IPO

While IPOs in their literal sense mean that the company is for the first time issuing its stock to the general public, in reality whichever company is coming out with an offer to sell its share to the general public is known to go the IPO route. So that also includes company who already have their stock trading in the stock market.

Generally the investing community is excited about IPOs because traditionally it was thought that during its first offer companies sell their stock to the general public at a discount to their intrinsic value. While this was true for the Indian markets a few years ago one look at the IPOs coming out today tells us that this is not true anymore. Many companies who do not even have a financial history of five years or so, come out with IPOs to take advantage of the booming financial markets and therefore are not only ‘not’ selling their stock at a discount but even at outrageous prices.

There can be two kinds of investors for IPOs the long term investors who have bought the stock because they believe in the company and think that by holding the stock of the company for a long period they will be able to make profits. The other kind is the short term investors who just buy into the IPO to sell during the initial few days or even hours of listing and make what are known as listing gains.

While investing in IPOs investors should be careful about the history of the company because a lot of companies these days are just listing their shares out because they think that they can take advantage of the general optimism which prevails today in the markets.

The operational history can be a good judge and along with the pedigree of the promoters these two parameters can be a very good indicator of whether to invest in a stock or not.

After analysing the past performance of the company and making sure that the IPO is not being issued by fly by night operators, an investor needs to look at the price at which the IPO is being issued at and decide whether it is a fair price or not. While there is no fixed indicator for this the P/E Multiple provides a good yardstick and you can see what P/E is being demanded by the issuing company and whether it compares with the P/E that prevails in the industry. An important and often unnoticed thing about the P/E Multiple of IPOs is that it is calculated on the current number of shares that the company has got. However as soon as the IPO takes place most of the times fresh shares are issued in the market which will automatically push the P/E Multiple higher by pushing the EPS lower. So whatever P/E you are looking at, keep in mind that you will have to increase that by a bit most of the times after issue of stock.

These are a few tips to be taken care of while investing in IPOs so that  you don’t end up burning your fingers.

JSW Energy Limited – IPO

Business of JSW Energy

JSW Energy is part of the O.P. Jindal Group and this particular company comes under the umbrella of of the JSW Group. JSW Energy was incorporated in 1994 and derives most of its revenues from power generation. JSW Energy currently owns and operates a 260 MW power plant in Karnataka. The company is further expanding its capacity by 3410 MW by constructing and implementing five more power plants in Karnataka, Maharashtra, Rajasthan and Himachal Pradesh.

Apart from power generation JSW energy has also been engaged in power trading since June 2006 and according to CERC is one of the top five energy trading company in India. As next steps JSW energy plans to enter transmission business and for this purpose has created subsidiary.

Financials of JSW Energy

The consolidated revenues of JSW Energy have grown from Rs.5,505.28 million for the year ended 2003 to Rs.8115.48 million in the year ended 2007 at a CAGR of 8.07%. The profits after tax have grown from Rs.214.63 million to Rs. 2904.5 million in the same period at a CAGR of 68.38%.

The EPS for the last three years was Rs.6.38 in 2007, Rs.3.11 in 2006 and Rs. 3.80 in 2005. The RONW for 2007 was 26.59% and for 2006 it was 13.71%.

Objects of the Issue

JSW Energy will use the IPO proceeds primarily to fund the five power projects totaling to 3410 MW mentioned above, it has earmarked a sum of Rs.29186.50 million for this purpose. Apart from this the company would also repay debt worth Rs.6000 million using the proceeds of the IPO.

Key Risks

The company’s financial performance is based on the only operational plant which is the 260 MW power plant. However JSW has a lot of projects underway which are at initial stages and have long gestation periods. Given this scenario the historical financial performance may not accurately forecast the future performance.

The power plants are dependent on various different kind of fuels and JSW relies on a few power suppliers in China, Indonesia and Mozambique. These companies have a limited track record and it becomes difficult to enforce fuel supply agreements if the suppliers fail to carry out their obligation.

Ashoka BuildCon – IPO

Business of Ashoka Buildcon

Ashoka Buildcon is in the business of building and operating roads and bridges in India on a built – operate – transfer mode. The company has been organized in four divisions which are the BOT Division, the engineering, procurement and construction division (EPC) which does the designing, procurement of raw materials and construction of roads, bridges, commercial, industrial and institutional buildings. The other two divisions of the company are the RMC division which sells ready to mix concrete (RMC) and bitumen and then the toll collection contract division which collects tolls on roads owned and constructed by third parties.

