Career Point Infosystems: Strong Point

Career Point Infosystems is entering the capital market on 16th September 2010 to raise Rs. 115 crore, via a fresh issue of 37-39 lakh equity shares of Rs.10 each (depending on the price discovered). The issue, priced in the band of Rs. 295 to 310 per equity share, constitutes about 20% of post-issue paid-up capital of the company and closes on 21st September 2010.

The company provides tutorial services for engineering and medical entrance exams such as AIEEE, IIT-JEE and All India pre-medical and pre-dental tests. It has presence through 33 centres, of which, 17 are company operated while balance 16 are franchisee centres, spread over 13 states of the country, mainly in North, East and Central India.

For FY10, it had close to 32,000 student enrolments, of which, over 40% were from a company operated Kota centre alone. Kota centre alone accounted for over 60% of the company’s consolidated revenues of FY10.

Going forward, the company plans to discontinue the franchise model for tutoring and also diversify into the formal education space. It plans to set up a university in the name of Career Point University in Kota, Rajasthan and also set-up another university in Himachal Pradesh.

The funds being raised via the IPO will be used to finance the following:

a) Establishing an integrated campus spread across 8.6 lakh square feet in Kota, for 3,000 students, with investment of Rs. 68.25 crore. This facility will provide accommodation to students and visiting parents, library, recreation and other such facilities.

b) Expansion of campus and office at Kota, across 45,000 square feet, with investment of Rs. 16.49 crore.

c) Strategic acquisitions worth Rs. 15 crore, to be deployed in FY11, however no targets have yet been identified

For objects a and b above, no funds have been deployed till date, despite a cash balance of Rs. 22.74 crore and liquid investments of Rs. 37.87 crore in its books, as of 31st March 2010.

The company, being debt-free, earns most of its revenue during the first six months of the financial year itself. For FY10, on a consolidated basis, it generated a topline of Rs. 66 crore against Rs. 48 crore in FY09, growth of 38%. Of this, education and training income grew by 49% to Rs. 59 crore, from Rs. 40 crore in the previous year. However, the company’s margins have been on a decline, mainly due to decrease in franchisee fees and rising employee costs. Employee costs increased by 75% in FY10 to Rs. 21 crore, from Rs. 12 crore a year ago.

The net profit for FY10 was Rs. 18 crore, resulting in net margin of 27%. The resultant EPS was Rs. 13.2 on equity of Rs. 14.42 crore. Post IPO, if book gets discovered at the upper end of the price band at 310, the company’s equity will rise to Rs. 18.13 crore. Promoter holding, presently at 75.4% would drop to a little under 60%, post-issue.

As on 31st March 2010, the company’s networth stood at Rs. 133 crore and BVPS was Rs. 92. As on that date, the company had cash and cash equivalents (liquid investments) aggregating to Rs. 61 crore.

For FY11, the company is expected to report net profit of about Rs. 21 crore. Discounting one year forward PAT by 20 times, gives a value of Rs. 420 crore. Add to that the cash and cash equivalents of Rs. 61 crore, as of latest balance sheet date, gives a pre-IPO valuation of Rs. 481 crore for the company. This gives a per share value of Rs. 334, while the upper band is set at Rs. 310. Looks fair, as it leaves close to 8% on the table for the prospective investors.

The company is expecting its core business to grow at the rate of 30% on an annualised basis, while its margins are likely to improve slightly by over 33% on marginal basis. The contribution from new areas will start flowing in from FY 12 onwards, which will improve its financials further, so as to service the higher equity base post IPO. To implement these new projects, the company made a preferential allotment of shares in July 2009, at Rs. 248.60 to Franklin Templeton for Rs. 50 crore, and to Mr. N S Raghavan, founder promoter of Infosys, at Rs. 292.64 per share in January 2010, for Rs. 10 crore.

This is the first company from tutorial education field, tapping the capital market, from Kota, which is termed as Mecca for IIT aspirants and hence is likely to have some extra interest in its IPO. We advise to apply in it, even at the upper end of the band at Rs. 310, as it is likely to give some listing gains but better gains in the longer horizon of 6-8 months.

Microsec Financial Services: For micro returns

Microsec Financial Services is entering the capital market on 17th September 2010 with a fresh issue of 1.25 crore equity shares of Rs. 10 each, in the price band of Rs. 113 to Rs. 118 per share. The company will raise Rs. 141 to Rs. 148 crore via the public issue, depending on the price discovered. The issue, constituting 39.3% of post-issue paid-up capital of the company, will close on 21st September 2010.

Microsec, an NBFC, is a financing and investment company, providing services such as investment banking, brokerage (equity, commodity and currency), wealth management, insurance broking, financial planning and loan against shares. It has a dominant presence in East India (where 89% of its 239 branches are located) with strong focus on West Bengal (accounting for 74% of branch network) and more particularly in Kolkata with 99 branches (which accounts for 41% of total branch network).

