Stunner ! - IPO Rating - MCX India

CRISIL has assigned a CRISIL IPO Grade "5/5" (pronounced "five on five") to the proposed initial public offer of Multi-Commodity Exchange of India Ltd. (MCX). This grade indicates that the fundamentals of the issue are strong relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.

CRISIL expects MCX to maintain its dominant market position in the commodities market, backed by product innovation and strong technological capabilities. Currently, MCX enjoys market leadership, with a share of 77 per cent in volumes traded on commodities exchanges in India. The company has consciously focused on commodities such as bullion, energy and metals, which are benchmarked to international prices. The high liquidity in these commodities and the low impact costs (comparable to other leading exchanges), along with MCX's strong technological capability - aided by its association with the promoter, FTIL, a leader in exchange related technology - are expected to help the company maintain its competitive advantage.

MCX's profitability and return indicators have been strong in the past 4 years. Growth is likely to moderate in the short term due to the impact of the commodity transaction tax (CTT). However, in the medium term, MCX's strong market position and continuous focus on product innovation would act as growth drivers. In the long term, growth could be spurred by the introduction of new instruments (like options) and participation by institutional players, once the necessary regulatory changes are in place.

Mr Jignesh Shah, the founder and Non-Executive Vice Chairman and Mr Joseph Massey, the MD & CEO of MCX, have been the driving force behind the company's business growth and product innovation. MCX also benefits from a strong and experienced senior management team as well as a highly capable product innovation and development team.

About the company and the issue
Multi-Commodity Exchange of India Pvt Ltd was incorporated on April 19, 2002. The proposed IPO is in the form of an offer for sale of 4 million shares by the promoters and a fresh issue of 6 million shares. Subsequent to the IPO, the promoters' stake in the company will reduce to 26.1 per cent.

On September 26, 2003, MCX received permanent recognition from the Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. MCX offers trading in 56 different commodities categorised into various market segments such as bullion, energy, ferrous and non-ferrous metals, oil and oil seeds, cereals, pulses, plantations, spices, fibre and others. The company has leadership position in bullion, energy and metals trading in India.

Of the company's total turnover, bullion accounts for 53 per cent, metals for 28 per cent, energy for 16 per cent and agricultural commodities account for the rest. Globally, MCX is the largest silver exchange, second-largest natural gas exchange, third-largest gold, crude oil and copper exchange in terms of number of contracts traded in each of these commodities. MCX was the first exchange to launch futures trading in steel, crude oil and plastics in India. The company has launched weather indices such as RAINDEX - to track the progress of monsoon rains in locations such as Mumbai, Indore and Jaipur - and also trading in carbon credits on the exchange. MCX was also the first exchange to initiate evening trading sessions to coincide with trading on international exchanges such as London, New York and other international markets. The company's initiative to constantly innovate and develop new products is expected to help increase volumes.

For the year ended March 31, 2007, MCX reported a net profit of Rs 930 million on a turnover of Rs 2.0 billion, as compared with a net profit of Rs 375 million and revenues of Rs 1.0 billion in the previous year.

Acme Tele Power gets highest IPO grading

Proposed public issue of 17,283,580 equity shares of face value Rs 2 targeted at an issue price in the range of Rs 800 to Rs 950 per share

CRISIL has assigned a CRISIL IPO Grade "5/5" (pronounced "five on five") to the proposed initial public offer of Acme Tele Power Ltd. (ATPL). This grade indicates that the fundamentals of the issue are strong relative to other listed equity securities in India.

CRISIL expects ATPL to report strong future growth while maintaining its track record of exceptional operating and financial performance. This reflects the company's solid market position, and its customers' focus on rapid expansion: ATPL's unique products are used by mobile operators to manage power consumption at cell sites in areas where the supply and quality of power is unreliable. With a market share of around 25 per cent across all cell site installations, ATPL enjoys leadership position in its segment. The company is thus well placed to benefit from the large investments planned by mobile operators in India, who propose to add almost half a million cell sites over the next five years.