Ashoka Buildcon was awarded its first BOT contract in 1997 which was the Dhule Bypass in Maharashtra and the company has been in the construction business since 1976. The company right now has operations in MP, Maharashtra, Chhattisgarh, Rajasthan, Gujarat, Goa, Tamil Nadu, NCR, Dadra and Nagar Haveli and Daman and Diu. Ashoka Buildcon is operating or has interests through joint ventures, subsidiaries and associate companies in 21 roads and bridges as of date.

Financials of Ashoka BuildCon

The company has steadily grown in revenues and from total revenues of Rs. 1568.34 million in fiscal 2003 it has grown to Rs.3711.61 million for the year ended March 2007 at a CAGR of 24%. However this figure must be looked at keeping in mind that the company grew its revenues by 106% in just the last year from Rs.1797.01 million to Rs.3711.61 million.

The profit after tax have also grown steadily at a CAGR of 55% from Rs.25.57 million in the year 2003 to Rs.147.38 million in the year 2007 and it has only declined once in that period when it came down to Rs.85.88 million in the year 2006 from Rs.113.46 million in the year 2005.

The P/E multiple for the years ended 2005, 06 and 07 were Rs.3.11, Rs.1.41 and Rs.6.24 respectively.

Objects of the Issue

Ashoka Buildcon intends to raise funds from the IPO in order to contribute a part of funds required by Ashoka Highways (Bhandara) Limited which is Ashoka’s subsidiary and has been formed in order to construct, operate and maintain 320 km 4 lane section of NH 6. Ashoka Buildcon estimates to spend Rs. 1250 million on this.

The other key area where the proceeds from the IPO would be spent are funding subsidiaries for repayment of debt for which funds Rs.731.14 million are earmarked and then investing in capital equipment for which Rs.300.15 million is earmarked.

Compound Annual Growth Rate Calculator

CAGR is compound annual growth rate and it is used to calculate what your principal would grow to if your interest earned is invested back at the same rate. So if you invest 100 bucks at 10% at the end of first year you would get 10 bucks as interest but at the end of the second year you would earn interest on 100 (original investment) + 10 (interest earned at the end of first year) = 110 and your interest would be 11 instead of 10.

CAGR is widely used in business to calculate the growth rate of revenues and profits as the assumption in business is that the money that is made is reinvested for future growth (the part which is not given as dividends to shareholders)

CAGR is a helpful tool when you are looking at a particular stock to buy and have its historic revenues and profits available. You can input the revenues at a year 2003 and then at the year 2008, enter the number of years as 5 and see what the CAGR comes out to be.

This will give you an idea of the rate at which the company has grown.
CAGR is also helpful to calculate the amount of money that you would have after a certain period of time if you were to invest a certain sum now at a given rate of interest. So in the above example 100 bucks will become 121 in two years time at a CAGR of 10%.

In this calculator you could calculate both, if you know what is the principal you are going to invest, number of years and rate of interest you could calculate the amount it would result in after the period.

Or if you knew the number of years, initial principal and then the resultant amount you could key in that to see at what CAGR the growth took place.

Sea TV Network Limited – IPO

Business of Sea TV Network

Sea TV Network is an Agra based company which is in the cable TV business and is a Multi System Operator. A Multi System Operator or MSO is a company which operates multiple cable TV systems and serves many localities.

Sea TV Network is one of the two existing MSOs in Agra which provides services to various local cable TV operators of Agra. Sea TV also has its own TV channels, which focus on the city and state news and events and the content of this is created in house. The company provides these channels free to their subscribers.

Sea TV now wishes expand its presence and emerge as an All India MSO and also has expansion plans which focus on setting up network for CAS, complete IPTV solution, underground optical fibre network throughout agra and adjoining areas and setting up 20 branch offices in Agra in order to reach directly the end customers and reducing their dependence on the local cable operators.

Financials of Sea TV Network

The revenues for the year ended 2005 was Rs.1.46 lakhs, for 2006 it grew to Rs.175.05 lakhs and for 2007 it was Rs.453.13 lakhs. The profit after taxes for the year ended 2006 was Rs. 2.31 lakhs and the year ended 2007 it was Rs. 18.07 lakhs.

The EPS for the last three years starting from 2007 was Rs.30.25, 4.65 and (0.12) respectively.

Key Risks

There are certain income tax litigations against the directors of the company and in case they are decided against them there could be adverse impact on the business.

