilma brand, which is targeted at the semi-premium segment.

Proceed is being used for:

• Repayment/pre-payment, in full or part, of certain borrowings availed by the company.
• General corporate purposes.

Industry overview

Indian appliance and consumer electronics (ACE) market reached INR 2.05 trillion (US $31.48 billion) in 2017. It is expected to increase at 9% CAGR to reach INR 3.15 trillion (US $48.37 billion) in 2022. Urban markets account for the major share (65%) of total revenues in the consumer durables sector in India The key ‘Large’ and ‘Small’ Cooking Appliances categories, which are covered in the scope of this report, the current market value is estimated at about INR 148.5 billion, which is set to reach Rs 238.0 billion by end 2022, growing at a CAGR of about 9.9%. The kitchen appliances industry has traditionally been skewed toward unorganized players while a handful of organized players have dominated major regions and key urban markets. Urban markets account for a major share of total revenues in the consumer durables sector in India whereas rural markets have only now begun to contribute recently.

Considering ‘zonal’ market representation, ‘South’ India contributes to about 35% of the total kitchen appliance market in India, followed by ‘West’ zone. ‘East’ zone, currently, has the least penetration of Kitchen appliances market with 10-12% contribution, where, high-value and niche products like food processor, air fryer etc. have negligible sales due to affordability issues which pose a challenge for growth in the region. Major players currently operating in the Indian kitchen appliances market include TTK Prestige, Stove Kraft Limited, Gandhimathi Appliances Ltd, Hawkins, Bajaj Electricals, Preethi Industries Ltd., Glen, Faber, Kaff Appliances, Inalsa, IFB, Panasonic, and Phillips, etc.

Pros and strengths

One stop shop for well recognized kitchen solutions brands: Since the company’s inception, it has grown from a single brand small LPG stove manufacturing company to become one of India’s leading manufacturers of kitchen appliances, with revenue from operations of Rs 3,288.36 million and Rs 6,698.61 million for the six month period ended September 30, 2020 and Fiscal 2020, and a presence in 27 states and five Union Territories of India and 14 countries across the world. Its brand portfolio, comprising of the Pigeon, Gilma and BLACK + DECKER brands caters to the value, semi-premium and premium customer segments in the kitchen solutions industry, and allows its customers to engage with the brand specifically designed for their budget and lifestyle. Its award winning Pigeon brand is well established in the Indian kitchen appliances industry. The existing market presence and strength of the Pigeon brand has been instrumental in enabling the company to successfully enter into home solutions vertical with products like LED products in 2016.

Widespread distribution network: The integration of its supply chain and distribution network with its manufacturing facilities provides the company with a competitive advantage over other players in the Indian kitchen appliances industry. As of September 30, 2020, the company’s manufacturing facilities in Bengaluru and Baddi are well connected with nine strategically located C&F agents. Additionally, it has 651 distributors in 27 states and five union territories of India as of September 30, 2020. The C&F agents and distributors are, in turn, connected with a dealer network comprising of over 45,475 retail outlets, which are driven through a sales force of 566 personnel as on September 30, 2020. In addition to independent third-party retail stores, it has also partnered with major Indian retailers for the sale of its products, and for Fiscal 2020, its products are available in retail chains such as Metro Cash And Carry India Private Limited. It has also partnered with e-commerce retailers such as Flipkart India Private Limited for the sale of its Pigeon branded products on their portals.

Strong manufacturing capability: The scale at which it undertake the manufacture of its products, combined with its raw material sourcing, packaging, transportation practices and quality control, enables the company to derive higher margins from the sale of its products. Its Bengaluru Facility is a large facility for the manufacture of kitchen solutions, which is spread over approximately 46 acres and five guntas out of which 30 acres and one gunta is available for future expansion. It is an integrated facility comprising of 12 manufacturing units, tailored to manufacture pressure cookers, non-stick cookware, hard anodized cookware, mixer grinders, induction cooktops, LPG stove, glass cooktops, IR thermometer and handy vegetable chopper. Further, the company has also commenced manufacturing LED products in its Bengaluru Facility.

Consistent focus on quality and innovation: The company’s focus on quality is maintained at all stages - right from the sourcing of raw materials, which is undertaken from manufacturers to the product development and manufacturing stage, which is subject to a rigorous review and monitoring process undertaken at its Bengaluru Facility. For products which are sourced by it from third party OEMs, it has a dedicated sourcing team and quality assurance team based out of China, which closely monitors the quality of such products. Its efforts to maintain the quality of its products have been well recognized in the industry, and it has been awarded the ‘Gold Award’ by Quality Circle Forum of India (Bengaluru chapter) in the years 2013 and 2014.