As of 30th June 2010, the company had 26,000 broking clients and 459 clients registered for its loan against shares service. The fund deployed towards loan against shares facility, as on 31st March 2010, was Rs. 41 crore for 72 clients, leading to an average ticket size of Rs. 42 lakh per client with no NPAs, as of that date. Going forward, the company plans to increase its focus on this line of financing activity.

Of the total funds to be raised in the IPO, the company plans to use Rs. 113 crore for expanding the financing business and Rs. 8 crore each for setting-up new facilities (30 branches and 4 regional offices) and upgrading present technology.

For FY10, on a consolidated basis, the company had a topline of Rs. 57 crore, of which, brokerage and investment banking accounted for 37% and 26% respectively. The net profit for the year was Rs. 25 crore, implying a net margin of 43%. The company’s net margins remain strong due to significant contribution of investment banking (debt syndication) income, which almost entirely gets added to the company’s bottomline.

As on 31st March 2010, the company’s networth was Rs. 92 crore with BVPS of Rs. 47.4. Its cash / bank balance (net of debt) stood at Rs. 15 crore, as on that date. EPS for FY10 was Rs. 12.6 on equity of Rs. 19.3 crore.

Post IPO, the equity will expand to Rs. 31.8, which is considered high for the nature and scale of the business operations. Post-issue, the promoter holding will reduce to 54.78% from the present 90.25%.

The narrow price band of 4%, between 113 to 118, is a refreshing positive, wherein the company will be valued in the range of Rs. 359 to 375 crore, at the lower and upper price bands, respectively. This seems to be quite stretched for a broking company, whose fortunes are so closely linked with the performance of secondary markets, thereby leading to uncertainty on future profitability.

Broking firms having made their IPOs in the boom time of 2007, viz. Motilal Oswal, Edelweiss and Religare Enterprises, have not all rewarded their shareholders in the long term. Except for Religare Enterprises, both Motilal Oswal and Edelweiss have underperformed, either the markets or in absolute terms, from their IPOs till date. Edelweiss’s market cap has reduced by one-third from Rs. 6,200 crore at the time of its IPO in Nov 2007, to less than Rs. 4,000 at present. On the other hand, market cap of Motilal Oswal increased by just 1% since its IPO in Aug 2007, as against Sensex’s return of 29% during the same period.

This company can be compared more with Emkay Global, having present market cap of Rs. 212 crore, with annualised topline of Rs. 115 crore and high promoter stake at close to 72%. This share is ruling at Rs. 87 on the hopes of promoters’ wanting to sell their stake in the company. This company, having gone public in March 2006, is still ruling way below its issue price of Rs. 120 per share. Microsec, being a regional player and that too in the Eastern part of the country, will have its disadvantage.

At 113 and 118, the issue is being priced at a revenue multiple of 6.3 and 6.6 times respectively. Bigger listed peers (both in terms of presence and turnover) are presently ruling at revenue multiple of around 3 times. On a PE based multiple, against the average of 16 for listed brokerages, the issue is priced cheaper at 9.0 and 9.4 times respectively, the higher net margins probably coming to the company’s rescue. However, Microsec stands at the disadvantage due to the smaller scale of its operations vis-a-vis the other listed players.

Given the sentiments around are very positive, the issue may give prospective investors some listing gains, but may not be able to reward investors having horizon of 12 months, on a sustainable basis. It would have been better, had the issue been priced at around Rs. 100 per share, which would have left higher margin of safety and returns on the table for the prospective investors. Investors can go for the issue only for listing and short term gains.

Prakash Steelage: Not a STEAL

Prakash Steelage is entering the capital market on 5h August 2010 with a fresh issue of 62.5 lakh equity shares of Rs.10 each, in a price band of Rs.100 to Rs.110 per equity share. The company will raise about Rs. 63-69 crore via the issue, which constitutes 35.71% of post-issue paid-up capital and issue closes on 9th August for QIB bidders and on 10th August for HNIs and retail investors.

The company manufactures seamless and welded stainless steel pipes, tubes and U-tubes at 2 manufacturing facilities located in Silvassa and at Umbergaon in Gujarat, with total installed capacity of 15,600 MTPA. It is undertaking capacity expansion at its Gujarat unit with an investment of Rs.49 crore. The other objects of the issue include meeting working capital requirements and general corporate purpose.

The company has already arranged for Rs. 43 crore via debt and Rs. 5 crore through equity issue (preferential allotment to promoters) for meeting the objects of the issue. Of the total issue, Rs. 15 crore will be used towards capacity expansion, about Rs. 40 crore towards working capital needs and balance for general corporate purposes.

During FY10, the company earned revenue of Rs. 437 crore, of which, Rs. 219 crore was from sale of traded products. It earned net profit of Rs. 18 crore, earning net margin of 4.1% and EPS of Rs. 15.84. As of 31st March 2010, the company’s networth stood at Rs. 51 crore while it had total outstanding debt of Rs. 141 crore, largely working capital loans.

