Category: IPO/NFO

Business Line had a very good piece on IPO Grading and stock returns on Indian IPOs in the last two years or so (January 2007 – October 2009).

They looked at 66 IPOs in that time frame and measured their returns till date. Turns out – the best performing IPO was Edserv Softsystems with a return of 265.9%, but it had the lowest grade of 1. In fact, the top 4 performers were graded just 1 or 2. And the fifth best performer was graded 3.

Before you make up your mind, and start looking for IPOs with poor fundamentals, take a look at the worst performing of the lot too.

The 4 worst performers were graded 1 or 2, and the fifth worst performer was graded 3. If you take a closer look at the results, you will find that there seems to be very little correlation between grade and performance.

This clearly shows that no one should invest in an IPO by grade alone. As I have written earlier, IPO grading doesn’t take into account a very significant factor – price.

When the rating agencies award a grade to the company, they take into account several factors, but not the price at which the issue is coming out. Everything is relative to price, so without that key input, — you can’t rely on grading alone.

The purpose of IPO grading is to tell you about a rating agency’s view about the company’s fundamentals, management standard and factors that will impact how well it does in the long run. It is not a tool that tells you whether you can make listing gains or not.

If you are in an IPO to make a quick buck, and sell on listing, — then be aware of the fact that you are playing a risky game, and no grading can be surefire.

If you are really looking to invest in a company, then IPO grading can help you understand the fundamentals of the company. If you like something, you can invest in it, even after the IPO is over, or looking at today’s environment, especially after the IPO is over, and the stock lists on the market. Not many Indian IPOs have done well on listing, and it might be better to wait and buy the stock when it lists rather than invest in the IPO and have all the cash blocked.

So, even though IPO grading may not help you make listing gains, there are other ways in which you can use it.

IDFC has filed a draft prospectus with SEBI, and is coming out with an open ended mutual fund targeted at the real estate sector.

This fund will primarily invest in shares of real estate oriented companies in India. The asset allocation will be as follows:

Asset Class	Range of allocation
Equity and related instruments of companies engaged in real estate related activity	65 – 100%
Debt and money market instruments	0 – 35%

As you can see from the above allocation, the fund intends to invest in shares of companies related in real estate. It will not invest in real estate directly. The percentage allocation may vary, but the basic idea of the fund is to get investors exposure to the real estate sector in India.

Let’s take a look at the sectors that are considered to be related to real estate:

1. Developer: These are the companies that acquire land, get clearances, architect and plan the projects.
2. Construction Companies: These companies engage in manufacture of cement, steel, glass, paints, lightings, heavy machinery required for construction and the like.
3. Buyer: These companies will provide housing finance, paints, air-conditioning and such.

Other Facts

The minimum investment amount in this IDFC real estate equity NFO is Rs.5,000. The fund has a growth and a dividend option, and further the dividend option has a reinvestment option.

The fund will charge 2.50% of weekly average net assets as recurring expenses. There is no entry load, and a 1% exit load if the investor redeems his units within a year.

The Real Estate Story

There are plenty of real estate mutual funds launched in the Indian market to take advantage of the real estate sector. The rationale behind these is that rising per capital income along with a movement to nuclear families, and increased home ownership will boost the real estate sector and increase its contribution to the GDP.

The problem with this story is that in the past price of real estate companies have far exceeded the underlying values, and real estate companies saw their stock prices falling greatly from the peak.

This is a equity real estate fund which is exposed to the same risks, and you could if prices in the underlying stocks fall, — you could see substantial erosion in your investment.

Birla Sun Life has filed a draft offer document with SEBI for its new mutual fund, — Birla Sun Life T – 20 Equity Fund. This is a close ended equity mutual fund that will invest in stocks of top 20 growth companies. This fund will allocate 65 – 100% of its net assets in equity and equity related instruments, and 0 – 35% of its assets in debt and money market instruments. The duration of the scheme is 3 years, and there will be a dividend and growth option of it. The fund will charge expenses estimated up to 2.50% of average weekly net assets.

