Dead Presidents! - India Equity Research

Monday, October 20, 2008

Considering the unprecedented carnage in the global financial markets and uncertainty over the fate of the US and other major economies, we would like to refrain from giving any intra-day trading ideas. We continue to advise caution at this stage.

Investors should stay on the sidelines till the global selloff abates and markets stabilise. One should not get carried away if there is any kind of a relief rally, as further selling is expected. Any advance in Indian stocks can only be sustained if global markets recover

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Daily News Roundup - Oct 20 2008

MRTPC orders probe in to Jet Airways-Kingfisher alliance.(BL)

Essar Oil to restart 70% of its fuel outlets by December.(FE)

Satyam Computers trims its hiring plans by a third.(BL)

Coal India says proposed private airport in West Bengal to block coal reserves of about 2.3bn tonnes.(FE)

Daiichi Sankyo acquires 20% of Ranbaxy Laboratories.(BS)

Essar and Gujarat State Petroleum Corp. win an oil and gas exploration block in Indonesia.(BL)

Hindustan Unilever raises prices by 5-10% on select items across soaps, detergents, shampoos and toothpastes.(TOI)

Ashapura Minechem forms a 50:50 JV with Adani group to set up an alumina refinery in Bhuj in Gujarat at an estimated cost of Rs35bn.(DNA)

Nalco to set up Rs100bn smelter project in Indonesia.(FE)

United Phosphorus eyes US$1bn buy in Israel.(BS)

Tata Sons in talks to buy stake in AIG’s Asian arm.(BL)

Parsvanath bags Rs295mn contract from Delhi Metro.(ET)

ONGC said it can fund the entire US$2.8bn for the acquisition of Imperial Energy, even if it was not able to raise the US$1bn bridge loan.(BS)

HCC has been awarded two contracts aggregating to Rs16.9bn from the Government of Andhra Pradesh.(FE)

Hindustan Zinc cuts zinc prices by 5.3%.(BL)

Punjab National Bank says eyeing a bank in Kazakhstan and also exploring options of a subsidiary in Canada.(DNA)

Ansal Housing & Construction to invest Rs1.4bn to develop residential project in Rajasthan.(BL)

NMDC to increase iron ore prices.(FE)

ADAG brings forward its plans to launch PE fund to January 2009 from March, but scales down the size from US$1bn to US$400-500mn.(BS)

Bharti Airtel could be one of the eight finalists in the race for a strategic 25% stake in the roughly US$1bn Omantel, Oman’s sole provider of fixed-line and Internet services.(FE)

Tatas to pick up undersubscribed portion of Tata Motors’ rights issue if the underwriter fails to do so.(ET)

RNRL asks Reliance Industries to pay it the difference between the price at which the latter would sell gas to other buyers and US$2.34 per MMBTU, the rate at which RNRL is seeking supply of gas.(BL)

An European telecom company to buy 43% stake in Unitech’s arm.(BS)

Tata Motors get rent relief for Pantnagar plant.(BS)

Four BHEL planned ventures may be hit due to current liquidity crunch.(Mint)

British Gas operated Panna-Mukta-Tapti JV plans a nine well in-fill drilling programme to enhance recovery from Panna-Mukta oilfield; project estimated to cost US$160mn.(BL)

Singapore fund pick up 8% stake in Mount Everest Mineral Water.(ET)

Reliance Power ties up US$2bn loan for Sasan power project.(ET)

ADAG eyes AIG’s Asian life insurance business.(ET)

Economic Front Page

Forex reserves drop by about US$10bn during the week ended Oct 10 to US$274bn.(BL)

Export curbs on rice, edible oils and cotton could be lifted in November.(FE)

Steel ministry is likely to consider scrapping the 15% export duty on steel, which includes long products, billets and slabs and pig iron.(DNA)

Cement production and dispatches grew 8% and 9% respectively in the month of September on a yoy basis.(ET)

Japan will provide India with US$4.5bn in loans to help build a freight railway between New Delhi and Mumbai, according to a newspaper report.(FE)

