IPOs have gone down massively in the recent past (see IPOs largely suck in 2010-11) and a large number of them have gone down over 80% from listing prices. Many are small issues, manipulated up on the first day, attracting investors, only to later slump to levels hitherto unheard of. SEBI now has announced norms to curb misuse of the listing day freedom.

To plug the high volatility, all new listings will have circuit limits from day one (currently, there’s no circuit). A new listing post IPO will have an auction similar to the pre-trade auction for one hour, where you can enter limit or market orders which won’t get executed until the end of the auction hour. The best price is then found by matching orders and the “equilibrium” price is used as the open for the subsequent part of the day (with appropriate circuits in place).

And then, for IPOs of less than 250 crore, the stock trades in “Trade for Trade” segment – meaning, you pay 100% margin for all buys, and you can’t sell unless you own the stock (no intraday short sells). Trade-for-trade applies for the first 10 days, only for IPOs less than 250 cr. 

While this is a good step, what it will really do is to move the manipulation to the first day AFTER the curbs are removed. However, the signal that SEBI is watching may just be enough for operators to stop the rampant abuse of the system that is currently happening. I think we simply need more IPOs, from the likes of Indigo airlines to Flipkart to Tata Capital, to fuel capital markets (and interest back into IPOs). I really don’t get the concept of selling IPO stock at a huge premium – it’s better to conservatively place stock and then make the big money on a follow on issue a year later. Sadly, we are all greedy pigs.

How useful have IPOs been in the last two years? Not very, it turns out.

(Click to enlarge)

The average return, till date, is (– 30.1%). The index has dropped about 25% from the peak. Even government owned company IPOs like MOIL, Engineers India and SJVNL have deeply negative returns.

I need to do a post for IPOs five years ago. GMR Infra, I just discovered, is below its IPO price 5 years ago, despite going up 5x in the interim. (Net of splits and bonuses)

The fall has been cushioned partly by promoter-owned Pantaloon Retail buying nearly 1 crore shares at Rs. 8 or whererabouts.

Very few of the IPOs have done well this year, the notable exceptions being Lovable Lingerie (up 50%) and Sudar Garments (up 60%). Most of the others are down, with Acropetal losing 65%, PTC Financials down 30% and even the recently listed Muthoot Finance just below it's IPO price.

Not that other years are better, but that's a story for a different post.

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

The best returns are of stocks like Gravita India (+160%), C Mahendra Exports (127%), Mandhana Industries (80%) and Talwalkars (72%) . (Click to see a huge picture) Notably, a government IPO - Coal India - has seen a 46% return on the back of rising coal prices. Gujarat Pipavav Port is still positive, while the smaller and popular IPOs of Lovable Lingerie, Persistent Infosystems and Career Point should help entrepreneurs that are actually making decent profits think of an IPO.

The worst performing IPO, Aster Silicates, went all the way to 250+ before crashing, in just a few days to end up 78% in the red. To the people who wanted to ride it up after listing, the return is even worse.

Of the losers, too many of them are shady small cap stocks that shouldn't deserve a mention. Of the notable non-shady stocks (or at least, people that have fancy degrees and wear ties) SKS Microfinance is in bad shape with a 44% negative return, most of which happened because of the AP government rules that took the carpet from under them.

Infra and power players like Nitesh Estates, Prestige Estates, Indosolar and SJVN fell more than 20% from the IPO prices.

As a follower but not a buyer of IPOs, I've seen that some stocks - notably those like Bedmutha Industries - are heavily manipulated. With huge volumes (over 50 cr. sometimes) and low delivery volumes, there seems to be a lot of circular trading or activity that smacks of promoter blessings. While there have been some investigations in the IPO process, we haven't seen any really strong effort to figure out how stocks are manipulated immediately after the IPO. With little history, it's difficult to trade them technically, and with little trader interest and low institutional support, such stocks can be easily moved around and rumours like "buy now before the juicy news comes" floated. But markets are markets, and money brings with it great incentives. All I can say is - if you trade them stick with a strong stop loss and expect that you'll get on the bad side of some manipulation.

Livemint's article prompted this post - because I wanted to see how they've all performed together. Overall, IPO investing has sucked unless you were a) selective and b) lucky.

I haven't included last year's IPOs (before 2004 April), but some of them have had horrible returns. NHPC sold at 36, and is below 24 after more than a year, a loss of 33% or more. NTPC is still below its IPO price of 201 (or lower if you were retail) last year.

Note: I've done my best to see if there were any bonuses or splits. Any data issues are mine alone, and regretted. Do let me know, though.

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

• 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.