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2005 IPOs: Ready, steady, grow

Sunil Nayanar | January 11, 2005

By any account, 2004 was a bumper year for public issues. In fact, in terms of the total issue size {Rs 30,511 crore (Rs 305.11 billion)}, it was the highest-ever in the history of the Indian capital market. The good news is that 2005 promises to be equally good, if not better.

According to an estimate by Prime Database, a Delhi-based firm tracking the primary markets, the year may end up with offerings of nearly Rs 40,000 crore (Rs 400 billion). It also promises to bring in more variety.

The issues slated to hit the markets are across sectors - oil and gas, telecom, power, chemicals, banking, technology, finance, infrastructure and even aviation.

There is going to be a mix of issuances, from growth-oriented businesses to well-established ones. Prospective issuers range from venture capital-financed start-up companies to well-established behemoths where the government is either seeking an exit or a dilution of its stake.

"The 2005 issues will come from a combination of well-established companies or promoters, divestments either by the government or venture capitalists and follow-on offerings," says Prithvi Haldea, managing director of Prime Database.

Public issues lined up to hit the markets in 2005 include follow-on offers from PSUs like Bhel (Bharat Heavy Elecrticals), Neyveli Lignite Corp, ONGC (Oil & Natural Gas Corp), RCF (Rashtriya Chemicals and Fertilizers) and SCI (Shipping Corporation of India).

There are at least 11 public sector banks in the queue, including Allahabad Bank, Bank of Baroda and Dena Bank. In fact, government divestments are likely to be the key drivers of primary markets this year.

As far as sectors go, the telecom sector will see lots of action in 2005. The telecom companies, which are looking at public issues include BPL Communications, Hutchison, Idea, Reliance Infocomm and Tata Teleservices.

Other issues are likely to include AB Corp, Air Deccan, Yes Bank, Emami, Fortis Healthcare, GE Capital International, IL&FS Investsmart, Jet Airways, MTR Foods, Shantha Biotechnics, Shoppers' Stop and Sify.

Foreign as well as domestic fund managers are already beginning to sift and sort. According to Ved Prakash Chaturvedi, chief executive officer of Tata Mutual Fund, "the issues coming up in the infrastructure space (read: aviation, power and telecom) are expected to be very attractive".

According to Rajat Jain, chief investment officer of Principal Mutual Fund, Jet Airways is one issue, which is being eagerly awaited.

"In 2005, the primary market boom will be led by good quality telecom offerings and we are eagerly waiting for these issues," Susanta Majumdar, director, UBS India, told The Smart Investor a few days ago.

Even while there are pots of money to be made via primary offers, analysts advise caution. It is common wisdom that the quality of IPOs tends go down in the latter stages of a bull run.

"The continuing bullish sentiment can bring a negative turnaround, with small issues, issues from unknown promoters and overpriced issues hitting the market," warns Haldea.

According to Tridib Pathak, chief investment officer of Cholamandalam Mutual Fund, the fact that the quality of IPOs was pretty good in 2004 is no guarantee that it will be equally good in 2005.

"Historical experience has been that the quality of IPOs starts deteriorating as a bull market grows older. So one needs to exercise caution regarding the IPOs that will hit the markets in 2005," says Pathak. In short, do your due diligence and look out for companies that are well-established and have a good track record on stability of revenues and profit growth.

A look at some of the companies that are expected to hit primary markets in 2005:

BPO

GE Capital International Services: GECIS is a world-class remote processing operation that services its clients from around the world through its IT-enabled services.

Parent General Electric holds 40 per cent of the equity. The company plans to add up to 8,000 new heads to take its employee base in the country to 23,000 by the end of 2005.

GECIS has set a target of clocking $513 million worth of business in 2005, while the turnover for calendar year 2004 is expected to be around $420 million.

Retail

Shoppers' Stop: The IPO from Shoppers' Stop, a leading player in the Indian retail sector, has been eagerly awaited for some time now. The objective of the IPO is to facilitate the expansion of the company's retail chain.

The Raheja group holds 82 per cent in the Rs 400-crore (Rs 4 billion) company. With the retail segment expected to take off in a big way, Shoppers' Stop is ideally poised to reap the benefits in the years to come, say analysts.

Telecom

Hutchison Telecom: Hutchison Telecom is a part of Hutchison Whampoa, a Hong Kong-based multinational conglomerate.

As of October, 2004, Hutchison has more than 65 lakh (6.5 million) customers and a market-share of 15 per cent, which makes it fourth among telecom service providers behind Bharti Tele-Services (20.70 per cent), Reliance Infocomm (19.10 per cent) and BSNL (18.10 per cent).

Idea Cellular: Idea Cellular is a cellular operator, which offers services under the brand name IDEA. The company covers over 3,660 small and major towns and villages along with a total highway connectivity of over 6,000 km. It is expected to make profits in 2004-05 and has a market-share of 10.10 per cent with a customer base of more than 44 lakhs (4.4 million).

