Category: IPO/NFO

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

In a bid to meet its disinvestment and fiscal deficit targets, the Indian government has once again started milking the public sector enterprises (PSEs) falling under its centralised ownership. Last month, after the government failed to convince the trade unions of Coal India for the latter’s disinvestment, it made the company to declare a special dividend of Rs. 29 per share, which amounted to Rs. 16,486 crore for the 90% stake the government is holding. It is just one such case.

Now, the companies, which could have got sold at a valuation in the multiples of their current valuations, are actually getting divested at some very low price per share. One of these companies is Engineers India Limited (EIL). EIL is the same company which issued its shares at Rs. 290 a share in its July 2010 FPO and the issue got a huge response to get oversubscribed 13.14 times.

Now, even after three and a half years, its shares are getting sold at almost half of its earlier offer price. The company is again coming out with its follow-on public offer (FPO) and the issue for the same will open for subscription today onwards. The issue is scheduled to get closed for the institutional investors as well as the retail investors on February 10 i.e. Monday.

Price Band & Retail/Employee Discount – EIL has fixed Rs. 145-150 as the price band for its shares in the FPO and has decided to offer Rs. 6 as a discount to the retail investors and employees of the company. So, if the price gets fixed at Rs. 150 after the issue gets closed, the retail investors will get the shares at Rs. 144 per share.

Lot Size, Minimum & Maximum Investment – With a lot size of 100 shares each and the higher offer price of Rs. 144 per share (Rs. 150 per share less Rs. 6 discount), a retail investor would be required to commit a minimum investment of Rs. 14,400. Maximum investment for a retail investor would stand at Rs. 1,87,200 for applying 1,300 shares in the offer.

Shares on Offer – The issue size is relatively smaller and the government is going to sell about 3.37 crore shares in the offer, constituting 10% of the company’s existing paid up capital. The company is not going to get any money out of this share sale as the whole of this issue would be a disinvestment by the Government of India. After the FPO, the government’s holding in EIL will come down to 70.4% from the current 80.4%.

35% Issue Reserved for Retail Investors – There are three categories of investors – Qualified Institutional Bidders (QIBs), Non-Institutional Bidders (NIBs) and the retail investors. 50% of the issue is reserved for the QIBs, 15% for the NIBs and the remaining 35% for the retail investors. 5 lakh shares have been reserved for the employees of the company.

Financials of Engineers India Limited

Net Profit of the company for the six months ended September 30, 2013 stood at Rs. 221 crore with revenues at Rs. 1,038 crore. The same figures for the twelve months ended March 31, 2013 were Rs. 576 crore and Rs. 2,773 crore respectively. At the current price of Rs 149.05, the stock trades at 8.72 times its trailing twelve months earnings per share and 2.19 times its book value.

EIL is a cash-rich company and has zero debt. It paid Rs. 6 as dividend last year. At Rs. 149.05, it offers a dividend yield of approximately 4%. Its order book stands at Rs. 3,232 crore which is closer to 1.2 times its FY 2012-13 sales.

Is it a great opportunity for the investors to buy EIL’s shares at these valuations?

I would say No, as I think it is not a “not to be missed offer” and its market price has the potential to fall below the offer price in a very short period of time. Also, I think the government in the last few years has either created a deeply messy business environment for some of these companies/sectors or has failed to clear the obstacles in their growth.

At the same time, these companies have failed to deliver on the investors’ expectations so badly that the investors, who made huge investments a few years back in these companies, are regretting their decisions and are highly reluctant to do the same once again.

Should I subscribe to EIL FPO at Rs. 145-150?

Share price of Engineers India Limited on the NSE got closed at Rs. 149.05 on Wednesday and I think it is very much possible for the stock price to go down even below the offer price of Rs. 144 i.e. Rs. 150 less retail discount of Rs. 6 per share. So, why should I buy it in the FPO at Rs. 144 when I am getting it for a price less than Rs. 144 from the market itself? Probably one should not.

But, if your investment horizon is longer than just listing gains and if you have some hope that the business environment for EIL would improve in the coming months/years, I would say one should subscribe to it.

Again, prevailing is a bad time for the share market and this FPO has also been an overhang on the company’s price movement. Going forward, it would depend on the company’s financial performance and the government’s policy framework, how EIL share price performs and whether the investors remain stuck in losses or if they get rewarded for their patience.

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Power Grid follow-on public offer (FPO) finally got closed yesterday. The issue got 6.74 times oversubscribed and the company successfully raised around Rs. 7,000 crore from the issue.

