• They’re raising 78 cr., with 60 lakh shares at an issue price of 123 to 128 rupees.
• That’s for 25% of the company, so the valuation is 312 cr. post money, 234 cr. pre.
• Revenue in FY09 – 60 cr., profits – 5.6 cr. FY10 looks like it will also see 60 cr. revenue and 5.8 cr. profit.
• That’s a P/E of about 40 for the company. I refuse to be surprised, but let’s see if there’s value.
• They have 55,000 members, and 58 clubs. That’s about 10K per user per year as revenue. Small scope for growth there, but there must be a number of dropouts. They charge about 15-20K per year.
• The aim is to grow to 100K customers by adding another 27 clubs. They’ll retire some 20 cr. of debt too (on which they pay around 3 cr. of interest per year). So if all iz well, they will get a revenue of: 100K x 10,000 per customer = 100 cr. plus the 3 cr. they save in taxes. Let’s assume they can raise prices 15-20% and get 120 cr. (Btw, these aren’t conservative estimates. The total number of gym-goers in India is currently 230,000. )
• Current margins are around 10%. Let’s up that a bit and say they will earn 15 cr. post tax. That will give us an EPS of about Rs. 6.25. At that EPS, the IPO price is a P/E of about 20. Not too bad; but remember, this is when they have achieved all their growth estimates and are at the edge – so the 20% growth from here will be tough.
• The huge plus point in India is that with the exception of Bangalore where you have great weather, indoor gyms are going to be a preferred location for exercise for the office going crowd. Try walking in the Gurgaon heat and you will find yourself turning into a blazing inferno. (I exaggerate; it’s okay between midnight and 1 am)

Stuff I don’t like:

• They don’t list prices on their site. I find that weird; the standard excuse is that prices change often. Dear Talwalkers, let me introduce you to the internet, where you can reflect changed prices as often as you want, that’s the point! But this is a common Indian malady so don’t expect concern from the guy who will load up on the stock anyway.
• There are 11 gyms running under the Talwalkars brand that are owned by promoters and which compete with the company. Free ride! And some relatives of the promoters have 13 gyms under the name Talwalkars which is their name as well so there’s more brand confusion.
• Competition: Their organized competition is Gold’s and Fitness First, which charge 3K-5K per month with annual discounts (price points are similar). Smaller local gyms are of the order of Rs. 500-1000 per month. Most apartment complexes have gyms for which fees are of the order of Rs. 300 to 500 per month. The market is very very tough, and organized players have huge real estate and operating costs in comparison with the competition.
• Calculations: Plus, unlike the west where organized players have HUGE gyms, Talwalkars’ standard gym size is a piddly 5,000 square feet, has 8 treadmills and 3 cross-trainers. That’s 11 people for the most requested cardio equipment. At 30 minutes per person per machine, and 10 hours of usage, we see a max servicing capabiilty of 220 people per day. Assuming people go to the gym twice a week that’s a serviceability of 700 people per gym per month. Make it a 1000 because there are enough suckers who pay and don’t gym. 27 new gyms is going to add capacity for just 27,000 more people – with their current 55K, this will add up to 82K and stop. If they actually do 100K with just 27 more clubs they will end up with many pissed off customers who simply won’t renew.
• Adding more clubs? Each club seems to cost 1.8 cr. to do. It’s not going to be easy to add a lot more clubs from free cash flow – consider that at the edge, net profits of Rs. 15 cr. a year, if fully reinvested in the business, may give you a max of 10 more clubs per year, or 10,000 members per year, which is only 10% growth.
• Their DRHP says Indian fitnes industry is hugely under-penetrated, at 0.4% versus 16%. But the 0.4% is only for the top 7 cities. That’s like saying see Bangalore has 32,000 gym goers out of a population of 8 million. 32,000 is HUGE for Bangalore, at the Talwalkars price point. Also see comparisons – Indian gyms have only 29% average retention rates which means you gotta churn, baby, churn.
• The debt – they have about 60 cr. of secured debt (other than what they borrowed from promoters). Every 1% increase in interest rates will hit their bottom line by 5-10%.

Tough industry but I think it’s a great space for a good organised player. I’m not sure if Talwalkars is that player, and if India is ready for it now versus say 5 years down the line (i.e. real estate will be more affordable, equipment costs will come down, more people will be interested etc.).

