Titagarh Wagons IPO - Subscribe

theIPOguru has a new issue analysis note on Titagarh Wagons. theIPOguru's recommendation is:

"Overall, the positives far outweigh the negatives. The company at its higher band is available at a price multiple of less than 20 times and market cap to sales of less than 4 times. A brief comparison with its listed peer suggests that the company is available at attractive valuations. Given that its future prospects appear encouraging, discerning investors could consider investment in the shares of TWL with a long-term view."

The full article can be accessed here.

The Union Railway Budget for 2008-09 had a host of announcements for the wagons manufacturing industry. Some of the excerpts from the Railway Minister's Budget speech are as follows:

• Modernization of Rolling Stock

While in 2003-04, 6,300 wagons were manufactured whereas in 2007-08, 15,000 wagons are expected to be manufactured. In 2008-09, manufacture of 20,000 wagons is planned which would be the highest level of wagon productions so far. Similarly, in 2008-09, 250 diesel and 220 electric locomotives will be manufactured which would be a record in itself. Production of new generation diesel and electric locomotives will also be stepped up substantially.

• Manufacture of new design wagons by wagon manufacturers

Till now, wagon manufacturers have been manufacturing wagons in accordance with standard designs prescribed by RDSO. As a result most of the wagons in use on Railways are of the design of 70s and 80s. We have formulated a new policy to promote induction of wagons with modern and new designs in the Railways. This policy makes adequate provision for simplifying the process of certifying and accepting the new wagon designs and protecting the intellectual property rights of the companies. Wagon manufacturers will now also be able to import technology from abroad to bring modern designs into the Indian Railways. This policy will facilitate continuous upgradation in the wagon technology.

• New Wagon Leasing Policy

In order to develop the wagon leasing market, we have prepared a new wagon leasing policy under which, rail customers and container operators will be able to take wagons on lease. For getting registered under the scheme, wagon leasing companies should have a minimum net worth of Rs. 250 cr and will have to deposit Rs. 5 cr as registration fee. Registration will be valid for 20 years and will be renewable for another 10 years on rendering satisfactory services. Leasing companies have been given full rights to choose or change their lessees. These companies will lease out special purpose wagons, high capacity wagons and container wagons.

• New Wagon Investment Scheme

The Wagon Investment Scheme announced in the year 2005-06 has been extremely popular amongs iron-ore customers. During the last three years, approval has been accorded for an investment of over Rs. 1,500 cr for procurement of 138 rakes. Against this, 42 rakes have been received so far at a cost of around Rs. 500 cr.The old Wagon Investment Scheme has not been popular with other than iron-ore customers. Therefore a new liberalized Wagon Investment Scheme has been prepared. Under this scheme, investments can be made for procurement or leasing of special purpose and high capacity wagons. Freight discounts at prescribed rates will be granted for investment in special purpose wagons and high capacity wagons.

• Container Business-Mission 100 MT

In the last three years, 15 operators have been given licenses for running container trains. Presently, 146 trains of Container Corporation and 44 container trains of other container operators are running. The number of trains run by other operators is expected to increase to 50-55 by the end of this year. The total container traffic is expected to be 26 million tonnes in 2007-08 including 2 million tonnes contributed by new operators. Presently 60 container depots are operational including three constructed by private parties. It is expected that eight container depots by Container Corporation and 40 by other operators would be developed in the coming years.

Each of the aforesaid announcements are expected to boost demand for wagons substantially over the next few years.

Reliance Power bonus issue ratio.... update

theIPOguru has a nice article (with computations) on the Reliance Power bonus issue. According to theIPOguru's analysis, Reliance Power's Board is likely to issue bonus shares in the ratio of 2:17. I agree, 1:17 or 2:17 is a more realistic ratio given the kind of price rise seen in the past few days. I had written on this earlier [link] where I had estimated a ratio of around 3:17.

Reliance Power bonus issue ratio ??

Reliance Power, one of the most hyped IPOs of recent times, dropped significantly below its issue price of Rs.430 per share. The company in an unprecedented move has offered to issue bonus shares to all non-promoters (individuals or institutions). Given that there are more issues lined up from ADAG's stable, the group can't afford a complete loss confidence of the retail investor.