As the issue has got closed now, the investors are quite eager to know what price has been fixed by the company to issue these shares at, when they will come to know how many shares have been allotted to them, when these shares will get credited to their respective demat accounts, when these shares will be admitted to trade on the stock exchanges.

Here are some of those post-offer FAQs regarding Power Grid FPO and my responses to the best of my knowledge and research capabilities:

How many times the issue has got subscribed and how many shares will I be allotted? I have applied for ‘X’ number of shares, what is the system for allotment – is it based on lottery system, proportionate system or guaranteed allotment of shares?

Vivek also put up a similar query today.

Vivek December 7, 2013 at 4:05 pm

How many shares can I get for 2L application if issue is subscribed 2.17 time? I will get 6 lots minimum- how much more?

The issue has got oversubscribed to the tune of 6.74 times overall and 2.17 times in the retail investors category. Approximately 3,89,142 bids have got placed on the stock exchanges during the offer period.

As per the new rules for Basis of Allotment – “Every retail participant gets a minimum bid lot allotted, irrespective of his/her application size. This is subject to availability of shares.” So, the allotment system is neither lottery based nor it would be proportionate or guaranteed allotment.

As the retail investors category in the issue has got 2.17 times subscribed, I think there are enough number of shares available in this category for every retail investor to get at least one lot of 150 shares allotted. In a way, it is guaranteed allotment, but only of 150 shares.

If you’ve applied for 2,250 shares or 2,100 shares, it is no guarantee that you’ll get these many shares allotted, even in a proportionate manner.

You will get to know the exact number of shares allotted to you only once the basis of allotment gets finalised.

What price has been fixed by the company to issue these shares at?

Simple asked me to guess the “Cut-Off” price yesterday.

Simple December 6, 2013 at 11:53 pm

Hi Shiv!

Retail subscribed @ 2.17 times. Any guesses about the cut off price?

The board of Power Grid is scheduled to meet on Monday and after its consultation with the book running lead managers (BRLMs), will fix the final issue price i.e. the cut-off price. I expect the cut-off price to get fixed at Rs. 90 per share. If it gets fixed below this price, it will be a bonus for the investors.

By when will I get to know how many Power Grid shares have been allotted to me? If I get certain number of shares allotted, by when will the shares be credited to my demat account?

SPPatel, a relatively new participant in the FPO/IPO process, wanted to know about the date by which he can expect the shares to get allotted and the allotted shares to start trading.

SPPatel December 6, 2013 at 11:52 am

Dear Shiv,

Can you tell me the allocation date of FPO. When it will be available to my account. And when i can do the buy/sell transaction. Actually i dont know much about FPOs. So i am asking these kind of question. Thanks in advance.

Post closure of the FPO, this is the most common query the investors have and the following table, which I have taken from page 418 of the Red Herring Prospectus filed by Power Grid dated November 15, 2013, is the best source to get all our queries answered.

Power Grid, in consultation with the NSE, the designated stock exchange, will finalise the basis of allotment on or about December 16th. As we can check from the table above, we’ll get to know the number of shares allotted to each of us either by December 16th or December 17th. The Registrar to the issue will initiate the refund process as early as December 17th.

After approval of the basis of allotment by the NSE, an allotment advice will be sent to each successful investor, who has been or is to be allotted Power Grid shares.

Investors can expect the FPO shares to get credited into their respective demat accounts latest by December 18th or December 19th. Once these shares get fully allotted, we can expect these shares to start trading on the stock exchanges by December 20th.

Power Grid will ensure that the whole FPO process gets completed within 12 working days from the closing date of the issue, including the finalisation of basis of allotment, refund of excess investment amount, allotment & credit of shares to the successful bidders and commencement of trading.

If there is any delay in the refund of investment amount, Power Grid will have to pay interest at the rate of 15% per annum.

Finally, if you have any other FPO related query, please share it here. I’ll try to answer it as soon as possible. If you have any allotment or refund related grievance, then you need to contact Karvy Computershare, the Registrar to the issue.

I’ll keep updating this post as and when I get any post FPO info. If any of you get info about the issue price, allotment, refund, listing or any related news, please share it here.