Note: I’m just putting in counter arguments. These may not be compelling, and by a stroke of luck we may have a HUGE increase in gym goers or a massive cost reduction due to exchange rate, and the business might boom. I’m known to have performed horribly as market sentiment has pushed stocks into much higher territory, so pinch of salt etc.

Overall I think the issue is too high a price. Something around the 60-80 levels would have been fair value, and I don’t even like fair value – it has to be a bargain. I haven’t experienced Talwalkars first hand, so I can’t comment on their service or quality. If you have and you think the deal is compelling enough to override the above arguments, you might want to buy. I’ll just skip and wait to see what the market says.

This post is written by Deepak Shenoy, at Capital Mind.

Perhaps, like the mega starrer Sholay, it will take some time before it shoots up? The stock has a great P/E compared to peers, but obviously the falling dollar – at 44.45 today – can hit profitability.

Let’s now get into the boring but highly informative world of IPO financing. I’ve been told of “innovative” IPO financing by brokers; some of them offered 95 lakhs of financing for the 15 day IPO, if you put in 5 lakhs of your own. At that leverage, you could hope for some allocation, they said, and of course they would “prop up” the price on listing.

Let’s do the math: for the 95 lakh loan at about 12% a year, you’d pay Rs. 47,500 for financing the loan for the 15 day IPO period. You’d apply for about 33,000 shares and hope for the best.

Going with the basis of allocation you might have got about 316 shares (the non-institutional portion was oversubscribed 106 times). If you sold at the high of the day, you made Rs. 130 per share, which gives you only Rs. 41,080. If you could only sell at the close, your gain was Rs. 100 per share, or a 31,600 rupee gain.

Your payout is Rs. 47,500. Your maximum potential income is Rs. 41,000, and more realistically, Rs. 31,600. This, on an issue that gained 30% on listing. IPO Financing #fail.

You think you might have got the loan and used ASBA (Application Supported by Blocked Amount) to get some interest for the 15 day period, say 5%, which could offset your interest payout. You silly fool. Of course they don’t let you do ASBA; you have to apply through that broker, who’s going to make that extra interest as well.

Don’t get suckered by IPO financing. Someone’s laughing all the way to the bank, and it’s not you.

Also read: The cost of IPO Funding.

This post is written by Deepak Shenoy, at Capital Mind.

The guide is good – but doesn’t tallk about the getcha’s in the offer document itself – like how to make sense of the craziness of subsidiaries, or why they put "[*]” in places like EPS because of silly excuses like we don’t know the price yet, or how to read the fundamental information. Fair enough. That isn’t a SEBI education book, it’s a college course in itself.

The guide tells you how you can invest, where you can get copies of the offer document, how does Book Building work (they stop short of: No, it doesn’t) and how long it takes for allocation/listing. Useful starting point.

Offer documents are also available at merchant banker web sites. By the way, you may not know this, but once the issue is over, you can get the END copy of the Offer document to see how the [*] areas eventually got filled in, by looking at the “Final Offer Documents filed with ROC”.

I wrote a small piece years back (“What to look for in an Offer Document”) which only talks of a few red flags.

Note: I started writing this article reading Hindu’s note about it – and then noting they hadn’t linked to the SEBI guide. Why? Why do online editions of newspapers just not get it? (Apart from LiveMint, that is. They get it. For the most part.)

This post is written by Deepak Shenoy, at Capital Mind.

Note that the current market price is 377. But that has come down from 425 in two days so expect more fireworks; plus in a very illiquid stock, the price doesn’t give you much information.

Okay so how do we value this business?

