As the secondary market has bounced back, the primary market is buzzing with activity once again. History suggests that reasonably priced issues have sustained performance through bad times.
As the stock markets turn bullish once again, initial public offerings have become numerous just as myriad little seeds sprout all over during the rainy season. Not all of these saplings grow to become giant trees.
Those that survive and prosper, are the ones that have found fertile soil, good sunshine and high resistance levels, which enables them to compete and spread out. Ditto with the mushrooming IPOs.
Companies with sound business models and good earnings potential would grow regardless of market conditions while the me-too IPOs which hit the market, essentially to capitalise on good weather, are bound to perish.
The performance of IPOs in the aftermath of the recent market volatility has proved that good issues attract investors and can sustain performance on the bourses unless the pricing is ambitious.
Consider the two recent issues -- GMR Infrastructure and Tech Mahindra -- which hit the market at the same time. Despite a solid business model and future potential, GMR Infrastructure failed to get good response with the issue getting oversubscribed 6.7 times, primarily on the back of institutional support.
On the other hand, Tech Mahindra which was largely perceived to be a reasonably priced issue, attracted large number of investors with the issue getting oversubscribed 71.7 times.
The stock market mirrored the same sentiment when the two stocks came up for listing. While GMR barely trades above its issue price even now, Tech Mahindra has managed to deliver 48 per cent gains so far.
Several stocks -- Deccan Aviation, Unity Infrastructure and Prime Focus -- that tapped the market during the market meltdown are trading below their issue price despite the market having bounced back.
But more importantly, the 2006 list of issuances throws several cases where there is a wide variance in the performance of IPOs launched during the same time, clearly suggesting that market condition is less relevant for the performance of an IPO.
Having said that, a large number of investors look at IPOs as a vehicle for quick gains, for which market sentiment does matter. Surely, the revival in the primary market is just as real as the bounce-back in the secondary markets and hence would last just as long as the latter is supportive.
For now, the selling pressure from foreign investors seems to have receded as fears of further hike in rates wane. Corporate fundamentals seem strong, especially going by the recent quarterly results.
However, since no one is predicting a runaway market this year, the primary market may not be as exciting as 2005 when an average IPO delivered about 50 per cent in three months, post listing. But reasonably priced stocks with good fundamentals are sure to reap rich rewards for patient investors.
Here is a low-down on the five IPOs lined up for this week.
Action Construction
Price band: Rs 110-130
September 1-7
Faridabad-based material handling equipment maker Action Construction Equipment has seen its revenues swell at a CAGR of 97 per cent between FY02 and FY06, thanks to the upswing in the construction and infrastructure business.
The Rs 199 crore (Rs 1.99 billion) ACE produces mobile cranes, loaders and construction elevators, which are used in infrastructure related projects. In future, the company plans to cash in on continued momentum through new product innovations and joint ventures with international players.
ACE plans to raise around Rs 50-60 crore (Rs 500-600 million) for funding its expansion plans. It is also scouting for acquisitions and is already in the process of setting up a joint venture with Tigieffe SRL, Italy.
ACE's marketing tie-ups with leading companies from Italy and China help to bring latest technologies and machines. Thanks to its versatile product range ACE enjoys wide client base including the likes of Reliance, Larsen & Toubro, Bhel, NTPC, Gammon India, Gujarat Ambuja and Nagarjuna Constructions.
Based on FY06 earnings, the stock is priced at a P/E range of 11.31-13.36x its pre-issue FY06 earnings. Other companies in the sector command higher multiples -- Tractors India (21.3x), Bharat Earth Movers (19.14x) and TRF (26.3x).
ACE is valued at 14.8x and 9.6x its FY07 and FY08 earnings estimates at the cap price, which is fairly attractive for a company with strong growth momentum.
Given its aggressive management, impressive clientele and promising business model, analysts feel that the company should maintain its growth. ACE seems to be reasonably priced and the IPO may be worth subscribing to.