Issue Price Fixed At – Rs. 90 per share with discount of Rs. 4.50 for the Retail Investors

Basis of Allotment

(Source: Times of India)

Refund Process Started From – December 17th (Updated on December 17th)

Credit of Equity Shares into Demat Accounts – December 18th (Updated on December 18th)

Trading in FPO Shares Begins From – December 19th (Updated on December 18th)

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Power Grid Corporation of India Limited (PGCIL), a ‘Navratna’ company and the Central Transmission Utility (CTU) of the country, is coming out with its second follow-on public offer (FPO). The issue will open for subscription today, December 3 and will get closed for the institutional investors on December 5 and for all other investors, including the retail investors and its employees on December 6.

Price Band & 5% Discount – The company has set the price band between Rs. 85 to Rs. 90 and has also decided to offer a 5% discount to the retail investors and the employees of the company. If the price gets fixed at Rs. 90, the retail investors will get the shares at Rs. 85.50 per share.

Lot Size, Minimum & Maximum Investment – With a lot size of 150 shares and the offer price of Rs. 85.50 per share, minimum investment required stands at Rs. 12,825. A retail investor may apply for a maximum of 2,250 shares in the offer i.e. a maximum investment of Rs. 1,92,375.

Shares on Offer – The company is going to issue about 78.71 crore shares in the offer, constituting 17% of the company’s existing paid up capital. This comprises a fresh issue of 60.19 crore shares and simultaneous disinvestment of 18.52 crore shares by the Government of India. After the stake sale, the Government’s holding in PowerGrid will come down to 57.89% from the current 69.42%.

35% Issue Reserved for Retail Investors – There are three categories of investors – Qualified Institutional Bidders (QIBs), Non-Institutional Bidders (NIBs) and the retail investors. 50% of the issue is reserved for the QIBs, 15% for the NIBs and the remaining 35% for the retail investors. 30 lakh shares have been reserved for the employees of the company.

Historical Price Movement – Power Grid launched its IPO in October 2007 and its first FPO in November 2010. Price band set for the current FPO is absolutely same as it was offered in its first FPO. Since then, its price has been moving in a limited range, touching a high of Rs. 124.70 and a low of Rs. 86.55.

But, during most of this time period, it has remained in a very tight price range of Rs. 95 to Rs. 115. During the same time, the fundamentals of the company never deteriorated, as it has been the case with many other public sector enterprises.

This FPO has been an overhang on the company’s price movement in the recent past. Despite a good performance and improved profitability shown by the company, its price has fallen from Rs. 110-115 to Rs. 93-98 in the last few months.

The company is to invest Rs. 30,000 crore in the 12th Plan and this FPO would help the company to partially fund its ongoing projects.

Power Grid is a defensive stock to buy in the power sector with extremely attractive valuations. Net Profit of the company grew at 22% compounded annually between financial years 2007-08 and 2012-13. At the current price of Rs 93.60, the stock trades at 10.05 times its trailing twelve months earnings per share and 1.64 times its book value.

I think the offer price of the company in the FPO @ Rs. 85.50 is extremely attractive and has the potential to provide around 30-50% returns in the next one to two years time frame. Personally, I’ll subscribe to the issue and advise my clients as well to invest in this offer.

Justdial offers local search services where you can search for a service around you using your cellphone, SMS, or just the internet. In fiscal 2012 they addressed 254.3 million searches on their platform, and that shows that it is a fairly big platform. I don’t think there is another local search engine in India that has these kind of numbers.

Just in case you’re wondering, Google said sometime ago that it addresses more than 100 billion searches a month. 

Justdial makes its money by advertising, and the way that works is that they have sponsors that pay to be displayed along side the organic search results that Just Dial shows.

So if I search for pizza home delivery near Chembur – Just Dial shows me links from Pizza Hut, Dominos etc. and then towards the right they have links for Pizza Craft, Smoking Pizzas etc. which are their advertisers and have paid to be listed there. You can see an example in the screenshot below. 

Justdial is debt free, cash flow positive and profitable so obviously the local search business is doing well for them. The company made Rs. 2,770.2 million in fiscal 2012 with a net profit of Rs. 522.8 million. The cash from operations was Rs. 1,166.05 million last fiscal. The EPS last year was Rs. 6.54 and it was Rs. 7.19 in the nine month period this fiscal.

The price band for this IPO is Rs. 470 to Rs. 543, so if you were to just annualise the EPS last year – the P/E ratio at the lowest multiple is about 49. So, the IPO is richly valued, however, there is a safety net in the Just Dial IPO so retail investors are at least guaranteed that their principal is secure for six months.