Delay in project implementation could cause adverse impact on the business as there are significant capital expenditures which have been planned by the company and the company needs statutory approvals in order to commence laying underground optic fibre. Therefore there are financial risks with implementation delays and there are external factors which could cause these delays.

Inability to manage the growth of the business is another key risk. The promoters have been in this line of business for close to 15 years however they do not have prior experience in managing the kind of growth that is being envisaged by the company.

The current premises from which the company operates are residential premises and if the state government takes any action in terms of sealing the property it would cause disruption of business for the company.

Euro Multivision Limited – IPO

Business of Euro Multivision Limited

 

 
Euro Mutlivision is the second largest company in India which manufactures CDs and DVDs. The company was incorporated in April 2004 and commenced production in April 2005 with five manufacturing lines and a capacity of 720 lakh units of CDs and 72 lakh units of DVDs. Currently the company has expanded by adding five more production lines and has capacity of 1800 lakhs CDs.  
Euro Multivision now proposes to enter a new business which is manufacturing solar cells for electricity generation. The company plans to build a photovoltaic solar cell manufacturing unit with a capacity of 40 MW per year at a total cost of Rs.16756 lakhs in Kutch District in Gujarat. The proceeds from the IPO will go towards this project. The manufacturing unit is proposed to be set in a SEZ and as such would qualify from all the exemptions that are available for a SEZ.  

 

 
Financials of Euro Multivision

 

 
Since the company commenced its commercial operations recently there is not a lot of financial history to go by with, the total income for fiscal 2006 was Rs. 4476.45 lakhs and for fiscal 2007 it was Rs.5914.47 lakhs. The profit after tax for these two years was a loss of Rs. 128.69 lakhs and Rs. 619.07 lakhs respectively. The EPS for the fiscal 2007 was Rs.7.30 and for the year before that was a loss of Rs.1.58 per share.

 

 
Key Risks

 

 
Euro Multivision is entering a completely new line of business in which it has no prior experience and would face stiff competition from existing and new players in the business.

 
For setting up the proposed manufacturing plant the company has bought agricultural land and has applied for the conversion of this agricultural land to industrial land which has not yet been approved.
 

For the expansion into this new line of business Euro Multivision is totally dependent on the success of this IPO and in a situation where the IPO does not yield the funds for the project, right now there are no alternate source of funds identified.

 

The company has made a loss in one out of its two years of operations, which was fiscal 2006 where the company incurred a loss of Rs. 128.69 lakhs.

Birla Cotsyn Limited – IPO

Business of Birla Cotsyn Limited

 
Birla Cotsyn belongs to the Yash Birla group which is one of the leading industrial groups in the country. There has been a joint venture agreement between the Yash Birla Group and the PB Bhardwaj Group and consequently the total promter’s part of the equity will be shared between these two groups in a ratio of 50:50.

 
The company is engaged in cotton ginning, pressing and oil expelling. The company is presently focusing on expansion activities at a total estimated cost of Rs.28919 lakhs. Birla Cotsyn has plans of expanding the spindle capacity for manufacture of synthetic yarn, setting up a 36000 cotton spindle yarn manufacturing facility, manufacture of open end rotor based cotton yarn, manufacture of finished cloth by setting up a dyeing and manufacturing unit.

 
Birla Cotsyn also has plans to set up retail outlets and setting up facilities for garment and apparel manufacturing. The huge size of the project has led to its being granted the status of a Mega Project by the Government of Maharashtra as a result of which Birla Cotsyn enjoys several benefits like electricity duty exemption for a period of seven years, 100% exemption of stamp duty, industrial promotion subsidy equivalent to 100% of eligible investments and 75% reimbursement of expenditure incurred on account of employer’s contribution towards ESI and EPF for a period of 5 years subject to certain limits.

 
Financials of Birla Cotsyn Limited

 
Birla Cotsyn has shown a significant jump in its sales and profit figures in the past year, where the revenues were Rs.40.43 million for the year ended March 31st 2006, it jumped to Rs.561.48 million for the year ended March 31st 2007. Similarly the profits increased from Rs. Rs.2.71 million to Rs.25.69 million in the corresponding period. The EPS for the last three years has been Rs.1.89 in 2007, Rs.0.20 in 2006 and Rs.0.04 the year before.

 
Summary

 
The issue comes from a well respected industrial house of the country however as the financials state the company has just about increased its revenues many folds in the past one year and has plans to go on a major expansion drive make it difficult to rely on past performance to make a future judgment.