PC Jewellers - IPO - Apply

Compared to the public issues of Tribhovandas Bhimji Zaveri (TBZ) and Tara Jewels, PC Jeweller’s initial public offering (IPO) is priced lower, at a PE of 9.7-10.5 times FY12 earnings (considering post-issue capital). But that is for a reason.


Though the promoters have more than two decades of experience in the jewellery business, the company is relatively new (compared to its nearest competitors, particularly TBZ) in the jewellery retailing business. Second, its operations are concentrated in the northern region, with Delhi NCR forming 57 per cent of domestic revenue in the first half of FY13. On the flip side, it has reported strong growth in the past, coupled with healthy margins. Growth rates should remain healthy and geographical concentration risk will ease, thanks to expansion. In this backdrop, investors can subscribe to the offer.

The company is engaged in manufacture, retail and export of jewellery, with five manufacturing facilities spread over 83,000 sq ft. Exports (on a wholesale basis to international distributors) formed 33 per cent of revenues in the year’s first half, but its share is expected to go down with a focus on domestic business.

By FY14-end, the company aims to have 50 owned-stores across India, from 30 stores in 23 cities and eight states currently, with addition of 20 stores (half in the western and southern; rest in north and east), which is to be funded through the IPO proceeds. Retail area would also jump 81 per cent from the current 164,000 sq ft. While the expansion should mitigate the geographical concentration risk, establishing a strong brand name (as in northern India) in the new regions might not be easy.

The company’s ‘Jewels for Less’ scheme (50,000 members) started just two years earlier, has seen good response and its policy of ‘full refund’ for jewellery returned within seven days of purchase are positives and should help on this front.

The company has reported rapid and profitable growth in a short span of time, which instils confidence. Says CRISIL in its IPO grading note, “The pace of expansion has been faster compared to other players with addition of 25,000 sq ft every year. The stores have been profitable from the first year of operations."

Apart from expansion, sales growth (CAGR of 70 per cent in FY09-12, highest among its competitors) is also aided due to a focus on wedding jewellery (80 per cent domestic revenues), the largest segment and relatively less affected by slowdown since it is an essential (planned) purchase.

The company’s strategy is to open large formats (average size per store of 5,500 sq ft). Of the 30 stores, 27 have an area of over 3,000 square feet each, which includes 11 showrooms of more than 5,000 sq ft each (four above 10,000 sq ft).

Says Balram Garg, managing director of the company, “The large format reinforces our positioning as trusted jewellery retailer, enabling us to attract a diverse customer base, offers a wide range of jewellery, ensures effective inventory management and provides benefits of scale."

Put together, these moves along with the increasing contribution of diamond jewellery (32 per cent of revenues in the first half from 18 per cent four years ago) have led to higher operating profit margin (OPM) than its peers. And there is further scope for margin improvement. Says Garg, “We are more focused on bottomline growth as it will help expand our network faster." Declining share of exports in total mix will also help. Buying gold on lease basis (against purchase) since inception has ensured less pressure on the balance sheet. All these have helped net profit grow at a faster pace.

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Making money in IPOs

Initial Public Offerings (IPOs)are a great opportunity for promoters to sell shares at a very high price and for the investing public to make some listing gains if possible. Buying a stock that has just got listed after an IPO is a foolish idea. While a Moneylife study has proven this (Read 'How to play the IPO game'), here is one more evidence. The BSE IPO index has performed badly since its launch on 24 August 2009. The index closed at 1947.54 on the day of its launch. On Friday, exactly 16 months since its launch, the BSE IPO index was at 1,908.90, down almost 40 points. In the same period, the Sensex is up by 28%.

The Bombay Stock Exchange (BSE) launched the BSE IPO index to track the value of the companies listing subsequent to a successful completion of an IPO. The index currently has 72 companies. But this figure is continually changing, depending on how many companies are listed, as an IPO company is kept on the index only for two years.