• You have to compare NMDC to the (much) smaller companies of Sesa Goa, or the (much) larger players of Rio Tinto, BHP and Vale.
• The FY10 P/E of the above players is 13 to 28. Averages are around the 20 range.
• NMDC has an EPS of about Rs. 11 last year (FY09) and in the nine months of FY10 they’ve got an EPS of 6.03. Assuming an EPS of 10 for FY10, the P/E is 30-35, in the price band. Comparatively, very high.
• In the first nine months of the year, the profits are about 2,400 cr. That doesn’t compare well with the last full year (FY09) profit of 4,350 cr. Expect a negative growth in EPS unless they have a mindblowing quarter.
• There’s a shortage of shares because of the huge govt. holding – that will indicate a premium of some sort. Also this is the largest mining co. in India. Added up, though, I wouldn’t pay a premium of more than 25% for these advantages.
• NMDC has cash of nearly 10,000 cr. on the books. That’s less than Rs. 30 per share; not very significant. But if they can deploy it well they could juice up EPS substantially – unfortunately nearly everything they can buy is expensive because it’s the up-cycle in commodities.
• Commodities are highly cyclical, and the company makes most of it’s money in iron ore. They plan to increase output to 50m tonnes after a drop to 24 tons this year from last year’s 29. That’s just doubling output over five years, a CAGR of 15%. Can one expect demand to grow at that rate – for products like steel? The price of ore will depend on prices abroad as well since steel producers will import ore if it is at a big difference to local prices.
• EBIDTA: Consider 7,000 cr. (FY09 was 6700 and this year will be lower) At the lower band price of 300, the company is valued at 120,000 cr. That’s EV/EBIDTA of 17. In comparison, other players are around 12.
• EV per ton of reserve: They have 1.2 bn of reserves, with about 65% iron. Worldwide EV to metal reserves is about $19-20 per ton. At that rate and a Rupee to $ price of 46, the valuation’s just 170.
• Valuation wise – if you look at comparative P/E, EV/EBIDTA, or valuation based per ton of reserves the lower band price of Rs. 300 looks ultra expensive. You’d probably pay 200 for this given the premiums, if you wanted to pay “fair price”. (But who wants to pay fair price, we all want a bargain)
• I’m personally not interested in this IPO. I’ve decided that if I want to buy stocks they should be so ridiculously cheap that it feels like a fantastic deal. “Shooting ducks in a barrel”. NMDC is like shooting a fish from 3 miles away in the ocean, with a bow and arrow. You might hit it, but how lucky is that.

Comparative charts: BHP and Rio Tinto

and Vale and Sesa Goa:

This post is written by Deepak Shenoy, at Capital Mind.

Institutional investors [will] now pay 100% of the bid amount upfront while bidding in an IPO, a far cry from the days when they didn’t have to put up any margin money and allotment to them would be on a discretionary basis by merchant bankers. Some years ago, Sebi applied a 10% margin and moved the system to one of proportional allotments. The current move brings complete parity.

This has gone through some iterations:

1. Institutions would pay nothing. They could just bid without putting a paisa down. So every one bid because it was unlikely they would ever have to actually pay up, since everything was oversubscribed 600 times or something.
2. So SEBI got angry and said we want you to put 10% down. Institutions said, listen, this IPO business takes 45 days, okay? I’m not going to bid if I have to pay money upfront and I get almost no allocation and the money blocked gets me no interest. But SEBI said 10% is 10% boss, you want it, take, otherwise go home. Some of them went home. Most stayed but then the big crash happened, and very few IPOs actually made it through.
3. SEBI realized the interest problem isn’t just institutional – even individuals suffer. So they created ASBA – your money stays in your bank account and earns interest while the IPO is booked. You just can’t use the money for other purposes, but at least you don’t lose the interest.
4. Now SEBI tells institutions: Listen, you guys can’t throw us the interest argument, so pay 100%.

Like the Mint article says, during the IPO process (usually three to five days), NSE and BSE reveal the size of the IPO book (how much already subscribed per category etc.). So if there was already 200% subscription, institutions would say I want to buy 100,000 shares, so let me bid for 200,000 – at current rates I won’t get more than 1/2 of my shares anyway. The 10% margin allowed them to do that (upto 10x the quantity required) That inflated IPO books unnecessarily. Now, with 100% margin, they have to put the entire money up so this practice will be curbed.

The downside of course is that TV channels will not get to make statements like “this IPO is only 2x oversubscribed”. (1x is pretty much what people were looking for, beyond that it’s just showing off)

Mint also says the exchanges may stop reporting book sizes prior to the issue. That’s not very useful because I for one don’t want to apply to a heavily oversubscribed book. Maybe a compromise can be to only reveal information on the last day of the IPO.

This applies only to IPOs after May 1, 2010.

This post is written by Deepak Shenoy, at Capital Mind.