Atlanta
Price band: Rs 130-150
September 1-7
The Rs 109 crore (Rs 1.09 billion) Atlanta, a diversified infrastructure player, is spreading its wings across construction, mining and real estate arenas. Backed by over 30 years' experience in the segment, Atlanta recognizes road construction business as its forte and plans to leverage its strengths to pocket complex projects.
Encouraged by the tremendous potential in the high margin mining and real estate businesses, the company plans to increase exposure to these segments.
The money raised through the public offer (around Rs 55- 65 crore), will mainly go towards funding the Nagpur-Kondhali BOT project, purchase of mining and construction machinery and meeting incremental working capital requirements.
Atlanta derives 90 per cent of the revenues from road EPC projects and the rest from mining operations. The revenues have grown at a CAGR of 43 per cent and profits at 59 per cent between FY02 and FY06.
The company holds orders worth Rs 310 crore (Rs 3.1 billion) as on June 2006, which amounts to an order book of 2.8 times its FY06 sales, which is not as impressive as its peers.
With one of its BOT road project, Mumbra bypass, expected to generate revenues from early FY07 and existing orders in its kitty, Atlanta is likely to have a strong earnings growth phase FY08 onwards.
Atlanta's valuation stands at 10.02 times its floor price and 11.56 times the cap price based on pre-issue FY06 earnings per share. For the same period, the valuations of other players stand at Sadbhav Engineering (27.8x), Unity Infraprojects (23x) and Pratibha Industries (21x).
Atlanta's FY07 and FY08 valuations stand at 10.1x and 7.5x on the cap price. Considering the earnings potential, the IPO seems reasonably priced compared to peers.
Gwalior Chemical Industries
Price band: Rs 71-85
September 11-14
Good monsoon is expected to shore up the growth in the agriculture sector and in turn would drive the growth of agri-inputs like chemicals and fertilizers. With 41 per cent and nine per cent of its revenues coming from agri-chemicals and pharma clients, Gwalior Chemical Industries smells good this season, even as there is competition.
The company that posted total revenue of over Rs 140 crore (Rs 1.4 billion) for nine months ended December 2005, is coming with an IPO to garner about Rs 80 crore (Rs 800 million) for its expansion plans at the existing sites and new plants.
Chairman, Ashwin Kothari says, "We are into speciality chemicals and user industries include agri-chemicals, pharma, dyes and fragrances. Our growth drivers are the outsourcing trends in the pharma sector and the growth in the perfumery sector. Our strategy is to focus on high margin downstream products." The four user industries contribute 41 per cent, nine per cent, nine per cent and 13 per cent respectively, to the topline.
Despite, concerns about raw material costs and crude oil prices, the company seems to have maintained its margins. Its raw materials to sales ratio has remained largely constant in the range of 44-53 per cent since FY02.
For FY05, the company posted a 33 per cent growth in net sales to Rs 136 crore (Rs 1.36 billion), while the operating profit margin grew to 21 per cent from 14.2 per cent in FY04. Net sales for the nine months ended December 2005 were Rs 126 crore (Rs 1.26 billion), while the OPM was 20 per cent.
Kothari is optimistic about India and China emerging as cheaper destinations for manufacturing and the R&D efforts on the part of his company for developing niche chemicals. Moreover, stringent regulations for the chemical industry in the West, is leading to a shift to India.
At the lower end of the price band, the P/E on annualised trailing earnings of Rs 10.16, stands at 6.99x, while that at the upper end stands at 8.37x. This compares well with most, among competitors like Ciba Speciality Chemicals (13x), Hikal (14.6x), Deepak Nitrite (6.9x), Transpek Industries (8.7x) and Aarti Industries (4.8x).
Hov Services
Issue price: Rs 200-240
September 4-7
The Pune-based finance and accounting BPO service provider, HOV Services plans to raise some Rs 80 crore (Rs 800 million) to expand its Pune and US offices and redeem units (shares without voting rights) worth Rs 65 crore (Rs 650 million) of one of its promoters.