The company’s profitability has been fluctuating due to foreign exchange gains and losses. During FY10, it earned Rs. 2 crore in forex gains, while in FY09, it suffered a loss of Rs. 6.6 crore due to currency fluctuations.

On the lower and upper end of the price band, the company is issuing shares at PE multiples of 6.3 and 6.9 times, respectively. Its larger listed competitor, Ratnamani Metals, having annual sales of Rs. 850 crore, net margins of 9.6% and debt-free status, is presently ruling at a PE multiple of 7.3 times.

Though not much disappointment on the growth and size of the company, but, Prakash Steelage is half the size of Ratnamani Metals in terms of turnover, earns net margins which are less than half of what Ratnamani presently makes, and has largely built its present manufacturing capacity only over the last 2-3 years. These factors must be discounted by atleast 15%, while valuing the company. Also, being a primary market issue, about 10% must be left on the table for prospective investors. Hence, a PE multiple of around 5.5 would have been justified for the issue, as against 6.3 – 6.9 presently. This translates into a fair value of share at Rs. 86. So, even at the lower band of Rs. 100, it is looking expensive.

Hence, investors can give this issue a miss, on the backdrop of expensive valuations.

Grey Market Premium Dt. 2-8-2010

Grey Market Premium Dt. 2-8-2010

Company Name	Offer Price (Rs.)	Premium (Rs.)	Kostak (Rs. 1 Lac Application)
Midfield Industries Ltd.	133	18 to 20	--
Engineers India (FPO)	270 to 290	9 to 10	1800 to 2000
SKS Micro Finance	850 to 985	63 to 65	2200 to 2300
Bajaj Corp. Ltd.	630 to 660	85 to 90	1800 to 1900
Prakash Steelage	100 to 110	3 to 4	1100 to 1200

Bajaj Corp: Long Term

Bajaj Corp is entering the capital market on 2nd August 2010 with a fresh issue of 45 lakh equity shares of Rs.5 each, in a price band of Rs.630 to Rs.660 per share. The company will raise Rs. 284 to 297 crore, depending on the price discovered via the public issue, which closes on 4th August for QIB bidders and on 5th August for retail and HNI category. Through the issue, the company is looking to dilute 15.3% equity.

A Shishir Bajaj group company, Bajaj Corp is India’s third largest producer of hair oils. The company’s brand portfolio comprises of Bajaj Almond Drops, Brahmi Amla, Amla Shikakai and Jasmine Hair Oil in the hair oil segment and Bajaj Kala Dant Manjan in the oral care (tooth powder) segment. Bajaj Almond Drops, a premium brand, is the largest selling light hair oil in India, accounting for 50.3% market share by value and about 47% share by volume. However, the company is heavily dependent on this single product, which generates about 92% of annual sales.

The company has an aggregate annual manufacturing capacity of 8.3 crore litres of oil, at 3 company-operated premises (2 in Himachal Pradesh and 1 at Dehradun) and 2 third-party facilities (in Himachal Pradesh and Rajasthan). It has a national distribution reach of 15.6 lakh retail outlets through its 4,600 distributors and 8,900 wholesalers.

The company’s manufacturing facilities are located in tax-free zones, due to which it is exempt from excise duty for a period of 10 years beginning FY09. It also enjoys benefits under section 80I-C of the Income Tax Act, due to which it is exempt from income tax for 5 years beginning FY09 and thereafter will be taxed at concessional rates for next 5 years.

The objects of the issue are:

Objects of issue	Rs. crore
Promote 4 new products during FY11-14	220
Acquisitions and other strategic initiatives	50
General Corporate purposes	Balance

With a limited product portfolio and heavy dependence on a single brand, the company’s prospects are vulnerable to the success of its 4 products to be launched in the near future. Moreover, the company is yet to identify the products or companies to be acquired, for which Rs. 50 crore has been earmarked from the issue proceeds.

Pg 26 of the RHP states that funds deployed towards general corporate purposes may constitute over 30% of the issue size. However, this contradicts the objects of issue. The company is expected to raise about Rs. 297 crore, at the upper end of the price band at 660. In that case, funds available for general corporate purposes would be Rs. 27 crore, amounting to only 10% of the issue size. Then how can the funds for general corporate purposes be close to Rs. 85-90 crore, in any case? Are the other objects of the issue, specially acquisitions, a mere gimmick for fund raising?

The company does not have much operating history as it was carved out from its parent Bajaj Consumer Care Limited only in 2008. For FY10, it clocked revenue of Rs. 330 crore and earned net profit of Rs. 84 crore, thereby earning an EPS of Rs. 33.6 on equity of Rs. 12.5 crore (2.5 crore shares of Rs. 5 each).