ET Story:

A spectacular debut by Jubilant FoodWorks, which runs the Domino’s Pizza chain in India, on the bourses on Monday has come as a welcome break for a market spooked by a string of subdued first-day performances by companies newly listing their scrips. At the end of the day Jubilant Food-Works was valued at Rs 1,456 crore which compares favourably with the $622 million (around Rs 3,000 crore) market cap of the New York Stock Exchange-listed Dominos Pizzas Inc on Monday evening. The Rs 330-crore IPO proved to be an exception to most recent issues, as it offered hefty returns to investors on the first day of listing.

You would think this was a little shady, because Jubilant has 286 stores in India and, er, the US company is 8,000 stores. Jubilant is only a franchisee and can’t do a thing other than what it’s got agreed with Dominos. They’ve made about 12 cr. in the first 6 months of this financial year, on a turnover of about 182 cr. – a margin of 5 to 6%. With the 6cr. shares outstanding the Earnings per Share was about Rs. 4 (annualized) and at the current price, the P/E ratio is 55.

With 6 crore shares outstanding, and most of the IPO proceeds (nearly 80%) going to existing shareholders, the company wouldn’t have benefited much. Only 40 lakh shares would be a fresh issue (of an issue size of 2.2 cr. shares) – which at a price of Rs. 145 would have raised only 58 crores.

It’s a low margin business; Even with the fresh cash they are unlikely to earn a lot more. As Deven Choksey says, this is a stretched valuation by most means. The stock should go down, though I don’t know when. Classic Pump-and-dump, don’t get caught.

This post is written by Deepak Shenoy, at Capital Mind.

OIL is an oil company (surprise!) and it looks like a proxy for crude prices. It's worse because it needs to subsidize the Public Sector OMCs against huge price rises - so it doesn't make as much on the upside as it loses when crude goes down.

They'll spend most of the money in exploration and maintenance. Which is good, but I don't really have the time to go through the points in detail. There's a huge dependence on the north-east, but that also reduces pipeline costs and such. They have an about 575 million barrels of crude estimated - to give you context, India uses about 3 million barrels a day, approximately.

Their EPS, in the last three years, was Rs. 71.98, 83.16 and 104.24 respectively. That's a healthy growth and the upper band P/E is thus about 10.5. All else being equal, this is a competitor to ONGC, whose EPS is 92 and price is 1192 - a P/E of about 13.

Taken that way, it's a go; but I won't apply because I don't have ASBA (Application Supported with Blocked Amount) set up yet. If I had ASBA, I'd take a chance and apply in the retail category (the ASBA ensures I don't lose interest in the time that they take to process apps and list).

So yes, for once, a good IPO. A thumbs-up from me, but remember: I'm not an advisor and I haven't even done the deep level of research I usually do. This is an "on-the-face-of-it" analysis.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.

Mumbai: Indian brokerages are borrowing ultra short-term money at almost twice the market rate, often from mutual funds, to lend to clients seeking shares in IPOs, fund managers said, in a sign of froth building in the market.

...

Brokerages have between them borrowed up to Rs100 billion ($2.1 billion) for IPO financing in the last few weeks, the fund managers said. None of the brokers would comment.

“They are lending the 15 days paper at 7-8% levels for IPO funding,” said K. Ramkumar, head of fixed income at fund manager Sundaram BNP Paribas. He declined to name the issuers.

Three-month commercial paper pays a coupon of about 4.5%.

The brokerages are issuing secured non-convertible debentures with a 15-day call option to fund houses and are lending the money to their rich clients at a minimum 11.5% and as much as 20%, the fund managers said.

I'd written a post about it in Feb 2008 (Borrowing for IPOs are loser loans) which, come to think of it, was just about when the markets had tanked; IPO loans were very popular then. If history is a guide, this is a sign of bad things to come.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.

But that's a different story, and the frauds will continue to milk the IPOs. Even if there was a jail sentence. Because the odds of getting caught are small - Ms. Panchal was an outlier; there are hundreds of others, unknown and known, that do this kind of fraud on nearly every IPO.