What does the poor performance of the IPO index indicate? Simply that one should avoid buying a stock after listing, especially when the IPO pipeline is robust. When the BSE introduced the BSE IPO index, it hoped to capture "the current primary market conditions in the Indian capital market and measure the growth in investor's wealth within a period of two years after listing of a company, subsequent to successful completion of an initial public offering (IPO)." As the index shows, there has been no "growth in investor's wealth" post-listing. The BSE, like everybody else blindly assumed that investor's wealth usually grows post-listing. This happens only in exceptional circumstances-when IPOs are made in a depressed market.

The BSE went on to argue, "robust growth of the Indian economy, 6.7% in 2008-09, and the expectation of higher growth in the future are expected to boost the primary market. For this and other reasons, it was an appropriate time to introduce to the market an indicator that will track primary market conditions in the Indian capital market." The "boost" in the primary market that the BSE is talking of is only the exorbitant high prices at which promoters are able to sell their IPOs, making sure that the index does not perform, contrary to the BSE's hopes!

Moneylife spoke to a few experts, all of whom said that high valuation of the IPOs is the main reason for the poor performance of the index. "Most of the IPOs come with high valuation. So there is a possibility that a majority of them will not give much returns," said the vice-president of the research unit of a leading brokerage firm who requested anonymity. This view was echoed by Rajesh Jain, executive vice-president (retail research), Religare Securities Limited: "High valuations are one of the main reasons for the index to fall." He argued that the movement of the secondary market was another reason for the downtrend in the IPO index. "Since its launch, the BSE IPO suffered a small dip then remained steady. From March 2010, it went up and did well till mid-September, reaching almost 2,340 levels. In November, there was a sense that the market would correct. This took a toll on the IPO index and it's been down since," Mr Jain explained.

According to Vivek Mahajan, head of research with Aditya Birla Money Ltd, over the past couple of months, most of the IPOs which have hit the market have performed miserably, including government sponsored ones. Aggressively high valuations of IPOs is leaving nothing on the table for investors. This is the reason for the poor performance of the index.

The fact is that, usually, IPOs are bad bets if you buy them after listing. The Moneylife study 'How to play the IPO game' (a research and analysis of 107 companies that have listed in the past three years), concluded that investors should avoid IPOs after listing. In the report we provided three scenarios for an investor to invest in IPOs, out of which only one is a winning strategy and the other two are not.

The first option, 'Buy and hold for the long term', leads to losses. According to our research, 60 out of the 107 companies that have listed in the past three years are now trading below their issue price. A 44% chance of making money on one's investment is hardly encouraging.

The second option, 'Buy at listing and hold on to the investment' again doesn't help. Our research suggested that of the 107 public issues over the past three years, as many as 65 are now trading below their listed price, giving investors only a 39% chance of getting something back on their investment in this scenario. This explains why the BSE IPO index is down.

The third option, which is a wining strategy, is 'Playing the flipping game', that means subscribing and then flipping it on the first day. Our research showed that an astounding 95 stocks that hit the market in the past three years got listed above their issue price. This gives the investor has an 89% chance of adding value to his investment on the listing day itself.

Source : Moneylife.in

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Get prepared for a deluge of IPOs

India's biggest inter-state transmission company Power Grid Corporation of India is set to hit capital markets again with a follow-on public offer on November 9, 2010.

The Board of Directors of the company in a meeting held on October 20, 2010, has approved the red herring prospectus (RHP) for follow on offer of the company. The subscription for FPO will be opening on November 09, 2010 while closing for QIB bidders on November 11, 2010 and for retail & Non-Institutional bidders (including eligible employees bidding in the Employee Reservation Portion) on November 12, 2010.

The company aims to raise Rs 8,000 crore through follow-on offer, reports CNBC-TV18.

The proceeds will be mainly utilised for constructing nine country-wide high capacity power transmission corridors costing USD 13 billion (Rs 58,000 crore), Chaturvedi said.