The idea behind launching the Birla T – 20 mutual fund is that diversification beyond a certain point leads to diminishing returns without any corresponding benefits.

By having about 20 stocks or related instruments in its portfolio, the fund plans to minimize risk (by buying across sectors and market capitalizations), and at the same time leave scope for appreciation. To protect itself from concentration risk, the mutual fund will not invest more than 20% of its assets in just one sector.

Having a small number of funds also allows the fund manager to focus much better on every holding, as they don’t have to look at a whole bunch of securities.

The norm is having 20 companies, but the prospectus says that the number of companies under the fund can go up to 25 at the discretion of the fund manager and also when the assets under management goes beyond 1000 crores

You are probably wondering how they will decide which 20 or 25 stocks will Birla Sun Life T – 20 hold, and the answer to that is the fund manager will decide whether a particular stock makes the cut or not.

The factors that will be taken into account to make a decision are valuation, consistent past performance, future growth prospect, company management, and future expansion plans.

The minimum application amount for this fund is Rs. 5000. There is no entry and exit load, but investors aren’t allowed to exit the mutual fund before the end of the expiry period.

Only time will tell how well the fund plays out and performance of the scheme largely depends on the stock picking skills of its fund manager – Mr. Ankit Sancheti who is also the fund manager of Birla Sun Life Dividend Yield Plus, Birla Sun Life Basic Industries, Birla Sun Life Long Term Advantage Fund, and joint manager of Birla Sun Life Commodities Equity Fund.

A last note about risk of investing in the Birla Sun Life T – 20 fund, — this is an equity oriented fund that will invest in a relatively lesser number of stocks. Equity markets are inherently risky, and investing in this fund means that you are exposing yourself to the normal risks of investing in shares, which can ultimately lead to significant erosion of capital.

I see a lot of mutual funds that are coming with something new for Indian investors, like the Mirae Korea fund or the JP Morgan JF Greater China equity fund, and the ICICI Prudential Oil fund brings something new to Indian investors too.

This is the first fund that allows investors to take long term calls on the price of international crude oil. Now, the straightforward way to do that would be by taking positions in crude futures. However, since regulation doesn’t allow that, this fund will invest in foreign debt securities, which track crude oil.

The ICICI Prudential oil fund is benchmark against the West Texas Intermediaries crude oil prices traded on the New York Mercantile Stock Exchange.

There are two important points that emerge from our knowledge of the ICICI Prudential oil fund so far:

1. It invests in debt, but don’t think of it as a debt fund: Normally people tend to think of equities as risky and debt as safe. So, it is a natural reaction to think of this fund as a relatively safe fund because it invests in debt.  If you were headed in that direction, then stop right now. Although this is a debt fund, it will really track the prices of crude oil, which as you all know – have been quite volatile in the past few years.
2. Investing in foreign assets exposes you to an additional currency risk: Whenever a fund raises money in one currency and invests in another, — it exposes it to an additional currency risk. This means that currency fluctuation can also eat into your profits. This is not a risk that a lot of funds face, so it is good to be cognizant of this.

These are points that you should keep in mind, but the real purpose of investing in this fund would be your bullishness on oil prices.

If you don’t think that oil prices are going to rise, then there is no point looking at this fund. Right now there is no direct way for Indian investors to gain exposure to oil prices. This fund changes that and gives you an option. Just because you have an option doesn’t mean you take it, but it does give you an option.

Here is how crude prices have moved in the past decade. In principle, this fund should move in tandem with oil prices, but only after a year or so of its launch will we know how precisely it tracks oil.

The last thing I’ll note about this fund is that it has an expense ratio of 2.25% of assets.

If you are bullish on oil prices, then this is a fund that lets you take such a position, but if you are not, then you should give this a pass.

Mirae Asset has filed its offer document for a new fund – MIRAE Asset Korea Discovery Mutual Fund.