This also means you SHOULD apply to good IPOs. With ASBA, your money is not blocked for long and you continue to earn interest in your bank account. By applying you ensure that these fraudsters get even lesser allocation - the more legit people that participate, the less space there is for these scamsters. So they'll be forced to raise the scale of their operation and hopefully, if our regulators aren't sleeping or in a government-pressure-induced-coma they will get caught.

But is NHPC a good IPO? I won't mull over much but the basics:

• It's a hydel power company, with a current capacity of 5000 MW.
• NHPC, in it's IPO, is selling 168 cr. shares between Rs. 30 to 36. The price has changed dramatically - an earlier prospectus talked about Rs. 20-24 per share, and even earlier, there were talks of 16 per share being the limit.
• Out of this, 1/3rd of proceeds will go to the government, and the remaining to the company. At Rs. 36, this is about 2000 cr. to the govt, 4000 cr. to the company.
• They have made 1244 cr. on a consolidates basis, on a current share capital of 1124 cr. shares. That's an EPS of about Rs. 1.1 per share.
• At a price of 36, that's a P/E band of 27 to 32.
• What are they using the money for? For 7 power plants, total capacity about 3300 MW, which will cost 14,000 cr. (equity+debt). The plants will all be ready only by 2011.
• If their 5000 MW current capacity delivers Rs. 1124 cr - We can stretch and say the 8,300 MW will deliver about 2000 cr. of profit? Let's say 2500 crores. At the expanded equity of about 1300 cr. shares, that's about Rs. 2 EPS. If you expect that in 2012, it's a 22% EPS growth CAGR. That's still way below the current P/E.
• In the last three years, EPS has grown at less than 10% a year compounded.

And given the sentiment even this one will go overboard in terms of subscription, and then list even higher. Irrational exuberance perhaps, but who am I to stand in the way of this juggernaut? And this stock is ripe for trading - will at this price end up as a component of the Nifty, will get F&O approval, and has the grand ability to give huge visual gains on the minimum tick size of 5 paise. So yeah, it's worth trading.

Otherwise, it's a dim IPO. The price-to-quality gets worse and worse with every bull market, it seems.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.

Price: 275 to 325.
Size: 92.65 Lakh shares (255 to 301 cr.). Of which, 59 lakh are fresh issuances, and the remaining are for sale by existing investors.
Date: June 23 to 26, 2009

What do they do?

Club Mahindra, run by them, is a time-share and vacation holiday business. They own 23 resorts and are linked with RCI to about 4600 others. Effectively, to join their "network", you pay them a huge upfront fee - around Rs. 2.5 lakhs - and you get 25 years of membership, with 7 days a year available on any of their (or RCI's) resorts free of cost. Or, inflation free, as they put it.

Like most timeshares, the costs are hidden. Srinidhi Hande runs an excellent blog, and has written a review of the Club Mahindra membership. He mentions that the club membership costs between 2 and 7 lakhs including taxes. Additionally, one pays Rs. 7,500 to Rs. 14,000 on annual fees, regardless of whether they take holidays. Overall, this is not very exciting to someone who isn't bowled over by their presentation.

• At 2.5 lakhs, at a savings rate of 8% a year (using P.O. deposit rates) you're actually paying Rs. 20,000 a year. Plus, the 7,500 annual fees adds up to Rs. 27,500. For a week, that's about 4,000 per day. At the Rs. 2.5 lakh studio room membership, you are unlikely to get peak season bookings. For what it's worth, you will pay Rs. 3,000 to Rs. 4,500 per day for most of these resorts if you book externally - all of them are available for "non-members".
• (Don't consider that you lose the entire 2.5 lakhs at the end of 25 years- otherwise you'd have to do a complex reducing balance calculation)
• You hope that you will get the rooms when you want, in the place that you want, and in the hotel of your choice. If they have no rooms available during your kids vacations (surprise!), bad luck, try next year. Costs escalate when you consider this.
• Given that you're paying upfront, you are unlikely to get top service - after all service comes with the expectancy of repeat business, of a payout at the end. When you have committed to repeat business, and have already paid, what are the chances you'll be treated as well as, say, a walk-in visitor who's booked as a "non-member"? The incentives don't quite work in your favour.
• If you decide, at any time, to use your vacation at a non-Club-Mahindra place for a particular year, you are paying Rs. 4,000 more per day from the already sunk cost. They'll probably tell you that your days can be sold, but in practise this is extremely cumbersome.
• Holidaying has been inflation proof for the most part, in the last few years, all things considered. Goa still costs the same for 3 and 4 star resorts as it used to in 2005, in fact you could get hotels at lesser. I honeymooned in Goa, and even today would pay the same rate for the same hotel (Taj at Fort Aguada). Even if you consider that average rates were around Rs. 2000 per night in 1999 and are about Rs. 4000 now, that's a 7% CAGR - just about meeting inflation. At the increase of holiday opportunities - you could holiday cheaper in Bangkok, Malaysia or Dubai - and the increase in number of resorts, one can expect that the next ten years will not see huge price increases.