DoT is likely to impose higher one-time fee for operators seeking above 6.2MHz spectrum in metros and category A circles.(Mint)

Petroleum and Natural Gas Regulatory Board is working on a policy that will allow companies to use the unutilized capacity in the country's LNG terminals.(BS)

Maharashtra state government okays monorail projects worth Rs24.6bn.(ET)

Oil marketing companies give airlines new deadline to clear their fuel dues within 15 days.(Mint)

NHAI to invite bids for 23 projects worth about Rs300bn.(FE)

Railways may roll back freight hike on iron ore.(ET)

Uttar Pradesh government raises State Advised Price for sugarcane by Rs150/MT to Rs1,400/MT.(BL)

Global financial turmoil to affect FDI inflows according to Commerce and Industry minister.(Mint)

Steel companies may witness 10-40% hike in ore prices.(ET)

Government has allowed captive coal block exploration by private firms.(BS)

DoT admits issue of levying 1% usage charge for 3G services is yet to be finalized; 3G auction process likely to be delayed further.(Mint)

OPEC may decide to cut oil output next week.(BS)

Government may ease rules for more FDI inflow.(ET)

Still time to take a chance!

There is no security on this earth, there is only opportunity.

The crash may tempt those with cash to jump in right now. After all, how low can we go? Friday's big crash in our market, coming a week after a global rout, must have unnerved even the strongest of bulls. Especially, as many market players believed that world equity markets had placed a bottom on Oct. 10. However, the late afternoon meltdown on Friday proved the most optimistic of bulls wrong. The key indices fell to two year lows, with the BSE Sensex sliding below the 10,000 mark. It just goes to show that looking for a bottom in this kind of an environment is a futile exercise.

Though, the market looks highly oversold, and a bounce back is on the cards on "not-so-bad" global cues, one should wait for things to settle down. Staying on sidelines for a while won't do one any major harm. One must remain on guard even if there is a relatively strong rebound, as the bulls may not be out of the woods completely. The brave heart bulls can use these opportunities to pick up some crown jewels, but only for long-term purpose (at least two years). We would caution against any bottom fishing attempts for short-term gains.

We expect a firm opening, partly in reaction to the massive selloff on Friday and partly because of some semblance of stability in world markets. But, don't get too excited, as the bears may still stage a comeback having already thrashed the bulls over the past few weeks.

For India, the big concern remains the incessant selling by FIIs. The Government may try and perk up the inflows from other sources, like FDI and ECB. The RBI will hold its half-yearly review of the monetary policy on Friday. Hopes are that the central bank may ease the repo rate now, after having slashed the CRR substantially and giving leeway on the SLR front. But we think nothing really will happen to coincide with the review. The market will of course get some boost if Mint Street indeed announces a cut in short-term rates.

Expect some more market friendly action from other global central banks and policymakers as well. Meanwhile, India Inc will continue to rollout its report card, which is unlikely to be too pleasing given the slew of headwinds confronting them. One more factor that could have some bearing on the Indian markets over the next few weeks is politics, with several state polls lined up in November and December.

The global newsflow continues to be poor, what with Pakistan almost on the verge of a default and South Africa having to announce a bank bailout plan of its own. Last week's economic reports from the US and Europe too was not at all inspiring, underscoring a growing fear that a protracted and painful global recession is imminent. Dutch financial giant ING is set to receive $13.4 billion in new capital from the Netherlands government. China, which is so used to nothing up double-digit GDP growth, has seen its economic expansion slide to 9% in the July-September quarter.

FIIs were net sellers of Rs9.15bn (provisional) in the cash segment on Friday while the local institutions poured in Rs7.13bn. In the F&O segment, the foreign funds were net sellers at Rs1.69bn. On Thursday, FIIs were net sellers of Rs19.11bn in the cash segment, taking their total outflows this year to above $11.56bn.