Risks and concerns

Rely heavily on brand portfolio: The market perception of its brands is one of the key factors for the sustained demand of its products amongst consumers. Its business performance is substantially dependent upon the continued success of its Pigeon and Gilma brands. The company spent Rs 49.31 million, Rs 119.64 million, Rs 316.26 million, Rs 227.01 million and Rs 161.73 million, on its business promotion and advertisement expenses during the six month periods ended September 30, 2020. September 30, 2019 and for Fiscals 2020, 2019 and 2018, respectively. A brand’s reputational value is based in large part on consumer perceptions, and even an isolated incident that causes harm, particularly one resulting in widespread negative publicity, could adversely influence consumer perceptions and erode consumer trust and confidence in the brand. Negative media coverage regarding the safety or quality of its products or any specific product, and the resulting negative publicity, could materially and adversely affect the level of consumer recognition of, and trust in it or its brands and its products. Any negative publicity or disputes involving its brands could materially adversely affect its business, financial condition and results of operations.

Geographical constrain: The company intends to increase the sales and distribution of its products in Indian states where large markets exist for the segments in which it operates, as well as introduce new products and brands in the states where it currently operates. However, for the products manufactured and sold by it under its Gilma brand, the company has limited experience and knowledge of operating in states outside of southern India, and its foray into new geographies, or into new brands or products in the existing geographies may be subject to high barriers to entry including existing competition, local laws and market dynamics. Further, it may not be able to effectively assess the level of promotional marketing required in a particular state, and the recognition of its brands and products in such states may not be in the manner or to the extent anticipated by it. Its expansion into new geographies may also be challenging on account of its lack of familiarity with the social, political, economic and cultural conditions of these new regions, language barriers, difficulties in staffing and managing such operations and the lack of brand recognition and reputation in such regions. Due to its limited experience in undertaking certain types of markets or offering certain services, its entry into new business segments or new geographical areas may not be successful, which could hamper its growth and damage its reputation.

Retail business is subject to seasonal volatility: The company’s business and the kitchen appliances industry in general is subject to seasonality. Generally, it witnesses an increase in sales in the second half of the Fiscal and sales generally decline during the first quarter of the Fiscal. Accordingly, its revenue in the first two quarters may not accurately reflect the revenue trend for the whole Fiscal. Its business is also affected by certain festivals which lead to an increase in its sales and by retailers reducing their purchases from it in first quarter of a particular Fiscal. The seasonality of its business operations and kitchen appliances industry in general, may cause fluctuations in its results of operations and financial condition.

Rely on third party OEMs for the sourcing of products: The company relies upon third-party OEMs for the sourcing of some of its products. For the six month periods ended September 30, 2020 and September 30, 2019 and Fiscals 2020, 2019 and 2018, such traded products contributed 19.21%, 29.82%, 27.59%, 31.63% and 31.50%, respectively, to its total revenues. While such traded products are manufactured on the basis of specifications provided by the company and under the supervision and monitoring of its sourcing team, it has limited control over the manufacturing and quality control processes, and any defects discovered in such products may have an adverse impact on its brand reputation and results of operations.

Outlook

Stove Kraft is one of the largest Kitchen appliance suppliers in India. The company manufactures and sells kitchen solutions under the brand name of Pigeon and Gilima brands and planning to manufacture value, premium, and semi-premium kitchen supplies under the 'Black + Decker' brand. The company has a strong distribution network as under the Pigeon brand, it has 651 distributors in 27 states and 5 union territories and 12 distributors for exports and under the Gilima brand, it has 65 stores across 4 states and 28 cities. On the concern side, due to the geographic concentration of its sales in the Southern regions of India, its results of operations and financial condition are subject to fluctuations in regional economic conditions. Moreover, the company’s retail business is subject to seasonal volatility, which may affect its results of operations and financial condition.

The issue has been offered in a price band of Rs 384-385 per equity share. Minimum application is to be made for 38 shares and in multiples thereon, thereafter. On performance front, the company recorded a total income of Rs 3,295.09 million during the six month period ended September 30, 2020, an increase of 3.80% over its total income of Rs 3,174.33 million during the six month period ended September 30, 2019. The company’s restated profit/ (loss) for six month period ended September 30, 2020 totaled to Rs 287.76 million during the six month period ended September 30, 2020 from a profit after tax of Rs 43.89 million during the six month period ended September 30, 2019.

The company’s wide spread presence and scale of operations allows it to increasingly focus on branding and promotional activities to enhance its visibility in the cookware and kitchen appliances industry. The company’s product portfolio under the brand Pigeon consists of four categories - cookware, cooktops and other solutions, small kitchen appliances and home utilities aiding different functions and utilities in the kitchen and home. It has consistently focused on expanding and optimising its product range to offer utility, a range of features and value for money. It seeks to utilise its research and development capabilities to develop new products to cater to the evolving requirements of a large customer base and cover newer customer segments.