ATPL has grown at remarkable pace over its relatively short history. CRISIL expects the company to continue its impressive growth in revenues and profits over the medium term, given its strong market position and the expected growth in mobile networks.

ATPL will also continue to benefit from the ongoing involvement of its promoter, Mr. Manoj Upadhyay, in new product research and development. The company's strong product development capability is a significant plus in a market that is highly competitive. To maintain its growth momentum, however, ATPL will also need to ensure that it retains its key employees: it has faced a fair amount of employee turnover in the past.

About the company
ATPL, incorporated in January 2003, was promoted by Mr. Manoj Upadhyay. The proposed IPO is in the form of an offer for sale of 17.3 million shares by the promoters. Subsequent to the IPO, the promoters' stake in the company will reduce to 84.6 per cent from 94.7 per cent.

ATPL manufactures shelters, power regulation equipment, and air conditioners, which are used at mobile operators' cell sites. It has manufacturing facilities at Pantnagar in Uttaranchal and Parawanoo in Himachal Pradesh. Until March 2005, the company had an exclusive agreement with Bharti Airtel, the market leader in mobile telephony, under which it could not sell its products to other operators until it had satisfied Bharti Airtel's requirements; the business relationship between the two companies continues to be strong, long after the agreement has expired.

At the core of ATPL's offering to customers is a packaged solution, 'Green Shelter', consisting of:
- A fibreglass reinforced plastic or a nano-cooled enclosure that houses the BTS and other electronic equipment at cell sites
- A power management system called the power interface unit
- A thermal management system with phase change material, and
- Two air conditioners.
The utility of each of these products is distinct, and therefore the company also sells them individually.

ATPL also plans to launch a new gas-free compressor-less AC, and fuel cells, which produce energy more efficiently compared to diesel. Besides, the company intends to undertake geographical expansion into international markets.

For the year ended March 31, 2007, ATPL reported a net profit of Rs.2.30 billion on a turnover of Rs.6.43 billion, as compared with a net profit of Rs.1.16 billion and revenues of Rs.3.85 billion in the previous year.

About CRISIL IPO Grading
CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security.

IPO Grading - Rural Electrification

CRISIL has assigned a CRISIL IPO Grade "3/5" (pronounced "three on five") to the proposed initial public offer of Rural Electrification Corporation Limited (REC). This grade indicates that the fundamentals of the issue are average in relation to the other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, the graded instrument's future market price or its suitability for a particular investor.

The grading reflects the Indian government's majority stake in REC and its developmental role in the government's plans for the power sector in India, especially the non-urban centres. REC's continuing role as an instrument of government policy and the consequent government support translates into significant advantages for REC as a borrower of funds viz the ability to raise bonds with tax benefits to the investors. CRISIL believes that REC will continue to discharge its developmental role over the medium term and shall display moderately strong business performance.

Notwithstanding the advantages on the liability side, REC's mandate requires it be one of the key lenders to state government power utilities, which have had a troubled credit history. Though REC is planning to increase its lending to the private sector, CRISIL believes that lending to state government utilities would continue to constitute a majority of REC's asset book over the medium term.

The company's profitability could come under pressure in the future as the share of market borrowings in REC's funding mix increases and the company begins to follow the RBI's prudential norms for NPA provisioning. REC will also need to considerably strengthen its internal control systems and loan pricing mechanisms to support the significant increase in business planned by the company. REC's business operations are susceptible to the effects of frequent top management changes as is the case with many other government run entities. REC's shareholders remain vulnerable to the possibility of REC's business operations being used by the government more as a tool for public policy than an engine for profit maximization.

About the company and the issue
REC is a public sector non-banking finance company (NBFC). REC operates under the administrative control of the Ministry of Power (MoP) and is wholly-owned by the Government of India (GoI). Established in 1969 with the sole objective of financing rural electrification schemes in the country, it services its clients -through a network of 17 project offices spread across India.

