LG Electronics India IPO: Risks & Concerns

New Delhi, Oct 9 (PTI) Proxy advisory firm Ingovern has cautioned the investors of LG Electronics India (LGEI), raising concerns over the contingent liabilities aggregating Rs 4,717 crore, which includes disputed tax claims, saying that a negative outcome could "significantly erode" future earnings of the appliances and consumer electronics major.

The company's Rs 11,607-crore IPO has been oversubscribed by about 13 times so far. The initial public offering closes on Thursday.

"LGEI has disclosed contingent liabilities aggregating Rs 4,717 crore, constituting 73 per cent of its net worth (aggregation/calculation made from the RHP). These relate to disputed tax claims from authorities. A negative outcome in those proceedings could significantly erode future earnings or require provisions," the report said.

According to the report, South Korean parent entity LG Electronics Inc., the promoter, continues to hold a dominant stake of 85 per cent post-IPO, which is "resulting in concentrated ownership and potential minority shareholder influence limitation".

"However, as a pure OFS (offer for sale), the capital benefits flow to the promoter, and the company receives no fresh funding for expansion," it said.

LGEI's IPO is entirely an OFS of 10.18 crore shares, representing about 15 per cent stake, by the South Korea-based parent entity.

It had further said the Indian entity of LG Electronics is paying a royalty to the South Korean promoter under the License Agreement, or otherwise may attract regulatory scrutiny or action.

"As of the date of the RHP, they have a contingent liability of Rs 315 crore in respect of royalty payments to the promoter. There is no assurance that such observations will not be raised by South Korean tax authorities in respect of future periods, which could then have an adverse impact on results of operations. Investors should monitor the progress and resolution of these claims closely," it said.

The RHP (Red Herring Prospectus) discloses a fixed royalty rate of 2.3 per cent of net sales (for products other than LCD TVs/monitors) and 2.4 per cent (for LCD TVs and monitors). This royalty, as a proportion of revenue, has ranged between 1.63 per cent and 1.9 per cent over FY23-FY25, indicating a consistent outflow to the parent company.

"The promoter can increase royalty fees up to 5 per cent of annual consolidated turnover of domestically manufactured products (including OEM output) without requiring shareholder approval under SEBI Listing Regulations. This provision could affect margins without minority investor oversight," the report said.

It also observed that the Indian unit is license-dependent. It is operating under a perpetual license agreement, effective January 1, 2023, with its promoter, LG Electronics Inc., for use of the LG brand, patented technologies, and technical know-how.

"Any termination or alteration of this agreement by LG Electronics - with six months' notice - would halt the company's right to manufacture and sell products under the LG brand, materially disrupting operations," it said.

On the 15 per cent stake sale by the promoters in IPO, Ingovern said post-listing, LG Electronics will retain 85 per cent shareholding, enabling substantial control over board decisions, including approval of related-party transactions.

"The RHP specifically states that the promoter may consider the interests of its subsidiaries and affiliates that may not align with minority shareholders," it said.

Moreover, it highlighted disclosure gaps as no independent benchmarking study or third-party pricing review for royalty payments is presented, raising potential concerns around transfer pricing transparency and arm's-length validation.

"The RHP flags exposure to fluctuations in raw material prices, foreign exchange risks, and competition from both domestic and international players such as Samsung and Whirlpool," it said.

However, the Ingovern report also said LGEI IPO offers investors a chance to participate in a well-established consumer durable business with steady financial growth and a strong distribution network.