This is a fund of fund, which means that it will hold other mutual funds as its assets. As the name suggests, the objective of the fund is to invest in Korean equities. It will do that by investing in the units of the Mirae Asset Korea Fund. It will also invest in other exchange traded schemes focused on Korea, and some part of the fund will be invested in debt and money market securities in the domestic market.

Asset Allocation

Here is how the asset allocation will look like:

Instrument	Indicative Allocation
	Minimum	Maximum
Units of Mirae Korea Equity Fund or other equity assets invested in Korea	80	100
Money market and debt instruments	0	20

Since a large part of the fund is expected to be invested in the Mirae Korea Equity fund, let’s take a look at what that fund is all about.

Mirae Korea Equity Fund

The Mirae Korea Equity Fund is a bottom up stock selection fund which focuses largely on equity investments. This means that the portfolio manager of the Mirae Korea fund analyses stocks and companies, — and then selects stocks that promise to provide superior returns.

Benchmark

The Mirae Asset Korea Fund is benchmarked against the KOSPI index, so here is a chart of how KOSPI has performed over the last ten years.

Continue reading “Mirae Asset Korea Discovery Fund”

Price Band and Dates of Astec IPO

The IPO is priced between Rs. 77 to Rs. 82. It opened on October 29^th 2009, and will close on November 4^th 2009.

IPO Grading

ASTEC Lifesciences has been graded 2 out 5 by CARE, which denotes below average fundamentals.

Business of ASTEC

Astec is engaged in the following two segments:

1. Agrochemicals
2. Pharmaceuticals

The agrochemicals segment involves manufacture of active ingredients, intermediates and formulations. The company is involved in manufacturing products that are used in crop protection and anti fungal agents.

The Triazole fungicide — its main product — is used in the agrochemical segment, and contributed 65.81% to sales. Dicap, its key product in the pharmaceutical segment contributed 14.14% of sales during FY 2008 – 09. So, you can see that the major chunk of revenue come from the agrochemical sector.

It has two plants – one in Mahad, Maharastra and the other in Dombivili, Maharashtra. The company is coming out with the IPO primarily to raise funds for expansion of the manufacturing facility of the Mahad plant and expanding the R&D facility of the Dombivili plant.

Financials of Astec

The company had net sales of Rs. 8,441.46 lakhs in 2008 – 09, up from 6,120.78 lakhs in 2007 – 08. The corresponding net profit for the two years was Rs. 1072.98 lakhs and Rs. 793.64 lakhs.

The company had an EPS of Rs.11.37 for the last year, and the P/E ratio comes out between 6.77 and 7.21 on the higher and lower band based on the earnings. BL states that much larger companies such as Hikal, Meghmani Organics and Sabero Organics command multiples of just 5 – 6 times.

Risk Factors

There are several criminal and civil legal proceedings against the company, its directors and promoters. Any decision against them will impact the future of the business.

Astec operates in the agrochemical industry and is vulnerable to seasonal and weather fluctuations.

The company is subject to product liability claims in relation to the quality of and use of its products. This means that if someone is harmed by the use of its products, the company can be liable to pay claims. This exposes it to potential legal costs.

Conclusion

These were some key factors that you should keep in mind while thinking of investing in the Astec IPO. The grading, earning comparison, and industry that the company is in are all important factors to keep in mind while deciding whether you should invest in the company or not.

A quick post on one useful fact and one interesting one related to the Indian IPO market.

The useful fact is that Oil India IPO allotment has already been done, and you can find the allotment details here. The shares will list on 30th September.

The thing that I found interesting was that looking through the subscription numbers of ThinkSoft Global Services Limited on NSE’s website, I saw that they have extended the issue close date to October 1st instead of the earlier Sep 24th, and also that they have lowered the price band from Rs. 120 – Rs. 130 to Rs. 115 – Rs. 125.

This in itself is quite striking because it doesn’t happen very often, but the thing that is even more striking is that the Qualified Institutional Buyer portion of Thinksoft IPO shows that not even a single share has been bid for. Now that’s something that doesn’t happen too often, if it happens at all.