Key Results Today: Akruti City, Alembic, Alfa Transformers, Archidply, Aztecsoft, Canara Bank, EMCO, Geometric, Granules India, Grindwell Norton, Hindustan Sanitary ware, HT Media, Idea, Indian Hotels, IL&FS Investment Managers, Ingersol Rand, JM Chemicals, Kale Consultants, KPIT Cummins, KRBL, Lumax Auto, Lumax Ind, Mic Electronics, Mindtree, MRO-TEK, Omnitech, Patel Engineering, Petronet LNG, Rolta, Sanghvi Movers, Shree Cement, Sterlite Technologies, Texmaco, Titan, United Phosphorus and Voltamp Transformers.

US stocks closed lower on Friday after another highly volatile day, as investors remained apprehensive about the future prospects of the world's leading economy amid a fresh set of disappointing data points.

Profit-taking set in ahead of the close, capping a day that sent the S&P 500 Index swinging between gains and losses at least 28 times, as worsening consumer confidence and housing data overshadowed Warren Buffett's advice to buy shares.

Treasury bond prices advanced, lowering the corresponding yields, and the dollar gained versus other major currencies. The credit market showed some signs of loosening, as several key lending rates declined.

The Dow Jones Industrial Average climbed more than 300 points before surrendering gains in the final hour of trading. The Dow retreated 127.04 points, or 1.4%, to 8,852.22 to cap its best week since 2003.

The S&P 500, which rose as much as 4%, ended down 5.88 points, or 0.6%, at 940.55, trimming its best weekly advance since February. The Nasdaq Composite Index slipped 0.4% to 1,711.29.

Market breadth was mixed. Four stocks fell for every three that gained on the New York Stock Exchange.

US stocks seesawed throughout Friday as a report showing housing starts at a 17-year low was countered by Internet giant Google's strong quarterly performance and bullish comments from Buffett.

Markets were also impacted by the monthly options expiration, which can cause increased volatility in the underlying equities.

Despite the extremely volatile week, US stocks managed to end with gains for the five-session period, which included the Dow's biggest one-day point gain ever on Monday and the second-biggest point loss ever on Wednesday.

For the week, the Dow and S&P 500 both added 4.7% and the Nasdaq gained 3.6%.

The advance last week added US$500bn in market value, according to gains in the Dow Jones Wilshire 5000, the broadest measure of the stock market. Overall, the tone of the market seemed to be better this week, compared to last week, with perhaps the exception of Wednesday's big slump.

Many Wall Street experts feel that Oct. 10 lows could potentially represent a bottom for the current bear market. During last week's topsy-turvy ride, the major indices did get close to those lows, but managed to bounce back.

Lending rates improved last week, as a slew of government initiatives around the globe started to bear some fruit. Treasury prices rose, lowering the yield on the 10-year note at 3.97%.

US light crude oil for November delivery rose US$2 to settle at US$71.85 a barrel on the New York Mercantile Exchange after ending the previous session at a 13-month low. Oil prices have slid since hitting an all-time high of US$147.27 a barrel on July 11.

Gasoline prices fell another 4.4 cents overnight, to a national average of US$3.04 a gallon. It was the 30th consecutive day that pump prices have decreased - in the past month alone, they are down more than 81 cents a gallon.

Over the weekend, the price of regular gasoline at US filling stations fell below $3 a gallon for the first time in eight months.

COMEX gold for December delivery slumped US$16.80 to settle at US$787.70 an ounce. A variety of other metals declined as well. In currency trading, the dollar rose against the euro and the yen.

European shares surged on Friday, bucking the generally weak trend across other global equity markets, with a regional stock benchmark logging its biggest weekly gain since March 2007.

The Dow Jones Stoxx 600 Index had its biggest two-day rally on record, before posting the steepest two-day slump since 1987 even as the cost of borrowing dollars in London fell on a weekly basis for the first time since July.

The pan-European Stoxx 600 index added 3.8% on Friday to 214.23, closing an eventful week on a positive note, as 15 of 19 industry groups increased. The index gained 4.5% last week, the first such advance since Sept. 12.

National stock benchmarks increased in 14 of the 18 western European markets. The UK's FTSE 100 index jumped 5.2% to 4,063.01, while Germany's DAX 30 index climbed 3.4% to 4,781.33 and the French CAC-40 index advanced 4.7% to 3,329.92.

