Promoter LG Electronics Inc. intends to sell up to 10.18 crore shares through the IPO.
South Korea’s LG has highlighted multiple risk factors as part of its Red Herring Prospects (RHP) ahead of its IPO. Here are some that investors should know:
Royalty
LG Electronics India pays royalty to its South Korean parent annually as a percentage of its overall sales.Between financial year 2023 and 2024, the royalty component increased to 1.89% from 1.63%, but has remained consistent since then. For the June quarter, the Royalty paid by the company to LG Electronics Inc. stood at 1.88% of overall topline.
However, the company, in its RHP has warned that any increase by the promoter for the Royalty component, not exceeding 5% of the annual turnover, will not require shareholder approval and there is no assurance that this may not happen.
“The royalty payments made by us to our Promoter under the License Agreement or otherwise may attract regulatory scrutiny or action. As of the date of this Red Herring Prospectus, we have a contingent liability of ₹3,153.00 million in respect of royalty payments to our Promoter,” the company stated.
Competitive Intensity
LG Electronics India competes with peers such as Havells, Voltas, Godrej, Blue Star, Whirlpool, Phillips and others in India’s consumer durables market. There is also competition from Chinese players.
The company’s RHP highlights that it may not be able to compete successfully in a highly competitive, price sensitive and fast-evolving home appliances and consumer electronics market, which also now has competition from online players, thereby adversely impacting their operations.
Lack Of Free Float
Despite the promoter selling stake, it will still continue to own 85% of the company, there by resulting in a lack of free float.
However, since the issue will fall into the large IPO category as per the SEBI’s revised rules, it will have a five-year timeline to bring the stake down and comply with minimum shareholding norms.
Heavy Dependence On LX Pantos
LG Electronics India is heavily dependent on third parties for transportation services, both in the domestic market, as well as for exports. It majorly relies on its logistics partner LX Pantos Solutions India Pvt. Ltd., and other companies within the LX Pantos Group to manage warehousing and collaborate with third parties, according to its RHP.
For the June quarter, the company incurred a ₹255.6 crore freight and forwarding expense, of which, 92.75% was paid to LX Pantos, or companies within the group.
Any failure on their part to provide timely service could adversely impact their operations, LG Electronics India stated in its RHP.
Purely OFS
The entire issue size of ₹11,607 crore will be an offer for sale (OFS), meaning the parent company will be selling stake in the IPO.
There is no fresh issue of equity, which means the India unit will not receive any proceeds from this and all of it will only go to the global parent.