Earlier, on July 02, 2010, the company has approved the FPO of 20% of existing paid up share capital comprising fresh issue of 10% of existing paid up share capital and offer for sale (Disinvestment) of 10% of existing paid up share capital by Government of India. Post dilution, the government stake would be 76.36% in company.

The company had raised nearly Rs 3,000 crore via IPO in October, 2007, wherein the government had divested 5% stake in the company.

Power Grid Corporation has reported net profit at Rs 651 crore in Q2FY11 as against Rs 460 crore, a growth of 41.52% on year-on-year basis. Total revenue jumped 25.04% to Rs 2,127 crore from Rs 1,701 crore (YoY).

There will be six public issue lined up this fiscal. Earlier in an interview with CNBC-TV18, Divestment Secretary Sumit Bose said Power Grid is the next big FPO in line. He was confident of the Power Grid,Shipping Corporation, Manganese Ore, and Hindustan Copper share sale getting done by March. Bose was however unsure if IOC and ONGC's share sale will happen by March, although he added that the government was trying hard on that front. He informed that the due diligence process was underway for SAIL's FPO.

Bose said that the government will achieve the Rs 40,000 crore divestment target that it has set for itself in FY11. He however added that the government is not aiming to exceed this target. According to him, Rashtriya Ispat Nigam will be the next big PSU IPO.

The next IPO from government will be MOIL. The Steel Secretary, Pradeep Kumar Misra, said that the roadshow for Manganese Ore's IPO would begin by mid-October. “MOIL's pre-roadshow for the IPO will begin around October 20, with the final roadshow happening in the middle of November. The IPO could be launched in November-December,” Mr Misra said.

According to the proposal, the Central Government will sell a 10% stake, while Madhya Pradesh and Maharashtra governments will dilute 5% each in MOIL. Currently, the Centre holds 81.57% in the company, while Maharashtra and Madhya Pradesh have 9.62% and 8.81% stake, respectively.

Investment Advisor, SP Tulsian said, the issue sizes for MOIL, Shipping Corporation, Power Grid and Hindustan Copper would be around Rs 600 crore, Rs 800 crore, Rs 4,000 crore and Rs 1,500 crore, respectively.

He expects follow-on offers of IOC, ONGC and SAIL by January-March 2010. He said the issue sizes for these FPOs would be around Rs 19,000-20,000 crore, Rs 15,000 crore and Rs 18,000 crore, respectively. "Out of this Rs 52,000-53,000 crore, the government will dilute around Rs 35,000 crore worth of equity shares and the rest will be by fresh issue," he said.

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Jaypee Infratech - IPO Invest at Cut off

Ride on the twin advantage.

Vidya Bala

Investors with a penchant for risk can consider the initial public offer of infrastructure developer, Jaypee Infratech, a subsidiary of the listed Jaiprakash Associates. A unique combination of infrastructure and real-estate development, with each segment driving the other's prospects, is the company's key advantage.

The company is in an advanced stage of expressway construction that is likely to be commissioned two years ahead of schedule. This combined with the availability of low-cost land for real-estate development (with a good part in Noida) provide earnings visibility to Jaypee Infratech. Revenues and earnings could be lumpy until 2011, after which the expressway would start earning toll revenues. Income from real-estate development would be the key contributor to revenues until such time.

The primary risk to this recommendation is that both the business segments are working-capital intensive and, until such time, the expressway is complete, liquidity could be tight. Inability to fully monetise the land bank would also mute growth.

The offer price band is Rs 102-117. Retail investors would get a 5 per cent discount on the offer price. Post- discount, the company's share is likely to trade at 24-27 times its annualised per share earnings for FY-10 on an expanded capital base on listing.