Russian shares extended the recent sell-off on Friday, with the dollar-denominated RTS stock index dropping 6.5% on the day, after Goldman Sachs slashed its 2009 economic growth forecasts for the federation. The RTS index fell 46 points to end at 667.62 points.

Among the other emerging markets, the Bovespa in Brazil was nearly flat at 36,399 while the IPC dropped 0.7% to 20,312. The ISE National 30 index in Turkey plunged 7.5% to 32,334.

Bulls look for resurrection

Indian markets ended the week with a deeper cut with the BSE benchmark Sensex sliding below the 10,000 mark for the first time since July 2006. Likewise, the broader NSE Nifty index also declined below the 3,100 mark. Markets witnessed intensified selling after starting off the Friday’s session with a positive bias extending previous day’s pull back. However, intensified selling in the index pivotal like Reliance Industries, L&T, Infosys and SBI dragged the key indices lower.

Massive selling was witnessed on the FII front, on provisional basis FIIs sold nearly Rs1,000cr on Friday and during the week FIIs were net sellers to the tune of Rs5,000cr.On the other hand, DIIs turned out to be net buyers, and bought stocks worth Rs712cr on Friday (prov).

Finaly, the BSE benchmark Sensex plummeted 606 points or 5.7% to close 9,975 and the NSE Nifty index dropped 194 points to close at 3,074.

All the 30-components of Sensex were in the red, Reliance Industries, SBI, Bharti, Infosys and HDFC Bank were among the major laggards.

Among the BSE Sectoral indices, BSE Capital Goods index (down 12%), BSE Power index (down 8.5%), BSE Metal index (down 7%) and BSE Bankex index (down 6.3%). Even the Mid-Cap and the Small-Cap indices declined over 3% each.

HDFC announced that it posted a net profit after tax of Rs5342.3mn for the quarter ended September 30, 2008 as compared to Rs6463.9mn for the quarter ended September 30, 2007.

Total income has increased from Rs18925mn for the quarter ended September 30, 2007 to Rs26205.9mn for the quarter ended September 30, 2008.

HDFC was down by 1.3% at Rs1776 hitting an intra-day high of Rs1860 and a low of Rs1751 and recorded volumes of over 4,00,000 shares on BSE.

Shares of Mphasis erased early gains and lost ground by 2.5% to Rs173. The company announced that it posted a net profit after tax of Rs1127mn (up 128.7%) for the quarter ended September 30, 2008 as compared to Rs492.7mn for the quarter ended September 30, 2007.

Total Income increased from Rs4124.1mn for the quarter ended September 30, 2007 to Rs6539.3mn (up 58.7%) for the quarter ended September 30, 2008. The scrip touched an intra-day high of Rs193 and a low of Rs172 and recorded volumes of over 99,000 shares on BSE.

Satyam announced that it posted a profit after taxation of Rs5974.3mn (up 43.2%) for the quarter ended September 30, 2008 as compared to Rs4171.5mn for the quarter ended September 30, 2007.

Total Income increased by 3.5% from Rs20564.4mn for the quarter ended September 30, 2007 to Rs27839.8mn for the quarter ended September 30, 2008.

Shares of Satyam Computer ended lower by 2.6% to close at Rs265 hitting an intra-day high of Rs285 and a low of Rs263 and recorded volumes of over 13,00,000 shares on BSE.

Shares of HCC have gained by 1.3% to Rs48.3 after the company announced that it won two orders worth Rs16.9bn from the government of the Southern Indian state of Andhra Pradesh. The scrip has touched an intra-day high of Rs50.6 and a low of Rs47.7 and has recorded volumes of over 11,00,000 shares on NSE.

Shares of Elecon Engineering also erased early gains and slipped sharply by 6% to close at Rs47. The company announced that it secured order worth Rs177mn from Techpro Systems Ltd, Chennai Supply of an Unidirectional Stacker cum Reclaimer & Slewing Boom Stacker. The scrip touched an intra-day high of Rs55 and a low of Rs46 and recorded volumes of over 1,00,000 shares on BSE.