This IPO is akin to PSU disinvestment in the sense that proceeds from the IPO will go to existing shareholders, and the company won’t get any of the money. When you look at how much cash the company has generated over the past, and the capital expenses, it does seem like there is no need for the company to raise additional cash so in that sense I feel that the company isn’t losing out on anything, and the current market conditions give the promoters a good opportunity to cash out a little.

Retail investors will also get a discount of Rs. 47 and I feel that anyone interested in IPOs or direct equity this might be a good option to dip your toes in. However, IPOs haven’t done so well in the past few years and the general optimism in the market along with the rich valuation of this particular IPO makes me feel that it isn’t that great a deal for investors.

The idea of an IPO Safety Net is being discussed since the past couple of months or so and there were some news articles that said SEBI might even make it mandatory, but even before that Sai Silks came out with an IPO last week, and included the safety net scheme in that.

Under this scheme, if the share price fell below the IPO price at any time within 6 months from the issue of shares, the promoters will buy back shares from retail investors at the IPO price. Sai Silks put a limit of 1,000 shares per investor under this scheme. This of course only applies to the original allottee and if you bought the share from the stock market after it listed then you won’t be covered under this safety net.

This is not the first time a company has done this, and about 7 years ago – Usher Agro had also come out with a safety net.

I don’t see the point of this scheme and feel that if made mandatory it will be counter productive to its good intentions which is to protect the small investors against IPOs that fall very badly after listing.

Most small investors who invest in the IPO market have no intention of holding the stock for more than a few days and sell it if they can make a small gain. You can’t and you shouldn’t protect against this type of mentality. People should understand that equity is risky, and people should only speculate if they can stomach losing money.

If the idea is to kick start the IPO market again, then this will not solve it because the IPO market has slowed down due to the fact that there are hardly any good companies that have listed with a reasonable price. Till such time that good companies list in the market at a reasonable price, the IPO market won’t get started again, and this step, if made mandatory, creates a disincentive for good companies to list.

The promoters part with their stake in the company, and if the share falls due to a broader fall in the market, they have to now make good losses of the retail investors as well. So, first they part with their stake, and then they part with their money?

I think this creates an disincentive for good companies to list, or list their stocks at a considerable discount to what they feel is the intrinsic value which will in turn give rise to an IPO pop at the day of listing, and people will be busy selling within a few hours. This will also mean that a lot more people apply for shares and get only a handful shares at subscription. There is no benefit of being in this situation either.

I feel this is a bad idea and if a company wants to create such a safety net then they are free to do so but forcing it on all companies creates perverse incentives in the market, and won’t contribue to an environment where a healthy capital market can flourish.

This post was from the Suggest a Topic page.

CARE listed a few days ago, and it was heartening to see that there was a listing pop, and the share did well to close at a 23% premium to its closing price or about Rs. 170 more than it’s offer price of Rs. 750.

The allotment on the CARE IPO was different from the others we have seen previously, and while a lot of retail investors didn’t get anything at all, people who got the allotment, got 20 shares regardless of how many they applied for.

So, you got 20 shares if you applied for 260 shares, and you got 20 shares if you applied for 40 shares.

This is an unusual situation, and it creates a system which leads to a very tempting type of speculation. What happened with the CARE IPO is that by applying for 40 shares, you blocked about Rs. 30,000 and when the shares listed you could have made about Rs. 3,400 by selling the IPO pop. This isn’t bad at all if you can spare that Rs. 30,000 for a couple of weeks or so, and Sunil Srinivasan pointed to me on Twitter that if you use ASBA, you continue to earn interest on that Rs. 30,000 as well.

In the past you have had to block a large amount of money to get the minimum subscription for popular IPOs but with this new method used by SEBI, you now have an incentive to actually apply for a smaller lot during the IPO and then sell it at the pop.

Of course the assumption is that you will have a pop and not have a Bharti Infratel type listing which listed down 13% today. Is it too hard to figure out which ones will be like CARE and which ones like Bharti Infratel? Hindsight is 20/20 of course, but during my reviews on the two IPOs I did mention that Bharti Infratel valuation seems to be on the higher side while CARE has priced its IPO reasonably and I certainly didn’t do any sophisticated analysis, so with the usual risk that goes along with speculation, I’d say  the current system will promote a new type of IPO speculation – bidding across accounts with small lots for certain IPOs and then selling the pop, which is a lot better than what people had to do earlier which was bid for huge lots and get only small amounts of stock.

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

A few days ago when the CARE IPO was about to get opened, Rakesh got confused about the “Offer for Sale” process through which the share sale was to happen. He wanted to know whether the procedure to apply for CARE shares was to be same like normal IPO or something different.