This is at par with infrastructure industry average. On a price-to-book basis, the valuation comes to 3.7-4.2 times; at a marginal discount to IRB Infrastructure Developers, which has a larger portfolio of roads in operation. On an enterprise value to earnings before interest, depreciation, taxation and amortisation (EBITDA) basis, Jaypee Infratech appears to be valued closer to real estate players rather than infrastructure. Given that revenues from real estate are likely to be higher than income from toll, the valuation appears justified.

The company and offer

Jaypee Infratech was launched as a special purpose vehicle in 2007 to implement a single road concession agreement — Yamuna Expressway — that connects Noida to Agra through a 165-km single expressway, built in Uttar Pradesh. The concession would allow Jaypee Infratech to operate and collect tolls for a period of 36 years. This comes with about 6,175 acres of land (translating in to 530 million sq ft of area) for real-estate development for a lease period of 90 years. The land can be developed or sold at the discretion of Jaypee.

The company proposes to raise about Rs 1,650 core through fresh issue of shares, while the parent company, Jaiprakash Associates, would receive about Rs 700 crore through an offer for sale. The offer proceeds would be utilised predominantly to fund the expressway.

De-risked

Jaypee Infratech has timed its capital market foray after two key risk factors have been addressed. One, the entire Rs 6,000 crore debt, of the Rs 9740 crore of project cost has been tied up. The remaining funding has been done through promoter contribution and cash flow from real-estate activity. The current offer proceeds would go towards funding only 15 per cent of the project cost. Two, the company is in possession of 96 per cent of the land required for the expressway and expects to complete the project by 2011, two years ahead of the 2013 target. Three, Jaiprakash Associates, the parent, with wide experience in execution of large projects, is the contractor.

Besides, 70 per cent of the land proposed for real estate has also been handed over to the company.

Due to the above factors, Jaypee Infratech enjoys several advantages: The company would enjoy cost-efficiencies, given Jaiprakash Associates' captive cement production and ownership of stone aggregates. The company is unlikely to be leveraged further as the projects have tied up full funding. The company has stated that it would keep the real-estate development self-financed, as it can sell land to monetise it, apart from developing the same.

Low-cost land

Towards this end, Jaypee has already booked profits for the year ending FY-09 and nine months ending December 2009 by selling residential and commercial plots. It has also initiated development of 24 million sq ft of five residential and one commercial project, 88 per cent of which has been sold and advance received, although none has reached the revenue-booking stage. Jaypee's biggest advantage in this project is the lucrative land bank that has been leased to it. At the anticipated cost of Rs 2,619 crore (besides an insignificant annual lease), the land cost works out to Rs 25 lakh per acre. It has also stated that the cost of a small portion of the land sold in Noida was Rs 50 lakh per acre a couple of years ago.

Weighed against about Rs 5 crore per acre incurred by a few other large players in Noida in recent times, Jaypee's deal could be termed a steal. This edge would allow Jaypee to price its projects aggressively, especially in Noida. The company did launch its initial phase of residential projects at a list price of Rs 2100 per sq. ft, drastically lower than competitors' rates. For the nine months ended December, Jaypee's sales were Rs 525 crore and net profits Rs 399 crore, the high margins arising solely on account of selling plots. The 76 per cent net profit margin is unlikely to sustain once the company's development costs and revenue are brought into the books.

A good part of the revenue for the nine-month ended December came from associate companies for hotel and certain other developments in the township. Going forward, as revenue from residential projects are brought into books, income from associates may dwindle as a proportion of the total revenue. With 88 per cent pre-sales and the entire current development to be completed by 2013, the existing projects could well manage their working capital from advances; even as toll revenues are expected to kick in from 2012.

Real-estate development may turn out to be the key driver of revenues and improve prospects for the expressway. After all, the existence of crucial infrastructure such as road, power (hydro power to be developed by associate company) and water in integrated townships are the key attractions for buyers of property in Tier-II and Tier-III areas.

