IPO: Rishabh Instruments

In a nutshell

• Quality : Rishabh Instruments' three-year average ROE (return on equity) and ROCE are 13 and 13.7 per cent, respectively.
  
• Growth : Its revenue and net profit grew by 20.9 and 16.1 per cent per annum, respectively between FY21 and FY23.
  
• Valuation : The stock will trade at a P/E (price to earnings) of 35.8 times and P/B (price to book) of 3.5 times, respectively. There are no listed peers.
  
• Overview : Global expenditure on manufacturing facilities and higher requirements for electrification are the key growth drivers for the company. As a result, it has reported healthy growth in topline and profitability. However, weakening of the global economy can prove fatal for the business.

About Rishabh Instruments

Rishabh Instruments, incorporated in 1982, designs and manufactures electrical automation and measuring instruments used in various industries. The company has two manufacturing facilities each in India and Poland and one facility in China. It generated 65.7 per cent of its revenue from exports in FY23. In terms of revenue, the two biggest segments are metering control and protection devices (42.6 per cent) and aluminium high-pressure die castings (39.6 per cent), as of FY23.

Strengths of Rishabh Instruments

• It is the global leader in analog panel meters and among the leading global companies in low-voltage current transformers.
  
• The company has managed to maintain long-term relationships with its key customers in the Indian as well as global markets. Revenue from existing customers accounted for 88.1 per cent of the total revenue.
  
• Operates four end-to-end vertically integrated manufacturing and R&D facilities , two each in Poland and India.

Weaknesses of Rishabh Instruments

• Out of the five manufacturing facilities, one in Poland accounts for 62.7 per cent of total units produced. Moreover, around 70 per cent of the total revenue is generated from the European region. Any adversity in the region or weakening of Europe's economy can prove fatal for the company's business.
  
• The company relies on acquisitions to expand its addressable market. Though it has worked in the past, any larger-than-ideal acquisitions could be detrimental to Rishabh Instruments' financial health.

Risk report of Rishabh Instruments

Company and business

• Are Rishabh Instruments' earnings before tax more than Rs 50 crore in the last 12 months?
  Yes, the company's profit before tax for FY23 was Rs 61 crore.
• Will Rishabh Instruments be able to scale up its business?
  Yes, growth in manufacturing infrastructure and increase in demand for electrification and metering equipment will help the company scale up its business.
• Does Rishabh Instruments have recognisable brands with client stickiness?
  Yes, the company has maintained long-term relationships (between five to eight years) with its key existing clients.
• Does the company have a credible moat?
  No, the company faces high competition in the industry.

Management

• Do any of Rishabh Instruments' founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post-IPO, the promoter's stake will be 70.7 per cent.
• Do the top three managers have more than 15 years of combined leadership at Rishabh Instruments?
  Yes, the founder, chairman and managing director of the company continues to be associated with the company since its inception in 1982.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes, no information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes, no information to suggest otherwise.
• Is Rishabh Instruments free of promoter pledging of its shares?
  Yes, there is no pledging from the promoters.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No, the company's three-year average ROE and ROCE are 13 and 13.7 per cent, respectively. In FY23, the company's ROE and ROCE were 12.4 and 13.8 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes, the cash flow from operations was positive during the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes, the company's borrowings equal its cash and cash equivalents in FY23.
• Is Rishabh Instruments free from reliance on huge working capital for day-to-day affairs?
  No, the company has high working capital requirements. It often relies on working capital loans to fund the same.
• Can the company run its business without relying on external funding in the next three years?
  Yes, the company has a low amount of debt and reported surplus cash on its balance sheet. Along with the proceeds from IPO, the company should not require external financing in the near future.
• Is Rishabh Instruments free from meaningful contingent liabilities?
  Yes, contingent liabilities as a percentage of equity is 1.8 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No, the stock will offer an operating earnings yield of 3.3 per cent.
• Is the stock's price-to-earnings less than its peers' median level?
  Not applicable. The stock will trade at a price-to-earnings ratio of 35.8 times. There are no listed peers.
• Is the stock's price-to-book value less than its peers' average level?
  Not applicable. The stock will trade at a price-to-book ratio of 3.5 times. There are no listed peers.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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