To know more about it, TCB asked me to share the process details.

TCB
December 19, 2012 at 7:50 am
Dear Shiv,Can you please give details about the procedure for Offer For Sale (OFS) of Hindustan Copper, ONGC, NMDC etc. ? As you correctly said, this OFS is different from CARE Offer For Sale.I would like to know details like how to apply, how & when to pay, how & when is allotment done, what is the meaning of terminologies like indicative price, during the offer from where can we monitor the quantity and price of bids received etc.Thanks

Here is my attempt to let people understand the Offer for Sale process. Please leave your comments in case I miss something or you find any discrepancy in the post.

Poor economic growth causes poor investment sentiment which results in poor market conditions and thus forces corporates to cost cutting. In another attempt to save some unnecessary costs and to reduce the time taken to raise money, SEBI has introduced a new process called Offer for Sale (OFS).

Offer for Sale is getting really popular with the companies and as many as eight companies, like NMDC, Hindustan Copper, Eros International, Blue Dart, Honeywell Automation etc., have taken this route to either raise money from the markets or to increase non-promoter shareholding in order to comply with the minimum public shareholding guidelines.

What is “Offer for Sale” and can retail investors participate in the process?

Offer for Sale (OFS) is another form of share sale, very much similar to Follow-On Public Offer (FPO). OFS mechanism facilitates the promoters of an already listed company to sell or dilute their existing shareholdings through an exchange based bidding platform.

Except the promoters of the company, all market participants like individuals, mutual funds, foreign institutional investors (FIIs), insurance companies, corporates, other qualified institutional bidders (QIBs), HUFs etc. can bid/participate in the OFS process or buy the shares. The promoters of the company can only participate as the sellers in the process.

OFS Process

First of all, very basic, you need to compulsorily have a demat/trading account(s) and permanent account number (PAN) to participate in an Offer for Sale. The sellers are required to deposit the offered shares with the exchange before 11.00 a.m. on T–1 day, where ‘T’ is the day of OFS.

Once the OFS starts, you can participate in the process yourself using your online trading accounts like ICICI Direct, Kotak Securities etc. by placing your bids under the ‘OFS’ section of their respective broking websites.

Investors, who do not have online trading accounts, can place their bids by directing the dealer of their broking company to do it on their behalf. You can modify or cancel your bids during the offer timings except in the last 60 minutes i.e. till 2:30 p.m.

The exchange will announce the “Indicative Price” only during the last 60 minutes of the OFS. Indicative Price is the volume weighted average price of all the valid/confirmed bids. e.g. There are total 1000 shares in an offer for sale with Rs. 200 as the floor price. If the investors bid for 200 shares at Rs. 210 and 800 shares at Rs. 200, the indicative price for the offer would be [(200*210)+(800*200)]/1000 = Rs. 202.

No leverage is provided to the investors against the stock margin available in the trading accounts and thus, they are required to deposit 100% of the order value in cash to bid for it. Also, the funds allocated for OFS cannot be utilised for other investment purposes or against any other obligation of the trading member.

Once the bidding gets over, allotment price is fixed and allocation is done. The successful bidders will be allotted shares directly into their demat account on T+1 basis the very next day. In case of partial allotment or no allotment, the refunds will be made on the same day itself. This makes the OFS process really fast, just like buying shares of the company from the open market.

During the offer timings or once the offer gets completed, you can monitor the quantity and price of bids received etc. from this link of NSE, like it has the details of the OFS of Eros International Media Limited which got concluded on December 20th.

Allocation Methodology and Contract Notes

The companies can adopt one of the two methodologies for allocating the shares on offer i.e. either on a price-priority basis at multiple clearing prices or on a proportionate basis at a single clearing price.

Like you get the contract notes by the evening of the trading day on which you buy shares of a company, you’ll get a contract note in the same format when you buy shares in an OFS. Contract note will have the details of your bid price and the quantity allotted in the specified format.

What differentiates Offer for Sale (OFS) process from IPOs/FPOs?

Physical Application: Unlike IPOs/FPOs, no physical application forms are issued to apply for shares in the OFS process. OFS process is completely platform based.

Time Period: While IPOs/FPOs remain open for 3-4 days, OFS gets over in a single trading day as the markets gets closed for trading at 3:30 p.m.