As on 31st March 2010, it had a networth of Rs. 26 crore, down from Rs. 51.2 crore as on 31st March 2009. The book value per share, as on 31st March 2010, was Rs. 10.24. The low book value was due to the 110% interim dividend pay-out in FY10, mainly to benefit the promoters, before the company went public. The company declared interim dividend twice, at 700% and 176% in Dec 2009 and Mar 2010, respectively, entailing a total payout of Rs. 107.6 crore (inclusive of dividend tax). As on date, the company enjoys debt-free status.

Compared to peers, the company enjoys healthy net profit margin due to limited scale and depth of operations. Going forward, as new product launches are undertaken, margins are likely to come under pressure.

At the lower and upper end of the price band, the company is issuing shares at PE multiples of 18.8 and 19.7 times, respectively. This works out to valuation of Rs. 1,850 to Rs. 1,950 crore, mainly for 1 hair oil brand – Bajaj Almond Drops. The issue price factors in the growth of future products to be launched by the company. Listed peers, both Indian and MNCs, much larger in size, are presently ruling at PE multiples of 25 and above on the bourses.

On a relative basis, the valuation seems to be fair. However, taking a fundamental call leads to a neutral view on the issue. The company being an FMCG player, considered a defensive sector, may give safe returns to investors in the longer term, as it continues to grow through new product launches and strategic acquisitions to taps its distribution reach further.

Engineering India Ltd: Well Engineered

Engineers India Limited (EIL) is making a further public offer (FPO), through an offer for sale, for 3.37 crore equity shares of Rs.5 each, in the price band of Rs. 270 to Rs. 290 per share. The issue, offering a 5% discount to investors applying under the retail category, represents 10% of the paid-up equity share capital of the company. The issue opens on 27th July 2010 and closes on 29th July for QIBs and on 30th July for the retail and HNI category.

Through the FPO, Government of India (GoI), which presently holds 90.4% in the company, plans to raise between Rs. 894 to 960 crore, depending on the price discovered. Post the offer, public shareholding in the company will increase to 19.6% from the present 9.6%.

EIL, a leading engineering consultancy company, is primarily focussed on oil and gas and petrochemicals industries and serves clients both in India and globally. For FY10, the company reported consolidated revenues of Rs. 2,014 crore and net profit of Rs. 444 crore, resulting in an EPS of Rs. 13.19 on the present equity of Rs. 168 crore (33.69 crore equity shares of Rs. 5 each). On standalone basis, these numbers were marginally lower; revenues being Rs. 1,993 crore, net profit Rs. 436 crore and EPS at Rs. 12.93.

As on 31st March 2010, the networth of the company was Rs. 1,152 crore and it had no debts on its books. Cash and bank balance, as on that date, was Rs. 1,795 crore, which amounts to cash of Rs. 53 per share. Its order book as on 31st March 2010, was Rs. 6,237 crore, which represents over 3 times of FY10 sales.

For the quarter ended 30th June 2010, on a standalone basis, it reported revenues of Rs. 606 crore and net profit of Rs. 115 crore, with quarterly EPS of Rs. 3.40. It is expected to report FY11 EPS of close to Rs.15.

At the upper end of the price band of Rs. 290, the issue is priced at a PE multiple of 19.33 times, based on FY11 estimated earnings of Rs. 15 per share. After applying the 5% discount for retail investors, the FPO price at the upper end of 290 is discounted by 18.37 times, its forward earnings.

If the cash and bank balance on the company’s books is deducted from the share price, the effective price per share for the company’s business, clocking annual topline of Rs. 2,000 crore, is Rs. 223, which implies a discount of less than 15 times forward earnings. The same is explained as under:

		(in INR)
Price Band	270	290
Less: 5% Retail Discount	13.5	14.5
Net Price (for retail)	256.5	275.5
Less: Cash in co's books (as on 31-03-10)	53	53
Effective Price	203.5	222.5
FY11 expected EPS	15	15
Effective PE multiple	13.57	14.83

On comparing the FPO price vis-à-vis the share’s current market price of Rs. 318 (Monday’s closing price), the pricing looks attractive, inspite of the fact that secondary market price in case of FPO of PSUs are not relevant. Still, on pure fundamentals, share deserves a price of Rs. 300 per share on listing.

After having witnessed poor show for the recent public offerings of PSUs, and keeping an eye on the targeted Rs. 40,000 primary market pipeline for this fiscal, the Government finally seems to have done a fair job with respect to EIL’s pricing. The issue is recommended even at the upper end of the price band, as effective cost will be at around 276 per share, thus leaving room for listing gains on table for the prospective investors and good potential of appreciation over the next 6 to 12 months period.