The issue is priced at 16-18.5x FY06 earnings. The industry average P/E is around 10x and the issue is priced at a premium to peers like Allsec Technologies (13x) and Datamatics Technologies (7.6x), which are comparable in size, though not in terms of the business model.
HOV provides services in the areas of account receivable management, enterprise management apart from insurance and tax related services to US-based clients. Its dependence on a single economy is an obvious risk.
The management believes its key strength lies in its strong domain expertise and relationships with over 100 clients from the telecommunication, healthcare, insurance and financial services industry.
The company sees potential in cross-selling its products among its existing clients to propel growth.
The company plans to add 1500 employees to its existing staff of 785. Despite a high attrition rate of 45 per cent, the company does not expect employee costs to rise significantly.
The company's sales and profits have grown at a CAGR of 20 per cent and 100 per cent over the past three years driven by acquisitions. In FY06, sales stood at Rs 164 crore (Rs 1.64 billion) and net profit at Rs 12 crore (Rs 120 million). Last year, however, competitor Allsec fared better.
Though analysts find the company's business model interesting and perceive lot of opportunities, they are concerned about the rising competition leading to pricing pressure.
Valuations do not look attractive either. As far as tech goes, analysts still have a scale-bias and prefer to bet on biggies like Infosys and Wipro or mid-caps like Mastek and Hexaware, which have a proven track record and are quoting at attractive valuations.
Usher Agro
Issue price: Rs 15
September 5-11
The Mumbai-based non-basmati rice miller Usher Agro, plans to enter the branded wheat flour market by leveraging its existing non-basmati rice brand - Rasoi Raja - for which it plans to raise Rs 18 crore (Rs 180 million) through an initial public offering. The new foray augurs well for growth.
Even though the company sells to wholesalers, which fetches lower margins as compared to selling in the retail segment, millers get a fixed margins that are fairly stable, says managing director V K Chaturvedi. "We plan to take the share of our brand from the current 50 per cent to around 80 per cent in next few years," he adds.
The company's issue is attractively priced at a multiple of 5.7 times its FY06 (June ending) earnings, lower than industry average.
Though the companies are not strictly comparable, Usher is priced at a discount to peers in the basmati rice segment like KRBL (7.2x) and Satnam Overseas (6.5x) based on trailing 12-month earnings.
KRBL and Satnam are large players with established brands like India Gate and Kohinoor respectively, whereas the company is relatively smaller and mainly sells to wholesalers.
However, the company earned a return on networth of 14 per cent, in line with the branded basmati players last fiscal. Book value per share currently stands at Rs 17. Assuming the company is able to maintain its profitability, the stock is valued at a P/E of 4.97x FY07 and 4.48x FY08.
The stock is unlikely to yield blockbuster returns. But what makes the issue attractive is the 'safety net scheme' provided by the lead manager IDBI Capital wherein an original resident individual allottee can sell upto 800 shares at the issue price within six months of allotment.
Thus, the original investors are protected from any capital erosion during this period.
Usher plans to set up a 250 MT per day wheat roller flour mill, modernise its existing rice mill plant and install a 1 MW rice-husk based co-generation plant, all at Mathura. It has two rice mill plants in Mathura and Buxar with a total capacity of 57,600 TPA.
The company's biggest strength lies in the strategic location of its mills in the major rice and wheat producing areas. On the flip side, being in agri-commodities, the business tends to be working capital intensive and remains vulnerable to the vagaries of monsoon.
In 11 months ended May 2006, both net sales and operating profit grew at 6 per cent to Rs 35 crore (Rs 350 million) and Rs 3.5 crore (Rs 35 million) respectively.
Net profit shot up 48 per cent to Rs 1.45 crore (Rs 14.5 million) mainly due to substantial reduction in the deferred tax provisions.
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