The notification is as follows:

Reliance Power Ltd on February 17, 2008 has announced that a meeting of the Board of Directors of the Company will be held on February 24, 2008.

The Reliance Power Board will, inter alia, consider a proposal for issuing free bonus shares to all categories of shareholders, excluding the promoter group (comprising of Reliance Energy Ltd. and the ADA Group), and / or other measures, which will result in reduction of the cost of Reliance Power Ltd, shares below the IPO price of Rs 430 per share for retail investors, and Rs 450 per share for institutional and other categories of investors. [I think shareholders who were given 17 shares during the IPO will get an additional 3-4 shares, which will result in a significant drop in their acquisition cost, to around Rs.350 per share. This compares well with the current market price of Rs.415 per share].

Reliance Power's IPO closed on January 18, 2008, receiving an overwhelming and record breaking response, with commitments of nearly Rs 7,50,000 crore (US$ 190 billion), from nearly 500 institutional investors across the globe, and 5 million retail investors. The sheer scale and unprecedented magnitude of the response clearly reflected the pricing of the IPO as being in line with prevailing valuation benchmarks and market sentiments.

However, subsequent to the closing of the IPO, the global and Indian equity markets have suffered an extra-ordinary meltdown, with all benchmark indices down 15% - 20%, and leading Indian stocks down by an even greater range of 20% - 40%.

In line with this global trend, the Reliance Power stock price has closed below the IPO price, since listing on February 11, 2008.

From the time of opening of the Reliance Power IPO on January 15, 2008, the Sensex is down 13%, while the Reliance Power stock is down 11% from the IPO price for retail investors, and 15% for other categories of investors.

The decline in the Reliance Power stock price has been compounded by:

- a vicious and orchestrated campaign of market manipulation and market abuse

- unleashed by unscrupulous rival corporate interests

- to hammer down all Reliance ADA group stocks

- in an attempt to undermine our fair name and reputation, and

- cause losses to millions of genuine investors.

Reliance Power has formally written to SEBI seeking an investigation into the same.

Equity shares, by their very nature, are risk-bearing instruments, and there is no obligation on behalf of any issuer to insure investors against possible losses.

However, in keeping with the Reliance ADA Group's fundamental and over-riding philosophy of creating value for genuine long term investors, the Board of Directors of Reliance Power will be meeting as above, to consider appropriate one-time measures which will result in reduction of the cost of Reliance Power shares below the IPO price.

This will include, inter alia, consideration of a proposal for issuing free bonus shares to all categories of shareholders, excluding the promoter group (comprising of Reliance Energy Ltd. and the ADA Group), thereby protecting investors even from notional short-term losses on their shareholdings.

The proposal will result in dilution of the promoter group's shareholding in Reliance Power, which they have indicated they will accept in the broader interest of protecting and enhancing value for over 4 million institutional and retail investors.

Reliance Power has the world's largest shareholder family of nearly 500 overseas and domestic institutional investors, and over 4 million retail investors.

Reliance Power has a market capitalization of Rs 87,000 crores (US$ 22 billion) - among India's 10 most valuable private sector Companies, and a net worth of nearly Rs 14,000 crore (over US$ 3.5 billion) - among the top 5 private sector Companies in India on this parameter.

Reliance Power is implementing power projects with aggregate capacity of over 28,000 MW, by far the largest development pipeline in the country.

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theIPOguru has a nice article on the Reliance Power bonus issue. The article can be read here.

Indian IPO market in 2008

theIPOguru has a small review note on the Indian Primary market with recommendations on some of the stocks that listed recently. A brief summary of the same is as follows:

Future Capital Holdings Ltd: Hold
Mundra Port: Hold

Brigade Enterprises Ltd: Sell

Kolte Patil Developers Ltd: Sell

Aries Agro Ltd: Hold

Precision Pipes & Profiles Company Ltd: Sell

Burnpur Cement: Sell

Read the full article here.