SKS Microfinance: Macro gains

SKS Microfinance is entering the capital market through a public issue of 1.68 crore equity shares of Rs.10 each, comprising of an offer for sale of 93.46 lakh shares by 4 promoter entities and balance 74.45 lakh shares, through a fresh issue. The issue, priced between Rs. 850 to Rs. 985 per share, offers Rs. 50 discount to investors applying under the retail category. The issue represents 21.6% of the fully diluted post issue paid-up capital of the company, opens on 28th July 2010 and closes on 30th July for QIBs and on 2nd August for the retail and HNI category.

SKS Microfinance, an NBFC by legal constitution, is the India’s largest micro finance institution, in terms of value of loans outstanding, borrowers and number of branches. It provides collateral-free loans, having an average ticket size of about Rs. 10,000, to poor women in rural India, for conducting any income generating activities. The loans are repayable in 50 equal weekly instalments and carry interest rates between 26.7% to 31.4%. As of 31st March 2010, the company had a wide-spread network of 2,029 branches in 19 Indian states, catering to 67.8 lakh women borrowers.

The company has reported robust growth between FY07-FY10. Its total income grew at 176% CAGR to Rs. 959 crore in FY10, from Rs. 46 crore in FY07. Likewise, its net profit increased at 330% CAGR, during this period, to Rs. 175 crore in FY10 from Rs. 2 crore in FY07. During FY10, it disbursed Rs. 14,387 crore in loan amount and earned net profit margin of 18.2% and EPS of Rs. 32.98.

The company has a very good asset quality, as reflected by low NPAs. As on 31st March 2010, gross NPAs were Rs. 9.6 crore (0.33% of gross loans outstanding) and net NPAs stood at Rs. 4.8 crore (0.16% of net loans outstanding). For FY10, it earned a return on assets (RoA), a key parameter for NBFCs, of 4.9%. Its networth, as of 31st March 2010, was Rs. 950 crore and book value per share amounted to Rs. 147. Total debt amounted to Rs. 2,695 crore, of which 55.8% can be recalled by the company’s lenders anytime, leading to a debt-equity ratio of 2.8:1.

In the past, the company has faced instances of cash embezzlements and misrepresentation by employees. Also, with a headcount of over 21,000 employees, its employee attrition stood high at 25.7% for FY10.

The primary object of the issue is to fund the company’s future growth plans. At the upper end of the price band of Rs. 985, the company is expected to see fund infusion of about Rs. 733 crore while the offer for sale will amount to Rs. 920 crore. Recent trend in IPO pricing has been to keep a very close price band, generally in the range of 6-8%, representing confidence on the part of promoters. But in this case, the 16% range between the lower and upper end of the price band is quite large, considering the high issue price, in absolute terms.

At the lower and upper end of the price band, the company is issuing shares at PE multiple of 25.8 and 29.9 times respectively. On a PBV basis, it is issuing shares at 5.8 and 6.7 times respectively, calculated on pre-issue equity. On a post dilution basis, PBV works out to 3.9 and 4.2 times at the lower and upper ends, respectively.

There are no exact comparable companies listed in India. However, it can be benchmarked with asset financing NBFCs such as Shriram Transport Finance and M&M Financial Services. Shriram Transport, clocking annual revenues of Rs. 4,500 crore had net profit margin of 19.7% in FY10. It is presently ruling at PE multiple of 17.2 times and PBV of 3.9 times. On the other hand, M&M Financial Services, having earned PAT margin of 22.8% in FY10 on revenues of over Rs. 1,500 crore, is ruling at PE and PBV of 14.7 and 3.0 times respectively. These companies, bigger in size, with higher net profit margins, established presence and earning comparable RoAs are available at much attractive valuations in the secondary market. Obviously, an investor cannot afford to overlook these comparable peers and will not get carried away by the innovative concept of micro financing.

We have seen that a lot of hype has been created for this issue, firstly due to Narayana Murthy and George Soros backed Quantum fund being PE investors in the company and secondly due to the nature of business of discharging social obligations or rendering services to the poor. But both are coming at a heavy price, leading to good profit for the promoters. It would have been much better, if lending would have been made at around 15% to 18%, as there is not much NPAs. Infact, lending rate of around 28% looks quite exorbitant and seen as fleecing poor and illiterate borrowers. Also, it is felt that borrowers have seen adopting the teeming and lading approach, as fresh loan is availed to repay old ones.

On pure economics of business and fundamentals, issue is looking expensive, but still may evoke good response, which may result in listing gains. It would have been better to see book getting discovered at Rs. 850 per share (which looks unlikely looking to the response having received from anchor investors) thus having an effective cost to retail investors at Rs. 800 per share. But element of premium looks to have built in its pricing due to first mover advantage and good hype.

Those who are looking to go for it are advised to do so at the upper band, as otherwise they may get left out.

Midfield Industries: No Middle Path

Midfield Industries is entering the capital market on 19th July 2010 with a fresh issue of 45 lakh equity shares of Rs.10 each, in a price band of Rs. 126 to Rs. 133 per share. The company plans to raise between Rs. 57 to 60 crore, depending on the price discovered, via the 100% book-built public issue, which closes on 21st July 2010.