Price Band: Under IPOs/FPOs, there is a price band in which the investors need to bid for the shares or simply give their consent to buy the shares at the “Cut-Off” price. With OFS, there is a “Floor Price”. As the name suggests, it is the minimum price at which you can bid for the shares under OFS. You will not be able to place an order below the floor price as it will not be accepted by the system.

Though it is not mandatory to disclose the floor price before the issue opens, the promoters usually disclose it prior to the share sale in almost all of the issues. Alternatively, the promoters can submit the floor price in a sealed envelope to the exchange which will be disclosed post closure of the offer. In case the floor price is not disclosed to the public, the investors can place their bids at any price they want.

Charges: Investors are not required to pay any kind of charges over and above the ‘Fixed Price’ in an IPO or FPO. But, the OFS process involve certain transaction charges including the brokerage, Securities Transaction Tax (STT) and other charges, which the investors normally pay when they buy shares of a company in the cash market.

On the OFS day, normal trading in the shares of the company will continue even when the bidding process is ‘ON’. The investors have the option to either buy the shares of the company in the normal market or place their bids for the shares on sale in the OFS. The investors can place only ‘Limit’ orders under the OFS facility as ‘Market’ orders are not allowed.

OFS process has the following advantages over FPOs/IPOs:

Cost effective: I think this is the biggest reason for the promoters to sell their stake through the OFS route. OFS route involves very less formalities. Unlike IPOs/FPOs, the promoters of the issue under OFS are not required to file Draft Red Herring Prospectus (DRHP). Also, there is no need to get the application forms printed. It also saves big advertisement expenses.

Saves Time: This route involves sale of shares in a single trading day and that too, during the normal trading hours i.e. between 9:15 a.m. and 3:30 p.m. The promoters can announce their intention of share sale even one trading day prior to the opening of the offer.

Transparency: Retail investors have suffered losses in the past due to manipulation in IPO/FPO allotment. OFS process is quite transparent as it is done on real-time basis with a system based bidding platform and involves least amount of paperwork.

Multiple Orders: Under OFS, there is no restriction on number of bids from a single buyer. This facility is not available in FPOs/IPOs.

The formats are changing rapidly. One-day cricket is fast losing its appeal to T-20 matches. Similarly, 3-4 days long FPOs are getting replaced by these single-trading day Offers for Sale. Very few people read the DRHP or printed details on application forms while investing. So, in a way, these OFS will reduce the issue costs to a large extent. But, will the investors be able to make wise investment decisions in these OFS? Just wait and watch.

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

CARE IPO, which closed on December 11th, got oversubscribed by 34.11 times. After a very long time an IPO has seen such a good response from all the categories of investors. There was a huge appetite for its shares from Qualified Institutional Investors (QIBs) and Non-Institutional Investors (NII) categories, which saw oversubscription to the tune of 43.31 times and 110.24 times respectively.

Retail investors were a little cautious but some of them got interested to apply for it. This category got oversubscribed by 6.11 times. CARE has now become the third rating agency to get listed after CRISIL and ICRA.

CARE IPO – Explaining Basis of Allotment to Retail Individual Bidders

CARE IPO had total 71,99,700 equity shares on offer in the IPO, at an issue price of Rs. 750 per share. 35% of the offer was available for allocation to the retail individual bidders in accordance with the SEBI Regulations, which makes it 25,19,895 equity shares.

As many of you must be aware, when the investors apply for a company’s shares in an IPO, there is a bid ‘lot’ system. With CARE IPO, the bid lot size was in multiples of 20 shares and the retail investors had the option to apply for a maximum of 13 lots (260 shares) and a minimum of 1 lot (20 shares). So, the minimum investment in the CARE IPO was Rs. 15,000 and Rs. 1,95,000 as the maximum.

In August this year, SEBI announced certain new measures regarding “Basis of Allotment”. Some of the important measures are:

* Every retail participant gets a minimum bid lot irrespective of his application size. This is subject to availability of shares.
* The minimum application size band in an IPO has been increased from Rs. 5,000-7,000 earlier to Rs. 10,000-15,000 now.
* Issuers are now allowed to furnish the price band five working days prior to issue opening date as against the erstwhile two working days.

So, this new system of allotment, which got used in the CARE IPO also, has left many of the retail investors disappointed, including me.

Retail investors have been allotted only 20 shares irrespective of their application size i.e. whether they applied for 20 shares or 260 shares or any number of shares in between, they got only 20 shares allotted. That too, in the ratio of 101:256 i.e. only 101 applicants got these 20 shares out of 256 applicants.