Market players would keep a close track on the further measures to be taken by the Indian central bank on October 24^{th. Traders and investors are hoping for an interest rate cut from the RBI which could be a positive trigger for the Indian markets. However, having said that staying cautious is what we would advice.}

Sugar Sector

Satyam Computer Services

Ultratech Cement

HDFC

Sunday, October 19, 2008

Redington India

Investors willing to bet on the strong domestic and Middle-East’s IT (hardware and software) adoption story can consider buying the shares of Redington India, a hardware, software products and digital products distributor. At Rs 192, the stock trades at 10 times its likely 2008-09 earnings.

In the absence of listed peers and its strong positioning in the domestic IT market, the stock is attractive at these levels. The stock has come down from 27 times its historic earnings in January this year to the current levels.

Redington is the distributor for a range of IT products such as personal computers, laptops, servers, networking products and packaged software. It has vendor relationships with all the major names in this segment such as HP, HCL Infosystems, Acer, IBM, Intel and Cisco. This segment contributes over 85 per cent of its revenues.

The company has also started distributing products such as mobile handsets of Nokia, Microsoft X-Box, Apple iPods, Mac and consumer electronic products.

Redington’s revenues have grown at a compounded annual rate of 39 percent over the three years to Rs 10,883 crore in 2007-08, while net profits grew at a CAGR of 47.5 per cent to Rs 136 crore. The business is reliant on volumes and offers wafer-thin margins.

Though they remain narrow, Redington’s net profit margins have improved (from 0.69 per cent to 1.25 percent in the last five years) due to the reselling of better margin products such as networking products, lifestyle gadgets and contributions from improved after-sales and post-warranty service.
IT Products drive growth

Redington generates 53 per cent of its revenues domestically, and the rest from South East Asia, West Asia and Africa. The company’s customer base is now at 14,458 corporate clients, spread across as many as 44 brands and caters to a wide range of sectors.

Players such as HP and HCL Infosystems, and Wipro that dominate the domestic PC market, have continued to have strong relationship with Redington, thus assuring it of sustained volume growth.

According to a recent IDC report, the domestic IT hardware market is set to grow at an annual rate of 14.6 per cent to Rs 96,558 crore by 2012, while the packaged software segment is set to grow at a rate of 20.9 per cent to Rs 21,129 crore, representing a huge opportunity for players such as Redington. Increased Governmental spending on IT-enablement across the country is another important growth driver for the company.

The prospects are especially good for the better margin laptops, which have outpaced desktops in terms of sales growth in India and West Asia. The growth prospects for West Asia and the African region are equally impressive for IT hardware and software.

Redington, with its relationship with all the big names in the IT business, would be well placed to tap this opportunity.

In addition to hardware, the company has begun to resell packaged software as well and has tied up with players such as Adobe to distribute their products in India. This could usher in better margins, as does the expansion into networking and data storage products.

The company has also diversified into distribution of non-IT products such as mobile handsets of Nokia in Africa and other digital and consumer electronic products across India and West Asia. This segment contributes less than 10 per cent of the current revenues and may serve as a good diversification strategy over the long run.
Services business and other ventures

Redington has also added to its offerings, high-end repair, warranty and post-warranty services. These are aimed at capturing annuity-based revenues, in addition to hardware sales. This apart, Redington has leveraged on its existing distribution network to venture into third-party logistics and has acquired spaces in Chennai, Delhi and Kolkata and Dubai.

This division already has a few clients and hopes to target manufacturing companies for transporting their goods to retailers/other distributors. The company has already automated its distribution centres and additional clients may help the company optimise costs by better utilisation of space.

Both these ventures are at a nascent stage and do have the potential to scale up in the future.

Earlier this year, the company also started its NBFC operations to finance its channel partners. The division has already disbursed around Rs 477 crore and has reported profits for 2007-08. Given the long association with channel partners, Redington would be well aware of the credit quality of its borrowers, reducing the risk of default.
Risks

Competition from other bulk distributors such as Ingram Micro and Synnex Corporation is a threat. The company’s interest costs are going up. But the interest coverage has improved in 2007-08 compared to the previous fiscal (2.5 times compared to 2 times).