The company, an organised player in the industrial packaging segment, manufactures steel strapping, seals, angle boards, collated nails and also offers end-to-end packing solutions, to companies in the steel, aluminium, glass, jute and paper industry. It has an installed capacity of 12,000 MW per annum of steel strapping, which accounts for about 65% of its total sales.

The company has a customer base of over 500 clients, however it is highly dependent on a few of them, as top 10 clients accounted for 48% of its sales in FY10, 43% in FY09 and 49% in FY08.

The company plans to expand its existing manufacturing facilities at Hyderabad, Roorkee and Mumbai, as well as, establish new facilities at Hyderabad and Sharjah, UAE, with an aggregate investment of Rs. 38 crore, to be funded mainly through the IPO proceeds. The UAE facility will primarily cater to the export markets. However, the company’s exports have been declining over the years; having dropped from Rs. 8 crore or 12% of sales in FY08, to just Rs. 3 crore or only 3.3% of sales in FY10.

Other object of the issue include meeting working capital needs (Rs. 5.4 crore) and general corporate purposes. The benefits due to capacity augmentation will be reflected in the company’s financials only from FY12 onwards.

The company has entered into a 49:51 joint venture with Spanish company Centaur Equipos de Flejado, for establishing steel strapping manufacturing facility in India (same line of business as its existing one) to supply to Centaur in Europe. More than 3 years have elapsed, but this JV has not yet commenced any operations. Also, as per the JV agreement, the company will be selling Centaur’s products in India. One fails to understand the rationale for this JV, since the company could have independently catered to the European markets.

The company’s business has been growing at the steady pace. For FY10, it reported sales of Rs. 90 crores and PAT of Rs. 8 crores, earning EPS of Rs. 9.8. For FY09, it had reported sales of Rs. 83 crore with net profit of Rs. 6 crore and EPS of Rs. 7.1. However, it has defaulted in payment of 6 monthly instalments aggregating to Rs. 1.1 crore, since December 2009.

As on 31st March 2010, its networth was Rs. 33.7 crore and it had debt of Rs. 42.3 crore, resulting in a debt-equity ratio of 1.3:1. Working Capital (or net current assets), as on that date, was Rs. 62 crores, while fixed assets was only Rs. 13.2 crore. This shows that the business is very working capital intensive.

The company has failed to manage its working capital effectively - it is compelled to offer longer credit period to its customers, but does not enjoy as favourable credit terms from its suppliers. Nearly 8 months of its FY10 sales were locked in outstanding debtors of Rs. 58.4 crore, as on 31st March 2010, while in FY08, the outstanding debtors were less than 5 months sales. Going forward, for FY11, it estimates to offer 6.5 months credit period to debtors, whereas, it is expected to get only 3.5 months credit from its creditors.

At the lower end of the price band, the company is issuing shares at a PE multiple of 12.9 times, based on FY10 earnings, and at 13.6 times on the upper end of the price band. There is no justification for such a high PE multiple when the industry PE is less than 10 times and most of the smaller players, like Midfield, are ruling in the single digit PE multiples.

The company faces severe competition both from multi-nationals like ITW Signode, operating on a large scale in India and globally, as well as the fragmented unorganised players in India. It also enjoys very low pricing power. Also, the price-conscious industrial packaging industry has been witnessing increasing client preference for plastic strapping over metal.

We give a thumbs down to the issue, as a company clocking annual turnover of Rs. 90 crores in steel strapping and related packaging materials, does not deserve an enterprise value (market cap + debt – cash) of over Rs. 200 crores, arrived at the lower end of the price band of 126.

Grey Market Premium Dt. 20-7-2010

Grey Market Premium Dt. 20-7-2010

Company Name	Offer Price (Rs.)	Premium (Rs.)	Kostak (Rs. 1 Lac Application)
Aster Silicates Ltd.	118	6.5 to 7	--
Hindustan Media Ventures	166	3.50 to 4	--
Midfield Industries Ltd.	126 to 133	15.50 to 16	1400
SKS Micro Finance	--	47 to 48	1250

Note: Dont subscribe for issue by just seeing premium Price as it may change anytime before listing. Subscribe only considering Fundamental of the companies

Grey Market Premium Dt. 7-7-2010

Latest Grey Market Premium Dt. 7-7-2010

Company Name	Offer Price (Rs.)	Premium (Rs.)	Kostak (Rs. 1 Lac Application)
Aster Silicates Ltd.	118	7 to 7.50	--
Technofab Engineering	240	28 to 29	--
Hindustan Media Ventures	162 to 175	Discount	--

Note: Dont subscribe for issue by just seeing premium Price as it may change anytime before listing. Subscribe only considering Fundamental of the companies

Hindustan Media Ventures: Good News at lower end

Hindustan Media Ventures is entering the capital market on 5th July 2010 to raise Rs. 270 crore, with a fresh issue of equity shares of Rs.10 each, in a price band of Rs. 162 to Rs. 175 per share. The company will issue 154 to 167 lakh fresh equity shares, depending on the price discovered, via the 100% book-built public issue, which closes on 7th July 2010.