Actually, a total of 3,19,350 retail individual applicants applied for it, in varying number of bid lots i.e. between 1 to 13 bid lots and only 1,25,994 applicants got the shares allotted in the ratio of 101:256.

Allocation to Retail Individual Bidders (after technical rejection)

As you can check the Basis of Allotment in the table above, there were 2,45,680 applicants who applied for 20 shares with each of their applications. Out of these 2,45,680 applicants, 96,929 applicants have been allotted 20 shares each or total of 19,38,580 shares.

2,45,680 * 101/256 = 96,929 * 20 shares = 19,38,580

Similarly,

15,853 * 101/256 = 6,255 * 20 shares = 1,25,100
9,199 * 101/256 = 3,629 * 20 shares = 72,580

and so on.

If you want to check the manual of CARE allotment, you can do so from this link.

I was disappointed as out of my family members’ 4 applications, we got allotted only 20 shares. There have been many investors like me who are disappointed. But, the disappointment in the allotment is primarily due to non-awareness of the new system.

If the new system is analysed deeply, it is not that bad after all. I think the idea is to encourage and favour the small retail investors and also to discourage HNIs to take the retail category route to apply for higher number of shares.

At the same time, it creates uncertainty in the minds of the retail investors whether to apply for an IPO or not, as you never know whether you will fall in those 1,25,994 successful applicants or not.

With the new system in place, the retail investors will have to change their strategy to get maximum number of shares allotted in some popular IPOs like CARE i.e. they should now apply for minimum bid lots in popular IPOs and increase the number of applications using demat accounts of their family members.

CARE (Credit Analysis and Research) is coming out with its IPO and the issue opens on the 7th December 2012 and closes on the 11th December 2012.

They have fixed a price band of Rs. 700 – Rs. 750, and based on this the issue size is approximately Rs. 500 crores.

CARE is a well known credit rating agency, and the company rates debt instruments that are issued in the Indian markets. Though the company rates IPOs as well, most of its revenues are generated on rating debt instruments, and the business is dependent in on how well the market for new debt issues is doing.

CARE is the second largest credit rating agency in India and was the third credit agency to be set up in India after CRISIL and ICRA.

CARE Financials

It is quite a profitable company and has grown at a scorching pace of 55.6% CAGR in the five year period leading up to 2011. For some reason the prospectus doesn’t have number for 2012 and I couldn’t find these financials elsewhere.

The EBITDA margin is an amazing 77.1% and the PAT margin is equally impressive 51.6%. The company has no debt, and it’s net worth is Rs. 3,024.20 million. That’s about Rs. 106 per share.

Here is the total revenues and profit after taxes for the last 3 years in Rs. Millions. For some reason the prospectus doesn’t have numbers for 2012.

This gives an EPS of Rs. 31.9 for 2011, and at Rs. 700 which is the lower end of the price range, the P/E multiple comes out to be about 22.

The company already has Rs. 106 per share in assets so you can really think of the offer price as Rs. 600 and at that price the P/E multiple comes out to be Rs. 18.8 times.

Its competitors CRISIL has a P/E multiple of about 37 and ICRA has a P/E multiple of about 26 so CARE has certainly priced its IPO quite reasonably.

CARE Capital Structure

CARE isn’t issuing any new shares for this IPO and is offering existing shares for sale. This means that the equity base of the company isn’t increasing the earnings won’t be diluted to the extent of the new shares issued like in the case of other companies (Bharti Infratel in an example) where new shares are issued.

• Existing outstanding shares: 28,552,812
• Present offer for sale: 7,199,700
• Shares after IPO: 28,552,812

Conclusion

CARE IPO is an IPO of a good profitable company that has shown good growth and is reasonably priced. There’s everything going for the company but as far as IPOs are concerned you can never really say what will happen to the stock price. In fact this IPO reminds a lot of the MOIL IPO which was quite similar in terms of being reasonably priced, debt free, good growth but somehow that stock didn’t do well after its IPO. I think a large part of that is just the timing of IPOs where they are issued when the market is doing well, and of course when the market goes down (which it inevitably will) everything goes down with it, and even good companies fare badly, and that’s why IPOs should be treaded carefully even of good companies.

Bharti Infratel’s IPO is the biggest after Coal India’s IPO back in October 2010, and I think I didn’t do a single IPO review in between these two as there weren’t many good companies that came out with IPOs in that duration.