BPL Communications: BPL Communications is among the leading companies in the mobile phone service sector and is spread across 192 cities.

Its prepaid service is marketed under the brand name 'BPL Mobile On The Spot' (commonly referred to as MOTS). The company has a market-share of 5.5 per cent and a customer base of 24 lakhs (2.4 million).

Reliance Infocomm: Starting late in 1999, Reliance Infocomm built a fibre optic network of 60,000 km, criss-crossing the country. The company caters to nearly 84 lakh (8.4 million) customers.

While there are apprehensions about the controversy arising out of parent company Reliance Industries' holdings in Reliance Infocomm, proven management ability and sheer size make it one of the eagerly anticipated IPOs.

What is your IPO strategy?

The dilemma for an IPO investor is to decide whether to buy the issue and hold it for some time or go for listing gains. Experts say both strategies are valid, but one should make up one's mind on whether one wants to invest in a company for the long term or just want to participate in the public issue for quick gains.

Considering the listing gains made by most stocks that got listed last year, going for listing gains does make sense. Dishman Pharmaceuticals (209 per cent premium on listing) and Power Trading Corp (179 per cent) are classic examples. But even here, if you had opted merely for listing gains, you would have missed out on the rest of journey.

At current market prices, Dishman Pharmaceuticals is up 252.40 per cent and Power Trading Corp is up 297.81 per cent. Indiabulls, for example, had a premium of 25.53 per cent on listing but the prices have gone up by 327.63 per cent as of now.

But things can go wrong, too, even in a bull market. Between the time the issue closes and its listing (a gap of nearly a month), market sentiment could change and new listings may not always list at a premium.

In fact, if the market turns unfavourable, the listing price could even be lower than the issue price. MSK Projects (-5.50 per cent) and Sah Petroleum (-4.86 per cent) are two scrips that listed at a discount, while Patni Computers (1.39 per cent) and Deccan Chronicle (4.04 per cent) could only manage modest listing gains.

On the other hand, if the market is buoyant, the stock could even list at unreasonably higher prices either because IPO financiers (brokers) are trying to find favourable exit levels, or because people who did not get allotment are buying on listing. These price spikes are artificial and thus it makes sense to exit.

On the other hand, a buy and hold strategy will work when the markets are on the rise and the company in question is fundamentally strong and valuations are attractive.

Also it helps to get a hang of what kind of response an IPO is likely to generate or how many times it could get oversubscribed. The level of oversubscription determines how many shares you are allotted.

In a booming market, when IPOs are dime a dozen and demand is huge, the only way you can grab your share is by getting your IPO financed. The idea here is to bid for a large amount with the help of financing because you will otherwise end up getting much lower allotments than what you applied for, depending on the level of oversubscription.

Most banks are willing to finance up to 50 per cent of the application amount (50 per cent margin) on a maximum amount of Rs 10 lakh. Interest rates on IPO financing schemes range from 12-16 per cent depending on the bank.

Jet Airways: Waiting in the wings

Jet Airways, the largest private sector domestic airline in India, has filed its draft red herring prospectus with Sebi (the Securities and Exchanges Board of India). It will offer 17,266,801 equity shares of Rs 10 each for cash at a price to be discovered through a book-building process.

This includes a fresh issue of 14.24 million shares - the balance 3.02 million being an offer for sale by Tail Winds, the holding company.

According to analysts, the issue aims to raise Rs 1,400-1,500 crore (Rs 14-15 billion), which implies an issue price in the range of Rs 850-900 per share. Tail Winds, an Isle of Man company, currently holds over 99.99 per cent of the company's equity and is wholly owned by chairman and promoter Naresh Goyal.

Jet Airways has reserved 1,200,000 equity shares for subscription by employees at the offer price. Thus the net offer to the public would be 16,066,801 shares. After the offer the company's capital would be 86,334, 011 equity shares of Rs 10 each. The IPO is expected to help Jet Airways raise funds for its international operations.

The company commenced services in 1993 and has expansion plans for providing services in other parts of the world, apart from Colombo and Kathmandu where its services are already operational. In India it offers services to 40 destinations.

Jet currently has a fleet of 34 Boeing 737s and eight ATR-72 aircraft. The company made a net profit of Rs 129.40 crore (Rs 1.29 billion) for the six months ended September 30, 2004, against a net loss of Rs 15.50 crore during the same period in the previous fiscal.

For FY04, the company made a net profit of Rs 163.10 crore (Rs 1.63 billion) compared to a net loss of Rs 244.50 crore (Rs 2.44 billion) in FY03. The total revenues for FY04 rose 21 per cent to Rs 3565.70 crore (Rs 35.66 billion). The company reported a positive EPS of Rs 19.44 in FY04 after a gap of two years.

Even assuming a 20 per cent growth in FY06, the EPS will be Rs 23, which will discount the earnings by 36x. Based on an issue price of Rs 850, the company will be valued at Rs 7,300 crore (Rs 73 billion).


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