Future Capital Holdings - New Issue

theIPOguru has a new issue analysis note on Future Capital Holdings. theIPOguru's recommendation is: "Discerning investors with patience and risk-appetite can consider an exposure in this IPO"

The full article can be accessed here.

Two new listings - Precision Pipes and Aries Agro

Shares of Precision Pipes (issue price - Rs.150 per share) and Aries Agro (issue price - Rs.130 per share) will list on the bourses today. theIPOguru has a note on the Listing Strategy for Precision Pipes.

Reliance Power - the most awaited IPO, indeed !!

Reliance Power opens for subscription on 15th Jan 2008. While the issue price is likely to be around Rs.450 (i.e. on the upper end of the price band), the grey market price is already quoting at a close to 80-100% premium. At that price, the stock will be valued at around Rs.1.8-2.0 lac crore, that for a company that generates 'zero' watt of power !! There are various articles on the issue floating in the market, here's a look at two of them:

Article 1 -

The much awaited Reliance Power IPO is opening on 15^th January 08, with a net public issue of 22.80 crore equity shares, of Rs.10 each, in the band of Rs.405 to Rs.450 per share. Looking at the expected demand from HNI, QIB and Retail, it is a foregone conclusion that book would get discovered at Rs.450 per share.

We all know that QIB category is required to pay only 10% on application in an IPO, while, High Net Worth Investors (HNI) and Retail Category needs to pay the entire amount. This is a cause of dissatisfaction amongst the latter categories as it is not perceived to be a fair level playing and they resent the discrimination between the categories for the same stuff.

Reliance ADAG, has somewhat tried to ease this - firstly by offering a Rs.20 discount to retail category and secondly by asking only Rs.115 per share on application, from HNI and Retail Category. The effective cost to Retail Category would be Rs.430 per share, presuming that book would get discovered at Rs.450 per share.

HNIs generally make application in IPOs by availing IPO finance facilities offered by various investment bankers and stock brokers at an interest rate of 15% to 16% per annum. Due to this facility, (which is to the extent of 90% to 95% in IPO like Reliance Power), an investor is able to leverage it by 10 to 20 times. The duration of finance is generally for 16 to 20 days, during which, the whole process of IPO gets completed.

With only Rs.115 being asked on application, there is huge interest amongst HNIs to apply for the issue. Premium of Rs.370 in the grey market is added attraction as businessmen and traders are also finding it attractive to go for margin funding to earn a return of over 300% per annum, on one's own investment.

Let us try and understand how this works :

An investor wanting to apply for 1 lakh shares, needs Rs.115 lakhs as application money. With 5% margin to be provided by the applicant, he puts in Rs.6 lakhs while Rs.109 lakhs is financed by an NBFC at 16% per annum interest. Assuming fund remains blocked for 16 days, the funding would have an interest burden of Rs.75,000 on Rs.109 lakhs having availed. If HNI category gets subscribed by about 200 times, there would be an allotment of 500 shares. Taking grey market premium of Rs.370 per share, it would give a profit of Rs.1,85,000, which results into a net gain of about Rs.1,10,000 (after deducting interest costs of Rs.75,000), on own investment of Rs.6 lakhs. This results into a return of over 300% on annualized basis.

In HNI category, also called as Non-Institutional Category, 2.28 crore shares being 10% of net issue is reserved, while 30% being 6.84 crore shares are reserved for the Retail Category.

It is a broad consensus that HNI category is likely to get subscribed by about 200 times. If we go by issue size of 2.28 crore shares, in this category and with Rs.115 as application money, it would need Rs.262.20 crore for one time subscription and 200 times would need Rs.52,440 crores. Presuming that close to 95% of this would avail 95% funding, IPO financing from NBFC is estimated to be about Rs.47,300 crores.

Do the NBFCs have the required depth to provide this kind of funding ?

Leading investment bankers like JM, DSP, Kotak, Enam, Edelweiss, Motilal Oswal, Birla, Citibank, Religare have been financing this IPO and book of each of them is running between Rs.3,000 crores to Rs.5,000 crores. But due to huge demand for margin funding, many of them have already made allocations amongst their clients and have closed their books. Also, few of them are now charging interest of upto 20% per annum, against earlier rate of 15% to 16% annually, offered by some of them. Even allocation to each client has been put with a cap of about Rs.25 to Rs.40 crores, per client, on which margin money asked from them is just Rs.1.50 crores to Rs.2 crores.

