A tale of three stocks

A review of how three companies that recently raised funds through public issues have fared and could fare in the times ahead.

A sense of introspection and nervousness seems to have finally crept into the market. The moment is thus opportune to review how three companies that recently raised funds through public issues have fared and could fare in the times ahead.

Two of these companies namely IDFC and SPL Industries made initial public offerings while that of the third, namely Talbros Automotives was a follow-up public offering.

IDFC

IDFC entered the market on July 15th, 2005 with a book-building public offer comprising 40.36 crore ($03.6 million) equity shares of the face-value of Rs.10 each. Of these, 28.36 crore ((283.6 million) shares comprised an offer for sale while the rest comprised a fresh issue.

The price band ranged from Rs 29 to Rs 34 per share translating into a maximum issue size of Rs 1372.24 crore (Rs 13.72 billion). The discovered price, not unexpectedly, was Rs 34.

IDFC's shares have been listed at the NSE and BSE. The issue proceeds had been primarily earmarked for augmenting its capital base to meet future capital requirements. Engaged primarily in infrastructure financing, IDFC has a satisfactory, albeit unexceptional financial track record.

Infrastructure development activities are on the ascent in the fast growing Indian economy, but projects in this segment carry inherently high risk and the same is further magnified by volatile crude oil prices. Rightly or wrongly, past memories of IFCI and IDBI too are bound to cross the minds of investors.

Notably, more than one-third of IDFC's bottomline for FY05 was contributed by profit on sale of investments. Besides, IDFC's cost of funds appear to be on the higher side and margin pressures seem to have pulled down their spreads from 3.8 per cent in FY04 to 2.4 per cent in FY05.

IDFC enjoys well-developed client relationships, can leverage on its established relationship with the Government and has a relatively stronger asset quality, which has translated into lower NPA levels hitherto.

The stock has done well post listing and those betting on the 'India growth story', and resultantly rapid infrastructural growth, can place long-term bets on this company, albeit ideally at price declines.

SPL Industries

SPL Industries Ltd entered the market on June 29th, 2005 with a book-building public issue that comprised 90 lakh (9 million) equity shares of the face-value of Rs 10 each. The price band ranged from Rs 60 to Rs 70 per share translating into a maximum issue size of Rs 63 crore (Rs 630 million).

Again, the discovered price was at the higher end of the band.

SPL's shares were listed at the NSE and BSE. The issue proceeds had been primarily earmarked for expansion and setting up new plants. There was a six to ten month gestation period from the date of the issue, prior to the commencement of SPL's expanded and new plants.

SPL's key positives include its vertically integrated operations facility, which gives it a cost and lead time minimisation advantage. Over the past decade, SPL has developed strong customer relationships with the likes of GAP, JC Penney, Kohls and Haggar. Its design and sampling capabilities too are positives.

On the flip side, SPL's margins are modest and may come under further pressure following the depreciation of the US dollar and the expiry of the quota regime under the Multi-Fibre Agreement. The volatile nature of the prices of its major raw material, cotton yarn is another source of worry as also is the presence of two other group companies in the same segment.

Although unexceptional, SPL's financials pass muster. Notably, inventories had risen sharply and SPL's promoters had helped themselves to a 1:1 bonus at the end of FY05. The stock price of this company has been on the decline after a sound start. A look-in, if the price drifts close to the issue price can be considered.

Talbros Automotive Components

Talbros Automotive Components Ltd entered the market on September 1st, 2005 with a book-building public issue worth Rs 50 crore (Rs 500 million) of equity shares with a face-value of Rs 10 each. Of these, Rs 2.5 crore (Rs 25 million) comprised promoters' contribution while the price band ranged from Rs 90 to Rs 102. Again, there are no prizes for guessing, where the discovered price settled at.

TACL's shares have been listed at the BSE and DSE. The issue proceeds have been primarily earmarked for setting up a forgings unit, investing in a joint venture with Nippon of Japan and expansion of its gasket manufacturing facility and Pune plant. The project cost has been self-estimated at Rs 50.29 crore (Rs 502 million).

QH Talbros, an associate company will account for 65 per cent of TACL's sales. This guarantees off-take, even as it interlinks their fortunes. There has been a project time-overrun which could impact the results for FY06, as also could rising steel (input) costs.

However, the company will be engaged in the forgings segment whose fortunes have been on the ascent. A historical P/E multiple of 12.5 on the undiluted equity base, based on FY05 earnings passes muster, even as it increases to 20 plus if one were to consider the equity dilution. It is also noteworthy that there was a bonus issue in December 2004.

Yet, the huge outsourcing potential in the segment and TACL's joint venture with Nippon Leakless Corporation of Japan augur well.

This stock too has gravitated back close to the issue price and in the event of it slipping well below, a look-in could be considered.

Overall then, it is evident from the above that merchant bankers too have been overtaken by the market frenzy and are, more often than not, getting the public issue pricing equation wrong. Since, the rule of 'Caveat Emptor' applies at least as far as issue pricing is concerned, primary market investors would do well to put on their thinking caps.

Ashok Kumar heads Lotusknowlwealth in Mumbai, India.
Disclosure: The author has no outstanding interest in the shares of the companies discussed in this column.