Toll

Toll revenues on the road project would be subject to the UP Government's toll regulations, which currently allow about Rs 1.9/km as against Rs 1.4/km for the Mumbai-Pune Expressway. Jaypee may have to start at modest toll rates to attract traffic. The expressway has the advantage of operating within a single State, thus reducing hassles of inter-state movement for commercial traffic. Tourist destinations such as Mathura (along the expressway) and Agra candrive traffic volume.

An international airport and extension of Delhi Metro are other factors that could drive traffic. Nevertheless, the expressway cannot at this point look forward to volumes similar to the industrialised Mumbai-Pune route.

Lack of volumes may, however, be compensated by real-estate activity. It is perhaps for this reason that the government has chosen to bundle this expressway project with such massive tracts of land for real-estate development.

The offer closes on May 4.

Source : BL

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List of IPOs coming up soon

MUMBAI: Fourteen Initial Public offerings (IPOs) are ready to hit the market in the next 3-6 months. Since June, 12 IPOs have hit the market, raising Rs 14,600 crore.

More than 40 companies have raised Rs 33740 crore through Qualified Institutional Placements (QIPs) since April.

QUICKTAKES

Funds to be deployed for expansion plans, retiring debt, and for working capital
On back of rising stock prices, companies managed to raise funds. OIL India only IPO holding strong on bourses, Power IPOs laggards since listing

IPO pipeline
Company Issue size( in Rs cr)

JSW Energy 3000
Jindal Power 4000
Sterlite Energy 5100
GMR Energy 1500
Reliance Infratel 4200
Sahara Prime City 3450
Ambience 1293
Lodha Dev 2500
Emaag MGF 3850
BPTP 2000
Nitesh Estates 550
DB Realty 1500
Godrej Properties -
Hathway Cables -
Total amount 32943

Break-even price for QIB

Oil India Rs 1128
Adani Power Rs 105
Pipavav Shipyard Rs63
NHPC Rs 42

Weak IPOs

NHPC, Adani subscribed more than 20 times
Adani, NHPC priced at top of their price bands
Huge selling seen from high net worth individuals

Source : UTVI.com

Upcoming IPOs will you invest ?

“The more dependent the valuation becomes on anticipations of the future - and the less it is tied to a figure demonstrated by past performance - the more vulnerable it becomes to possible miscalculation and serious error.”

- Benjamin Graham

***

The observation by the legendary investor, in a lot of ways, captures the essence of the Indian IPO (initial public offer) market, which has been a notable victim of price abuse. The incestuous relationship shared by investment bankers and promoters has made a mockery of the so-called price discovery mechanism. A frenzied bull market also acted as a stimulant. For proof, consider this: Of the 286 IPOs from 2004 to September 2009, 184 issues are still in the red. In fact, had things not turned nasty on the global front, the Indian primary markets would have probably ended up raising more than the record Rs 52,219 crore mopped up by 90 IPOs in FY08.

While the last fiscal was a complete washout with only 21 issues managing to mop up Rs 2,034 crore, the inexplicable turnaround since March this year has put the IPO gravy train back on track. Eleven issues have raked in Rs 13,035 crore and, not surprisingly, five issues are already trading below their issue prices. Continuing with the tradition of aggressive pricing, Mahindra Holidays & Resorts was the first off the block in the current fiscal to raise money at 30x its 12-month trailing earnings. Having seen that the world is flush with funds and global investors are continuing to buy the India growth story pumping in over $12 billion since March, the pipeline for new issues is getting longer with every passing day.

As on date, 53 issues worth Rs 31,112 crore are waiting to hit the markets. A majority of these issues are from the realty, power and construction sectors, which have been the biggest gainers in the rally thus far. The list also features smaller companies driven by “first-generation entrepreneurs” looking for capital to “grow their businesses”. For those who are looking for a “gem” of an IPO, the list has also some jewellery makers.

To read the full article click here :

http://www.outlookprofit.com/article.aspx?262488

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