The price band of the Bharti Infratel IPO has already been decided between Rs. 210 and Rs. 240, and they are offering 10% of the equity (188.9 million shares) which makes this a roughly $825 million or Rs. 4,500 crore IPO.

Bharti Infratel Overview

Bharti Infratel is a subsidiary company of Bharti Airtel and it is the tower infrastructure provider to cellular phone companies. The company builds, operates and runs tower infrastructure for wireless telecom providers. It is going to be the first listed company of this kind as Reliance Infratel which had plans to list earlier this year didn’t go through with its IPO. 

However that doesn’t mean there aren’t other companies in this business. This is a very competitive market and there are many players in the tower business (though not listed), there are players like BSNL and MTNL who handle their own portfolio, then subsidiaries of companies like Reliance Communications and Tata Teleservices, independent companies like GTL Infrastructure Limited, American Tower Corporation, Aster Telecom Infrastructure Private Limited and Tower Vision India Private Limited.

The interesting thing about Bharti Infratel is that although is a subsidiary of Bharti Airtel, it has ownership stake in another tower company called Indus and through that Bharti Infratel provides tower infrastructure service to not only Bharti Airtel, but Vodafone and Idea Cellular as well.

This ownership structure is shown in the chart below that I took from the prospectus.

Bharti Airtel owns the majority stake of 86.1% in Bharti Infratel and Bharti Infratel in turn fully owns Bharti Infratel Ventures that it uses for its business, and then it has a 42% stake in Indus Towers as well.

Indus Towers is a joint venture between Bharti Infratel, Vodafone India and Aditya Birla Telecom and while Bharti and Vodafone own a 42% stake in the company, Aditya Birla Telecom holds a 16% stake.

All of this then begs the question – how much money does Bharti Infratel make from its parent company and how much money does it make from other customers?

In 2012, Bharti Infratel’s consolidated revenues were Rs. 95,970.6 million. Indus revenues were Rs. 121,033.6 million, and Bharti’s Infratel’s 42% stake gives them Rs. 50,834.11 million from that. So, approximately 54% of Bharti Infratel’s revenues come from its stake in Indus.  The take-away from this is that although the name and the 86% ownership stake of Bharti group may connote that the company depends on its promoter for the bulk of its revenue, that’s not quite the case and it also gets significant revenues from Vodafone and Idea Cellular.

Bharti Infratel Financials

The telecom sector has shown tremendous growth in the last few years, so it is no surprise that Bharti Airtel has also done pretty well in that time period.

Here are Bharti Infratel’s key financials for the last few years (In Rs. Millions):

The company also has a positive operating cash flow and has negligible debt, so it is in a good financial position.The diluted EPS for the 2012 was Rs. 4.29 and that gives you a rather high P/E multiple of 48.9 on the lower range of the IPO price band.

Bharti Infratel Capital Structure

The company currently has 1,742,408,730 shares outstanding and it’s going to issue 146,234,112 new shares during the IPO, the remaining 42,665,888 will be offered by existing shareholders. This means that the new number of outstanding shares of the company is 18,886,428,420.

Based on the new number of outstanding shares and Profit After Tax last year of Rs. 7,507.3 million, you can calculate the new EPS post listing to be Rs. 3.97 and the new P/E multiple based on that as 52.9 times.

The company’s profit for the first quarter of 2012 was Rs. 2,130.7 million, and if you simply multiply it by 4 to annualize it you get Rs. 8,522.8 million and at that rate the projected EPS for the next year will be Rs. 4.51 and P/E multiple will be 46.5 times.

This valuation seems to be on the higher side to me, but Reuters has a story that talks about analysts using the EV / EBIDTA method and based on that number, the analyst concludes that the Bharti Infratel IPO is cheaply valued.

Objects of the Issue

The IPO will include a combination of shares from existing shareholders and fresh issue of shares from the company. So only a part of the money raised from this issue (fresh shares) will go to the company. The rest will go to the existing shareholders.

That part of the money raised will go towards installation of new towers and upgrading existing towers. The prospectus lists down that the funds raised will be utilized to install 4,813 towers among other uses for the funds.

 Issue Open and Close Date

The IPO will open on December 11th 2012 for retail investors and will close on December 14th 2012, and will offer investors an opportunity to invest in a company that gives them exposure to a new area as no other company is tower business is currently listed. The financials of the company are good, and so it’s only a question of valuation and people investing in the company will have to take a call that the IPO is fairly valued, and that they won’t be able to get this share at a lesser price in the future after the stock starts trading in the market.