How do people like their service?

First, a personal opinion. I have only heard of people being dissatisfied. From friends who couldn't get any rooms when they wanted, to others who couldn't get refunds, or even get anyone to answer their call, nearly all responses were negative. The only positives I got were for individual resorts, but like a friend said "You will get that even if you book as a non-member".

Let's also look at published (negative) opinions on the service or lack thereof:

• Mouthshut reviews are all negative, with literally no supporters for the service.
• Consumer complaints have a significant number of negative views on the service.
• A court recently asked it to refund the membership to a consumer.

If you're looking to buy or sell your membership check out Srinidhi's page with an excel sheet of sellers and prices listed - list your membership there for selling, and if you're looking to buy you can get much better deals here.

Club Mahindra is only one of their offerings. They also have Zest, the 10 year version of the above. And a corporate package deal called Fundays, a holiday travel website at clubmahindra.travel and Mahindra Homestays.

What does this have to do with the IPO?

Very little, really. Having crappy service or crappy products has never meant that the company won't grow in a stellar way going forward. But this has been a subject close to heart, so I wanted to write about. Let's get on with the financials and stuff.

What are the figures like?

They have 1261 apartments/cottages, and nearly 96,000 members. This might pose a small problem because each room can only be used 52 times a year (one week for a member). That's about 66,000 member nights available, meaning 30% of their members can't be currently accomodated, more if you consider "non-members". The official response is that many members don't get eligible, either by being early on EMIs or by default, but that isn't good enough as an explanation - simply put, they need a LOT more investment before they can scale revenues, or they will lose a substantial amount of goodwill and membership.

Earnings: FY 2009 revenue was 442 cr. up 17% YOY. Net income was down 6% at 79.8 cr.

They currently have 7.83 cr. shares in issue, so their EPS is 10. So at the price band (275 to 325) the P/E ratio is 27 to 32. This is ridiculously high for a company that has flattened profit growth and is saturated on capacity.

How will they use the money? They'll spend 211 cr. on five resorts (new and expansions) which will add 500 rooms to their kitty. Note that this will add 26,000 member nights over two years, still not quite enough to satisfy their current member count. And I believe they will need to grow their member count if they have to increase revenues.

Still, there's another problem. The IPO has only 59 lakh new shares - the rest are an offer for sale, in which the company gets nothing. At the upper price of the band, Rs. 325, they will collect 192 cr. They spend 210 cr. but only collect 192 cr. max, and have to pay around 6% management fees, listing fees etc. They do stagger spending over two years but the shortfall will have to be met elsewhere. Perhaps by some debt.

They've securitised receivables for 150 cr. and if a customer defaults, they have to make good the shortfall. This is not good, if you consider that there will be reasonable dissatisfaction among customers due to lack of room inventory. They also have about 100 cr. of debt on their books.

Conclusion: Given that:

• They have about 30% more members than room nights
• New capacity from this public issue will not even satisfy current membership, leave alone new members
• Ensuing loss of members or defaults can impact cash flow negatively, since they have securitized receivables.
• Customer dissatisfaction, from what I hear, is very high
• They're asking for a P/E of 27 to 32 on very small EPS growth in the past, and very little expected in the future

This is not advice so I would encourage readers to come to their own conclusions. I'd rather see this company scale up inventory and build a more satisfied set of customers, and see the tourism cycle go through its downturn before considering investing, at any price. Perhaps in three-four years. But given my horrendous record of looking at IPOs, it might just be that this share doubles on listing. That's another reason why you should come to your own conclusion!

This post is written by Deepak Shenoy, at The Indian Investor's Blog.