Understanding Kundan Edifice SME IPO Business, Risks, Financials and Valuations

Company Background and Business Model

Kundan Edifice Limited has a decade-long history, being originally incorporated in 2010 as a private limited company before converting to a public limited company in 2023. The company entered the lighting products sector in 2014 and later specialized in the manufacturing, assembly, and sale of LED strip lights under the leadership of its current promoter, Divyansh Gupta.

The firm operates primarily as an Original Design Manufacturer (ODM), supplying products to clients who distribute under their own brands. It also works with clients to manufacture designs developed by them. With a focus on unconventional lighting solutions such as LED strip lights, the company has a diversified application across multiple industries like real estate, railways, and automobiles.

What is LED Strip Lights?

LED strip lights, also known as LED tape or LED ribbon, are a flexible circuit board populated by surface-mounted light-emitting diodes (SMD LEDs) and other components, usually backed with an adhesive tape for easy installation. The flexibility of these strips allows them to be bent and shaped around corners and contours, making them a versatile lighting option.

Financial Health

a) The company has demonstrated a strong financial history, with high customer retention rates. Over the last three fiscal years, approximately 65% of its revenues have consistently come from repeat customers, which indicates a strong business relationship and potential for future revenue streams.

b) Revenue has grown from INR 15 Cr in Fy21 to INR 60 Cr in Fy23.

c) EBITDA has grown from INR 1.66 Cr in Fy21 to INR 9 Cr in Fy23. EBITDA margins in Fy23 is ~14%.

d) PAT has grown from INR 77 lakh in Fy21 to INR 5.13 Cr in Fy23.

e) In Fy23, due to increase of inventory by ~7 Cr, the company has not able to generate positive cash flow from operations. Total debts on books is ~14 Cr. Company is raising funds to fund the working capital requirement.

e) ROE of business post IPO would be ~15% which is decent.

f) EPS of Fy23 is 4.99 and P/E is 18.2x and Mcap of 100 Cr. IPO looks decently priced.

Major Risk In the Business

Kundan Edifice’s group companies—Kundan Kundan Fastening Private Limited, Kundan Industries, and Kundan Fastners and Multitrade Private Limited—are currently embroiled in 28 income tax cases, involving a total amount of approximately 56 crore INR. Legal complications can serve as a significant risk factor for potential investors, affecting both the reputation and the financial stability of the company.

Declining Financial Performance

A review of the financials for Kundan Industries, one of the group companies, reveals a consistent decline in revenue, with the company posting a loss in the Fiscal Year 2022. The total debt as of March 31, 2022, stands at approximately 80 crore INR. Additionally, the interest coverage ratio is negative, indicating the company’s inability to meet its interest payments, which is a critical red flag

Research & Development

Kundan Edifice has a dedicated R&D department consisting of engineers specialized in electronics and telecommunication. This focus on R&D is a positive sign for future growth and innovation, which can translate to a competitive edge in the market.

Manufacturing Capabilities

The company has two state-of-the-art manufacturing and assembly facilities located in Maharashtra. These facilities are equipped with modern machinery and technology, ensuring quality and timely delivery. They have also backward-integrated some of their major manufacturing processes, which can improve cost-efficiency and reduce dependency on third-party suppliers.

Conclusion

In light of the available information, Kundan Edifice Limited exhibits a compelling business model with strong specialization in LED strip lighting, impressive revenue growth, and a dedicated R&D department. Its high customer retention rate and EBITDA margins are indicative of a solid financial position. However, the firm’s negative cash flow, coupled with ongoing legal entanglements among its group companies, pose considerable risks. The debt burden and declining performance in one of the group companies cannot be overlooked. Overall, while the company offers promise in terms of innovation and market positioning, potential investors should exercise caution due to the aforementioned risk factors.