Another issue from the Bhartiya stable, after Jubilant Foodworks, Hindustan Media Ventures publishes the 70 year old Hindi daily Hindustan, India’s 3rd largest newspaper in terms of readership (99 lakh readers). It also publishes Hindi magazines Nandan (children’s magazine) and Kadambini (general interest magazine).

‘Hindustan’, with 16% readership growth during Jul06 to Dec09, is currently the No. 1 newspaper in Bihar (45 lakh readers) and Jharkhand (14 lakh readers), No. 2 Hindi newspaper in Delhi NCR and No.3 newspaper in Uttar Pradesh (26 lakh readers), India’s largest market for Hindi newspaper. Going forward, company plans to improve its readership base and circulation in Uttar Pradesh and Uttarakhand.

A 98.85% subsidiary of HT Media, it has 17 printing facilities and an editorial team of over 800 journalists. A new printing facility at Gorakhpur, UP, will become operational by next month, which will give the company a pan-UP presence and help it offer a complete UP pack to advertisers, thus augmenting its position in that key growth market.

The objects of the IPO include:

1. Establishing 8 new publishing units worth Rs 66 crore, to be fully operational by FY12-end
2. Upgrading exiting plant and machinery for Rs 55 crore, during FY11
3. Immediate pre-payment of unsecured loans, borrowed for discharging purchase consideration for Hindi business acquired from HT Media in December 2009, worth Rs 135 crore. The company will, thus become debt-free post-issue.

Coming onto the financial performance, FY10 operations have to be viewed for 8 months period from Apr-Nov09, when the business was under HT Media, together with 4 months period from Dec09-Mar10, post transfer of Hindi business to the company. For FY10, it reported sales of Rs. 439 crores, of which advertising revenue accounted for Rs. 297 crore (or 68% of sales). It earned net profit of Rs. 45 crores, amounting to 10.3% net margins. Advertising revenue, the lifeline of media companies, grew at a compounded annual growth rate (CAGR) of 33% between FY07-10.

At the lower and upper end of the price band, issue is discounting an EPS of close to Rs. 8 for FY 10, by about 20 and 22 times respectively. With focus on UP market going forward, a pre-dominantly higher advertisement revenue generating market, the company is likely to increase its advertising revenue to paper sales ratio of 68:32 presently, to 80:20 in next couple of years. This will result in improvement in the bottomline. The company also enjoys operational and management synergies with parent HT Media.

Peers such as Jagran Prakashan and D B Corp, two Hindi print media companies, though larger in size, but with debts on their books, are presently ruling at PE multiples of 22-24 times, based on historic earnings.

The company, with estimated market capitalisation of Rs. 1,270 crore on the upper end of price band (debt free status due to loan pre-payment), looks good in terms of strong foothold in its key markets, future growth prospects and group pedigree. The issue looks good at the lower band of Rs. 162, considering its listed peers, while at the upper price band of Rs. 175, it restricts near term and listing gains.

Aster Silicates: Dont be Silly

Aster Silicates is entering the capital market on 24th June 2010 to raise Rs. 53.1 crores, with a fresh issue of equity shares of Rs.10 each, in a price band of Rs.112 to Rs.118 per share. The company will issue 45 to 47 lakh fresh equity shares, depending on the price discovered via the public issue, which closes on 28th June 2010.

The company, manufacturing sodium silicate primarily used by the FMCG, tyre and pesticides industry, operates two manufacturing units in Gujarat, with a combined capacity of 150 MT of glass per day (MTPD). It operates in a very competitive and fragmented industry in Gujarat.

The objects of the issue include tripling of manufacturing capacity to 450 MTPD, with investment of Rs. 44.3 crores and meeting working capital needs of Rs. 7.5 crores. For FY11, the company has estimated working capital requirement of Rs. 26.5 crores. Rs. 7.5 crores will be met through issue proceeds and balance Rs. 19 crores will be borrowed / arranged by the company, for which no arrangements have yet been finalised.

The company is heavily dependent on very few customers as well as suppliers. For FY10, top 5 customers accounted for over 83% of its turnover, whereas, its purchases were concentrated among just 3 suppliers, which supplied a whopping 97% of the company’s total purchases for that year. This only signifies a very low bargaining power in the hands of the company, both as a buyer and seller, which may be a concern post-expansion. Moreover, it does not have any long term supply agreement with its customers.

