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.

De-listing candidates: D-Link India

CMP: Rs.76
Mcap: Rs.226 crore
Non-promoters holding: 36.6%
Value of Non-prom. hldg: Rs.83 crore
Cash & Cash Equivalents for the year ended Mar'06: Rs.51.5 crore
Npat (12 mnths ended Mar'07): Rs.22 crore
Dividend paid out: Rs.6 crore
Retained Earnings for 06-07: Rs.16 crore
Cash & CE at the end of Mar'07 (approx): Rs.67.5 crore

Cost of a mgmt buyback -

@ 25% premium to the CMP - Rs.104 crore
@ 50% premium to the CMP - Rs.125 crore
@ 100% premium to the CMP - Rs.167 crore

Adjusting for the Cash & Cash Equivalents in the B/S:

@ 25% premium - Rs.36.6 crore
@ 50% premium - Rs.57.4 crore
@ 100% premium - Rs.98.9 crore

Based of last five years Cash Profits (Rs.28 crore), how much time will it take for the company earn the amount spent on the buy-back (net of the C&CE):

@ 25% premium - (36.6 / 28) = 1.3 years
@ 50% premium - (186 / 74) = 2.0 years
@ 100% premium - (320 / 74) = 3.5 years

A DEEP VALUE STOCK WITH GROWTH POTENTIAL....

D-Link India has been bearing the brunt of falling realisations in case of products like motherboards. It's margins have shrunk substantially over the past 3 yrs. However, the worst seems to be over for the company and over the next few years, growth in sales and profits will be driven by broadband and networking related products. Its only a matter of time before the CPE segment hits big in India.....the broadband sector in India is ripe for a growth seen in the telecom sector. What can be the potential size of this market:

Well here are some numbers to ponder:

1).One modem (cable or DSL) approximately costs Rs.1500-2000.

2).So if we hit 20 million broadband connections in the next few years with say 50% using DSL or Cable Modems, we are looking at 10 million modems and thats around Rs.1500 crore.

3).Even if the co. captures 20% of this, its looking at Rs.300 crore (same as its full year's turnover in FY07).

4). And as the number of broadband connections grow....so will D-Link's topline and therefore its stock price too!!

De-listing candidates - Abbott Labs

CMP - 486
Mcap - Rs.703 crore
Non-promoter holding: 34.86%
Value of Non-promoters holding - Rs.245 crore
Cash & Cash Equivalents as of the latest financial year - Rs.218 crore
Avg. Npat over the last five years - Rs.69 crore
Avg. Depcn over a similar period - Rs.5 crore
Avg. Cash Flow (a rough estimate) - Rs.74 crore per annum


Cost of a buyback -

@ 25% premium to the CMP - Rs.306 crore
@ 50% premium to the CMP - Rs.367 crore
@ 100% premium to the CMP - Rs.490 crore

Adjusting for the Cash & Cash Equivalents in the B/S:

@ 25% premium - Rs.88 crore
@ 50% premium - Rs.150 crore
@ 100% premium - Rs.272 crore

Based of last five years Cash Profits, how much time will it take for the company earn the amount spent on the buy-back (net of the C&CE):

@ 25% premium - (88 / 74) = 1.2 years
@ 50% premium - (150 / 74) = 2.0 years
@ 100% premium - (272 / 74) = 3.7 years

This ratio sounds more like our usual P/E ratio, and it actually is...in terms of the price the company will pay to acquire the remaining stake and time it will take to earn it back. The reason I am strongly in favour of a buy-back is the [USE OF CASH & CASH EQUIVALENTS]. There are neither being used for business purposes, since their current business barely requires any major CAPEX and nor is the mountain of cash being deployed for other purposes such as a OTS special dividend, acquisition, etc.

If the co. can't find any good reason for deploy its cash, it might as well give it back to the shareholders, instead of sitting on it for years. It only does one thing, destroys shareholder wealth, and plenty of it!!

A rising pile of cash, invested essentially in conservative mutual fund schemes (debt & liquid) can at best earn returns of 8-10% or in an exceptional case, a little more. Compare the same with the company's Return on Equity of over 35%!!

The stock remains a strong de-listing candidate despite repeated (1 & 2) buy-back offers from the Company.

L2 exams finally happened in India....

Thanks to some sane brain in the Delhi High Court.....the CFA exams finally took place in India. Really don't understand the logic behind AICTE blocking CFA institute in India......i did my MBA(Fin) from a college which did not have any AICTE approval...and there are literally hundreds of other MBA colleges (offering Post Graduate degrees), both in Mumbai and outside who do not have any kind of AICTE approval, and yet each one of them is happily offering MBA courses at sky-high prices. When I did my MBA, the per annum cost was around Rs.32k, today the same college charges close to a lac.

L2 Exams On 3rd June...

....no blogging for now !!