The company's schemes are primarily aimed at extending and improving the supply of electricity by providing adequate funds for transmission and distribution projects, especially in rural areas. However, over a period of time REC's mandate evolved, permitting it to finance all segments of the power sector in the country. In line with its overall objective of assisting the government's rural electrification strategy, REC also acts as the nodal agency for disbursing grants provided under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). The company enters into a Memorandum of Understanding with MoP, which outlines its yearly performance targets and the commitments from the government.

For 2006-07, the company's fund-based income and net profits were Rs 28.3 billion and Rs 7.7 billion, respectively. The operating income of the company has grown at a CAGR of 11.4 per cent over the past 5 years, while PAT has grown at a CAGR of 14.5 per cent in the same period.

REC aims to raise Rs 14 billion to Rs 16 billion by this proposed public issue of 156,120,000 equity shares.

About CRISIL IPO Grading
CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security.

Reliance Power - ICRA assigns 4/5 Rating

Leading credit rating agency, ICRA assigned IPO Grade 4, indicating above average fundamentals, to the proposed initial public offering of Reliance Power (RPower), a subsidiary of Reliance Energy. ICRA assigns IPO grading on a scale of IPO Grade 5 to IPO Grade 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals.

The IPO Grade 4 assigned by ICRA reflects the benefits arising out of being a part of the Reliance Anil Dhirubhai Ambani Group which has considerable experience across the value chain in the power sector and the expected cost competitiveness of most of the power projects in relation to the markets it proposes to serve, which when combined with spiraling energy deficits and the groups plans of maintaining a judicious mix of long term PPAs and short term trading, should result in strong earnings growth in the long term.

Further, the IPO proceeds would enable the company to tie up the equity funding for the first tranche of projects that it has identified. The grading also reflects the prospects for the power generation business in the country with increasing regulatory clarity, gradual emergence of a market for trading in power and improvement in financial position of some of the utilities in the state sector.

The grading is however constrained by the implementation risks inherent in project implementation of the scale and magnitude being envisaged by RPower, uncertainty on issues related to gas and the ability of the company to maintain the desired levels of all operating parameters, especially in case of the competitively bid projects, apart from executing the projects without cost overruns.

The company would also be subject to technology risks arising out of the fact that for some of its plants, which are based on Super Critical Technology, the BTG would be primarily imported and these are yet to be proven in Indian conditions, even though they have an operating history internationally. However these risks are partly mitigated due the significant financial strength enjoyed by the promoter group, along with demonstrated execution capabilities. Also, as a strategy to mitigate the financing risk, RPower has taken in principle sanctions for rupee debt facilities of Rs 179.4 billion and foreign currency denominated debt facilities of USD 542 million, which constitute more than 87% of total debt requirement for identified projects.

Shares of Reliance Energy gained Rs 144.4, or 6.76%, to settle at Rs 2,279. The total volume of shares traded was 1,396,980 at the BSE.

CRISIL IPO grade 4/5 for OnMobile Global

Proposed public issue of 10,900,545 equity shares of face value Rs 10 targeted at an issue size in the range of Rs 3,500-4,500 million

CRISIL has assigned a CRISIL IPO Grade "4/5" (pronounced "four on five") to the proposed initial public offer of OnMobile Global Ltd. (OGL). This grade indicates that the fundamentals of the issue are above average relative to other listed equity securities in India.

The grading reflects OGL's position as the largest player in the mobile value-added services (VAS) market in India, and its strong presence in the voice portal and ring back tone (RBT) segments of the VAS market. The grading also reflects OGL's ability to leverage on the unique voice recognition capability of its platform as telecom operators in India expand coverage into rural areas, and its ability to offer customer contact products to goods and services companies by virtue of having a voice channel relationship with almost all telecom operators. The grading also factors the management's strong understanding of market dynamics, as reflected in OGL's consistent track record in product innovation, and pro-activeness in setting up a corporate governance system in the company, as indicated by the appointment of independent directors over a year ago. The grading is tempered by the fact that OGL has low bargaining power with its customers i.e. telecom operators, as it does not brand its products and depends on the operators to take its products to the market. The grading also reflects the anticipated change in OGL's revenue profile, as it opens up its proprietary platform to third parties for applications development. This will cause the business mix to move from the current content cum platform mix to more of the latter.