Coming on to its financial performance, the company reported sales of Rs. 62 crores for FY10 and a PAT of Rs. 4.4 crores. On an equity of Rs. 10.36 crores, FY10 EPS was Rs. 5.1 and networth, as on 31st March 2010, was Rs. 20.3 crores, resulting in a book value per share of Rs. 23.5. Outstanding debt, as on 31st March 2010, was Rs. 14.5 crores. Over the years, its debtors turnover ratio has been falling, from 8.8 in FY08 to 3.6 in FY10, indicating softer credit period given to customers by the company.

At the lower end of the price band at 112, the PE multiple works out to 22 times and PBV 4.8 times. There are no listed companies engaged purely in sodium silicate business, but such chemical companies deserve a PE of not more than 5. To us, the share justifies a price of not more than Rs. 35!

The issue is grossly over-priced and does not deserve an enterprise value (market capital plus debt minus cash) of Rs. 183 crores, post-listing. The issue is a clear avoid.

Grey Market Premium Dt. 25-6-2010

Grey Market Premium Dt. 25-6-2010

Company Name	Offer Price (Rs.)	Premium (Rs.)	Kostak (Rs. 1 Lac Application)
Parabolic Drugs Ltd.	75 to 85	Discount	--
Aster Silicates Ltd.	112 to 118	2 to 2.50	1400 to 1450
Technofab Engineering	230 to 240	8 to 9	1600 to 1700

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Parabolic Drugs: Avoid this medicine

Parabolic Drugs, is entering the capital markets on 14th June 2010, to raise Rs. 200 crores, by fresh issue of equity shares and offer for sale of 20.26 lakh equity shares, in the price band of Rs. 75 to 85 per share. For the first time, an issue will have different closing dates; 16th June for QIBs and 17th June for the retail and HNI category.

Based on the price discovered, there will be a fresh issue of 2.15 - 2.46 crore equity shares of Rs. 10 each, enabling the company to raise Rs. 183 - 185 crore. Fresh issue will result in 37%-40% dilution on the expanded equity. The offer for sale by two private equity (PE) investors is a mere 8% of the total issue size.

The company, manufacturing active pharmaceutical ingredients (APIs) and providing contract research and manufacturing services (CRAMS), plans to establish new facilities for widening the product portfolio and undertake R&D activities, besides repayment of loans and general corporate purposes, through the IPO proceeds.

In the balance sheet, as on 31st December 2009, there is no capital work-in-progress nor have any funds been deployed towards the object of the issue, till 31st March 2010. All funds will be deployed in FY11 and FY12, benefits of which will accrue only from FY12 onwards.

The consolidated balance sheet, as on 31st December 2009, shows huge debts (secured and unsecured) of Rs.367 crores, on networth of Rs.112 crores, resulting in a debt to equity ratio of 3.3. Through the IPO proceeds, the company will make part pre-payment of the secured loans to the extent of Rs.38.8 crores. However, balance Rs.264.3 crores of secured loans will be subject to interest rate risks, as they are linked to floating rates of interest. One wonders, if the company is compelled to take the IPO route, to fund its expansion, since it is constrained to further leverage its balance sheet?

For 9 months ended 31st December 2009, the company reported sales of Rs.346 crores and EBITDA of Rs.62 crores and PAT of Rs.21.4 crores. Annualised EPS for FY10 is estimated at Rs.7.75 per share, resulting in P/E multiple of 9.7 times on lower end and 11 times on the higher end of the price band. Companies in the same sector like Nectar Life and Dishman, which are also bigger in size and having better margins, are presently ruling at PE multiples of 8 to 12 times. Thus the IPO does not leave much on the table (read listing gains) for retail investors. Even the price-to-book ratio of 2.5 to 2.8 times is quite high.

During financial year ended 31st March 2009 and 9 months ended 31st December 2009, the company incurred forex losses to the tune of Rs.4.7 crores and Rs.5.6 crores respectively, due to uncovered positions in the foreign exchange market.

The inventory, as on 31st December 2009, was Rs.230 crores, representing 6 months of sales. Likewise, the debtors of Rs.157 crores, as on that day, represent over 4 months of sales. This shows that the company has not been utilizing its current assets efficiently.

In January 2010, the company had placed 4 lakh equity shares of Rs.10 each with Kyodo International, Japan at Rs.100 per share, as part of marketing strategy for new geography. This placement, though made at a higher price, is very tiny and not material.

Better companies are available at attractive valuations in the secondary market. Also, off late, investors have got disenchanted with the primary market offerings and hence under the circumstances, best to give this issue a complete miss!

Grey Market Premium Dt. 8-6-2010

Latest Grey Market Premium Dt. 8-6-2010

Company Name	Offer Price (Rs.)	Premium (Rs.)	Kostak (Rs. 1 Lac Application)
Standard Chartered PLC	104	Discount	--
Fatpipe Networks India Ltd.	82 to 85	2 to 3	1500 to 1700

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