But in the light of the high interest rate scenario, maintaining effective working capital management could be a challenge.

Indotech Transformers

HDFC Bank

Investors can consider accumulating the HDFC Bank stock with a two-year perspective, given the bank’s resilience in a challenging environment and scope for strong growth in earnings.

At the current price of Rs 1,026, HDFC Bank is trading at 19 times its estimated earnings per share for 2008-09 and 3.2 times historic book value. Best-in-industry Net Interest Margins (NIMs) which provide a cushion against rising costs, a high proportion of low-cost deposits and an extensive branch network that can drive advances growth, make the stock a preferred exposure in the banking space.

After including the effect of the Centurion Bank of Punjab (CBoP) merger, HDFC Bank posted a profit growth of 44 per cent, backed by net interest income growth of 66 per cent in the September quarter. NIMs at 4.2 per cent increased due to a hike in lending rates effected this quarter; the impact of this will be sustained over the next few quarters. Deposit growth was strong at 46.7 per cent, with the proportion of Current Account Savings Account at 44 per cent. The recent CRR cut will also release around Rs 3,300 crore to fund growth plans.

Over the past two quarters, strong topline growth for the bank has not translated into equivalent profit growth. The CBoP merger has increased operating costs and reduced asset quality, and added a higher proportion of retail loans. However, as the integration of CBoP takes shape over the next one year, the expansion in the branch network and asset portfolio may help ramp up the bank’s growth.

HDFC Bank’s successful integration of Times Bank in the past induces confidence on this score. The bank’s branch network has expanded 85 per cent post-merger, with a presence in 200 cities added over a year. With this, HDFC Bank’s branch network rivals its peer ICICI Bank, but its advances are less than half its rival’s levels, suggesting untapped potential.

A high proportion of retail advances (54.7 per cent) is a matter of concern, making the bank more vulnerable to asset quality slippages in a high interest rate scenario. However, macro indications suggesting a peaking of rates and the bank’s ability to limit slippages over the past two quarters are the positives. The net NPA to advances ratio remains at a comfortable 0.57 per cent, with the provision coverage on NPAs at 65 per cent. HDFC Bank’s capital adequacy ratio at 11.4 per cent is relatively low. But conversion of warrants issued to the promoter, which expire in December 2009, may infuse Rs 3,600 crore and may improve this ratio.

via BL

A Bad year for IPOs

Even as late as June this year, investors in initial public offers (IPOs) continued to be better off than those who dabbled in the secondary market. Smaller IPOs continued to deliver good listing gains, even while selecting stocks in the secondary market became a much more difficult proposition.

But the vicious downswing in the market over the past three months has well and truly blown the froth off the IPO market. Not just the new ones, but even ones that were listed over the past year have all plunged below their offer price. Seventy-six of the 83 IPOs that listed between March 2007 and March 2008 are now available below their offer price.

Here are the lessons from those 83 IPOs (recent ones were excluded as the time window would be insufficient to draw conclusions).

Of the total 96 initial public offers in the period, 13 were withdrawn. The remaining 83 IPOs were considered for this analysis. For performance study, price movement from the listing date to October 15 was considered.
Should have sold on first day

One common lesson for investors from IPOs in this period is that, irrespective of the quality of the issuer, you would have fared better had you booked gains on the listing day. Holding these stocks in expectation of better gains in the secondary market would have resulted in sharp erosion in value. Fifty-two of the 83 stocks that debuted in the period closed in the green on listing day. Of these, 22 listed at a price which clocked a 50 per cent gain over their issue price.

However, of the 83 stocks only one (Allied Digital) currently trades at a price higher than its listing price; all others have fallen from their Day One prices. On the other hand, of those that had a bad listing, only three — Koutons Retail, Page Industries and Bang Overseas — made gains in the days following listing. The wait was not worth it for the others.