About the company
OGL is the largest mobile VAS provider in the Indian market. The company was promoted by two first generation entrepreneurs - Mr Arvind Rao, and Mr Chandramouli Janakiraman. The company was originally incorporated as Onscan Technologies India Pvt Ltd in September 2000 by its promoter OnMobile Systems Inc (OMSI). OMSI itself was an incubated start-up of Infosys Technologies Ltd, incorporated under the Delaware General Corporation Law in December 1999.

At the core of OGL's offering to telecom operators is a platform named MMP 2500 - a combination of standard hardware and OGL software - which is technology and handset neutral. Leveraging on this platform, OGL provides a range of services such as ringtones, information, RBT, and m-commerce to telecom subscribers. Currently, the only way to develop applications on the MMP 2500 platform is proprietary with OGL. The company, over the next few months, proposes to throw open the platform to third parties for putting their own applications.

CRISIL IPO grade 4/5 for Persistent Systems Ltd

Proposed public issue of 4,974,836 equity shares of face value Rs 10 at a targeted price of Rs 375 per share

CRISIL has assigned a CRISIL IPO Grade '4/5' (pronounced 'four on five') to the proposed public offer of Persistent Systems Ltd (PSL). This grade indicates that the fundamentals of the issue are above average, in relation to other listed equity securities in India.

The grading reflects the company's strong position in the outsourced product development (OPD) space by virtue of its ability to provide large scale services in specific parts of the software product development life cycle, such as software development, testing and support, and provide end-to-end product development services on a relatively smaller scale. The former is used by global software companies like Microsoft, Agilent, Covad, etc, while the latter is used by small and medium-sized software product companies who do not have the scale to set up captive operations in India. This has given the company a diverse customer base. The grading also reflects the strong corporate governance architecture in the company, in part due to the presence of eminent independent directors on the company's board for the past six years. The grading is tempered by the fact that the margin compression that the company has seen over the last three years is likely to continue in view of currency movements and wage inflation, as well as increased competition from IT Services companies such as Wipro and TCS, as a consequence of a likely slowdown in their traditional revenue streams. The possible withdrawal of tax concessions would also adversely impact the company's return on equity after 2008-09.

About the company
PSL, promoted by first generation entrepreneurs - Dr. Anand Deshpande and his father Mr. S. P. Deshpande, was incorporated in 1990. The company provides offshore software product development services to its customers, majority of whom are independent software vendors (ISVs). It provides services at all stages of the product development life cycle - product conceptualisation, design, development, testing and support. The company has around 190 customers, of which the top 10 customers account for around 47 per cent of its revenues. As of October 5, 2007, PSL employed around 3,700 people.

PSL focuses exclusively on the OPD market. By providing services to mid-sized and small ISVs, the company has been able to get access to the venture capital community. The company continues to use the venture capital community to garner business within the small ISVs space.

The company's offshore development centres are located in Pune, Nagpur, Bangalore, Goa and Hyderabad. The company owns most of its development centres. It currently owns over 5 lakh square feet of office space with a capacity to seat approximately 3,800 people. PSL plans to use its IPO proceeds to construct two new development centres - one in Pune and the other in Nagpur, with a capacity to seat 3,000 and 1,200 employees, respectively at an estimated cost of Rs 1,516 million.

Grading of IPOs

Investment decisions in IPOs are becoming increasingly difficult, given the flurry of public offers that hit the market these days. Differentiating a good offer from a bad one, assessing the company fundamentals and verifying the credentials are becoming more complex. In this backdrop, the Securities and Exchange Board of India's decision to make IPOs (initial public offers) grading by credit rating agencies mandatory, is likely to provide some respite to retail investors. However, the rating is unlikely to throw much light for short-term investors or traders seeking to make a quick buck from the `listing gains'.