Surprisingly, huge demand is seen coming from Doctors, Lawyers, Architects, Builders and other leading businessmen, who have never availed this facility earlier for any of the IPOs.

Why this sudden interest ? Strength of IPO or name of Anil Ambani ?

Even in Retail Category, an upfront premium of Rs.7,800 per application is offered by the grey market operator. This is for investors having Demat Account in their name and merely to lend their name for making applications. All the finances are arranged and provided by the broker/operator buying this application.

In this scheme, broker/operator would apply for 225 shares, (maximum permissible in this category), which has a bid value of Rs.96,750 (after considering Rs.20 discount on upper band of Rs.450). The market is expecting an allotment of 30 shares in this category and presuming grey market premium of Rs.370 per share plus Rs.20 discount of Retail investor, this translates into a profit of about Rs.11,700. Of this, Rs.7,800 is offered for lending the name, while Rs.3,900 remains with broker/operator as his share of profit for doing all these exercise.

In Retail Category, 6.84 crore shares being 30% is reserved. Presuming an allotment of 30 shares on 225 shares having applied, market expects subscription level of 7.5 times in this category. This level of subscription would need Rs.5,900 to Rs.6,000 crores. If subscription level exceeds beyond 7.50 times economics of broker/operator would go haywire. One section of market is expecting this category to get subscribed by about 10 to 11 times and hence, find it interesting to sell application at Rs.7,800 in advance.

Looking at the huge interest and response expected for the IPO, you need to agree that fundamentals need not be the sole factor for one to get attracted to an IPO.

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Article - 2

A right royal abuse of power by Udayan Mukherjee, HT 8th Jan. 2008

The most awaited event of the Indian primary market calendar is here. Reliance Power may have priced its IPO in the Rs 415-450 band but the active grey market price is Rs 900. This gives Reliance Power a potential listing market capitalisation of Rs 2,00,000 crore. With zero installed capacity today, expected generation capacity of 6,000 megawatts by 2011 and 26,000 MW by 2016. NTPC, in itself a richly valued stock, has an installed capacity of 27,000 MW and commands a similar market cap. The market has simply taken an eight year leap and priced it in the Reliance Power stock today. I find that staggering.

A look at the ratios look even more mind numbing. This IPO money is being raised to execute about 7,000 MW of capacity. That should be done by 2012. That year, if all goes perfectly, Reliance Power will have revenues of Rs 7,700 crore, EPS of under Rs 8 and a book value of Rs 70. At the listing price of Rs 900, the stock would be trading at a 2012 price-earning ratio of 110, a price to book value ratio of 13 and a market cap to sales ratio of 26. These are four-year forward ratios, remember. The ratios moderate somewhat for 2016 but by then much further dilution would have happened to finance the additional capacity so the market cap would balloon substantially.

This is madness. While many explanations abound on how such valuations could be justified, this is so similar to the 100-plus PEs the market gave freely to information technology stocks back in 2000. While all of us know how that story finally ended, we should also remember how long that madness continued. The power madness, too, will end, sector tailwind notwithstanding, but it may continue longer than we think it can before fizzling out. While it lasts, the most expensive stock in the sector will become the valuation benchmark and will pull the others into the clouds. Just remember the old adage: those who forget history are doomed to repeat it.

Indian Primary Market Momentum ???

theIPOguru has a nice write-up on the Indian Primary Market, what happened in 2007 and what's in store for 2008. The entire article can be read here. A brief excerpt follows.....

The clear primary market theme in 2007 revolved around Realty and Infra Structure companies. The big-ticket IPOs that hit the market included DLF, HDIL and Power Grid. Of the three, Power Grid was clearly the most attractively priced, as has been the case with many PSU IPOs – remember Maruti Udyog too ?