If stocks gave away much of the gains made on listing, a good number of them also plunged below their issue prices. As many as 76 IPO stocks are trading below their offer price now. When it comes to the extent of losses, the quality of the business didn’t matter much — IPOs from quality businesses, such as BGR Energy, Transformers and Rectifiers and Edelweiss Capital, were among the worst performers — their prices beaten down by over 70 per cent.

The extent of decline in stock prices shows that the pricing for IPOs in a bull market tends to factor in premium valuations and probably assume best scenarios for these businesses, resulting in high downside risk.

Better bet than listed peers

Would investors have been better off picking stocks from the secondary market as compared to the IPO? The answer is still ‘no’. Though IPOs have put up a dismal performance, they have still fared marginally better than peers from the same sector in the secondary market. A study of 30 prominent IPOs in this period suggests that newly listed stocks fared better than their listed peers since their offer date.

Of the 30 IPOs, 18 recorded a lower percentage fall than a listed peer from the same sector, from the time of their offer. In fact, select stocks such as Maytas Infra (up 22 per cent) and Religare Enterprises (up 76 per cent) actually delivered hefty gains from their offer price, even as listed companies from the sector fell sharply. Nagarjuna Construction (down 79 per cent) and Geojit Financial Services (down 47 per cent), loosely comparable to the above, declined sharply over the same period.

But do note that it is only the listing gains that have ensured better performance from the debutants.

Religare Enterprises, a financial services firm focussed on broking services, was sold at Rs 185 in its IPO. But on the day of listing, the stock closed at Rs 525.30, a straight 183 per cent gain. In one year from the month it listed (October 2007), the stock lost nearly 38 per cent, but the gains made on listing are still holding the stock above its issue price. This further supports the logic for selling stocks on the day of listing.

Maytas Infra, Power Grid Corporation, Everonn Systems, Allied Digital Services and ICRA are the other stocks that held on to gains over their offer price, thanks to strong listing performance.

So, if you were to make a decision on the day of the offer, the IPO would have been the better buy. But if you were to look for secondary market options, an older peer would have been a better buy than a newly listed stock.
The subscription figures delude

As in the preceding year, overwhelming response to an IPO was no guarantee of the stock’s performance. Of the IPOs in this period, Everonn Systems was in the top place, over-subscribed 145.5 times, followed by Future Capital (131.79 times), Mundra Port and SEZ (115.32 times) and BGR Energy (115.13 times).

However, from the date of listing to now (October 15), Everonn Systems has fallen by 55 per cent, Future Capital by 77 per cent, Mundra Port and SEZ by 60 per cent and BGR Energy by 81 per cent. The best performing IPO — Allied Digital Services — was subscribed by a little over 59 times and Indian Bank, another good performer, by 32 times.
No sector orientation

Last year’s IPO returns numbers showed a distinct trend, with those from financial services, software and infrastructure faring relatively well. But this year’s performance tally shows no sector-specific trend in the returns. In every sector an equal number of IPOs performed better than their listed peers as those that did worse.

The stocks that topped the listing gains list were Everonn Systems, Vishal Retail, Religare Enterprises, Nitin Fire and Mundra Port, hailing from diverse sectors. But the common thread that ran through them all was the time of their debut.

All these stocks were listed between June and December last year, a period when the Sensex rallied from 14K to 20K levels. And of all the IPOs, only seven are still holding above their issue price — Religare Enterprises, Maytas Infra, Koutons Retail, Everonn Systems, Time Technoplast, ICRA and Page Industries. Again, all of them listed between March and December 2007.

The performance of the IPOs was thus a function of market conditions at the time of the offer, more than company-specific or sector-specific factors. Of the 17 stocks that listed in the choppy markets between January and March this year only Bang Overseas is still in the green (up 54 per cent from the issue price). However, at current levels a few of them are really attractive ‘buys’ — Maytas Infra, Consolidated Construction Consortium, Mundra SEZ, Onmobile Global and MindTree Consultancy. Given the change in the earnings outlook, the ones in the financial sector are better avoided as concerns over the financial turmoil in broader markets persist.

Clearly this has been a bad year for greenhorns, whether they were investors or companies seeking to make a debut in the market!

Dead Presidents! - India Equity Research

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