We take a look at what the grading system proposes to do and what changes, if any, it is likely to bring in.

In a move, which does not appear to have any precedence elsewhere in the world of capital markets, the SEBI has introduced compulsory grading of initial public offers that will hit the market from now on. Credit rating agencies such as the CRISIL and ICRA will grade the various forthcoming IPOs on a five-point scale from grade 5 (indicating strong fundamentals) to grade 1 (indicating poor fundamentals).

This grading, which will be based on the agencies' assessment of company fundamentals, will consider the following five parameters — earnings per share, financial risks, accounting quality, corporate governance and management quality. Thus, the rating awarded to an IPO will mirror the company's general health in terms of these qualitative and quantitative factors. The IPO pricing, however, is not factored in for the purpose of rating.

These ratings, apart from being available in the respective offer documents of the companies, can also be viewed on the respective rating agency's Web site.

Grade 1

For instance, a company X decides to tap the primary market for raising capital. The rating agencies will now be required to grade the company. This process will include market checks, plant visits and practice of due diligence apart from studying the other already-specified macro factors. At the end of the process, say, X is awarded grade 1 (indicating poor fundamentals). This would mean that the company is fundamentally weak and investments in that company could be risky. However, the rating does not go on to say whether such an offer is to be avoided or not.

In a similar manner, if X gets a grade 5 (the highest one possible), it does not mean a blanket approval from the rating agency to invest in the public offer. It only means that X is fundamentally sound on the basis of metrics used by the rating agency.

Thus, in general, the grading process that has been introduced is meant to make the retail investors aware of the health of the company's business. It cannot be interpreted as a recommendation to invest or avoid any offer that is so rated.

Advantages

IPO grading, a hitherto optional exercise, has been made compulsory to encourage only serious companies.

Over the longterm, it is likely to help SEBI regulate the IPO market by helping it protect the investors from cases of vanishing companies. The rating will also facilitate the not-so-well known companies in tapping the primary market for capital.

Retail investors, on the other hand, stand to benefit the most. The grading system that purports to give a professional perspective of the company's fundamentals, is likely to help investors establish the credentials of the company they plan to invest in.

Neutral agencies can be more objective in their evaluation of a public offer compared to other market participants.

This apart, it is likely to help investors weed out companies with poor fundamentals or those with a spurious background at the preliminary stage itself.

Disadvantages

More often than not, the pricing of any IPO is what influences the decision of any investor. The rating agencies, in this case, will not talk about ``what price'' and ``what time'' aspects of the offer.

Given that the decision to invest or avoid investments in any IPO is most often a function of the pricing, the lack of this aspect in the present IPO grading system could make the whole process an unfinished task.

Also, rating agencies (experienced in debt rating) could face trouble with rating the equities, which, unlike debt rating, is more dynamic and cannot be standardised. Further, IPO grading mechanism is a globally-unique initiative; it could increase the cost of raising capital in India and urge companies to seek capital overseas.

Markets, in the short term, can be price-driven and not purely motivated by company fundamentals. That is to say that, at times, even good companies at a higher price could be a bad investment choice, while the not-as-good ones could be a steal at lower prices.

Despite having disclaimers, a higher graded IPO may well tempt small investors into falsely believing that a high premium would come about on listing.

Similarly, investors may get deluded by a low-graded IPO, which could become a `missed opportunity' in the future. The purpose of introducing grading, thus, might get defeated if it leads to a false sense of buoyancy or alarm among investors.

Till such time the utility of the IPO grading system is unravelled, it is advisable for investors to use the grades only as an additional input to make an informed decision.

Investors need to be convinced about the business potential, pricing and valuations of an IPO, together with the grading, to make a final choice.