Some of the relatively lower profile IPO’s that went on to grab the secondary market spotlight included Vishal Retail, MIC Electronics and Everonn. The high profile loser of 2007, primarily on account of gross over-pricing of its IPO was House of Pearl while fundamentally shaky IPOs like Transwarranty and Broadcast Initiatives bit the dust, post-listing.

Herein, one must call the bluff behind the brain-dead advise that some so called ‘experts’ are doling out to investors, suggesting that every IPO be subscribed to and sold on listing. Well, playing ‘Russian roulette’ might give investors lapping up such gibberish an even greater high, albeit with similar consequences.

Furthermore, wealth is created by holding on to the fundamentally sounder stocks and those who sold the likes of Infosys, Opto Circuits, Divi’s Labs and more recently, Lanco Infratech on listing might well be rueing the day they did so.

Indian IPO / Primary Market Preview 2008

Watch theIPOguru's preview of the Indian Primary (IPO) Market 2008 here.

eClerx Services & Brigade Enterprises listing today...

theIPOguru has a listing strategy for the new issues - Brigade Enterprises & eClerx Services. While the former is a real-estate developer (with a focus on residential properties) with Bangalore-centric business interests and other nearby areas like Mysore, the latter belongs to the fast emerging Knowledge Process Outsourcing sector. eClerx Services will be the first listed KPO on Indian bourses. Read the listing strategies for the two issues here and here.

Transformers & Rectifiers listed today...

theIPOguru has a listing strategy for the new issue - Transformers & Rectifiers (India) Ltd. , a company that is engaged in the manufacture of electrical transformers for the power sector and industrial applications.

Read theIPOguru's listing strategy here.

Jyothy Laboratories listing tomorrow...

Jyothy Laboratories, owner of brands like Ujala and Maxo recently came out with a public issue. The issue was primarily aimed to provide an exit route to its early investors, to that extent the issue was an offer for sale. The stock is listing on the bourses tomorrow.

theipoguru's listing strategy says:

Listing Call: Hold

Despite the current weakness in the market, we expect shares of Jyothi Laboratories to list at a healthy premium. At the upper end of the price band, the issue was priced in at a P/E of 21 times. Given that most of the FMCG companies are quoting P/Es of anywhere between 25-30 times, it will not be surprising if Jyothi Laboratories also lists at a similar multiple. With strong brand equity, wide distribution network, and well-distributed & tax-efficient production facilities, Jyothi Laboratories is a stock for the long haul.

The entire note can be accessed here.

Links: IPO Analysis - Omaxe & Alpa Labs.

Read insightful IPO analysis notes on:

> Omaxe Ltd and
> Alpa Laboratories,

here and here.

Investing in IPOs in India is a FREE LUNCH....

Economics textbooks have for long taught us "There Ain't No Such Thing As A Free Lunch".However, the Indian primary market seems to be an exception to this rule. A study of over 100 IPOs in the past three years reflects the same. A spreadsheet of the study can be downloaded from here.

Some brief numbers:

No. of IPOs: 100
Coverage period: late 2005 - 2007 till date.
Returns computation: Avg Price on the listing day over Issue price.
Avg. Price defined as Average (Open + High + Low + Close).

Result:

IPOs with +ve first listing day (i.e. avg. price > issue price) - 73
IPOs with +ve opening (i.e.open price > issue price) - 78
Average Gain to an investor who sells on the Ist of listing : 24.3%

I think it is this free lunch that has caused so much trouble in the IPO market. The IPO scam that was unearthed by the SEBI last year. The scam in brief was this:

"It involved manipulation of the primary market—read initial public offers (IPOs)—by financiers and market players by using fictitious or benaami demat accounts. While investigating the Yes Bank scam, Sebi found that certain entities had illegally obtained IPO shares reserved for retail applicants through thousands of benaami demat accounts. They then transferred the shares to financiers, who sold on the first day of listing, making windfall gains from the price difference between the IPO price and the listing price."

Any investment that earns returns (above the risk-free rate) without any risk will attract infinite investors. However, since the supply of IPO stock is limited, and there are limitations to how much one can apply, there is a mad rush to invest in IPOs.