Limited operations, poor track record and bad fundamentals make the stock hugely overvalued
Nitesh Estates Ltd, a Bengaluru-based real-estate firm, hits the market on 23 April 2010. The company was looking to price its shares in the band of Rs120-Rs128 but had to cut it by more than half to Rs54-Rs56, sensing that investor response would be poor. Indeed, it is quite audacious of Nitesh Estates to even think of coming up with the IPO. For the nine months ended 31 December 2009, the company suffered a loss of Rs1.32 crore. For the financial year ended March 2009, it had a negative cash flow of Rs46.87 crore.
Interestingly, the company has made a pre-IPO placement to Brand Equity Treaties Ltd (BETL), owned by Bennett, Coleman & Company Ltd, owners of the Times Group, at Rs143 per share on 19 February 2010 for 10 lakh shares aggregating to Rs15 crore. This is the main reason one can see large advertisements by the company in various publications of the group. Under such deals—called private treaties—the Times Group takes a stake in an upcoming company in return for low-rate advertisements.
Incorporated in 2004, Nitesh Estates primarily develops residential projects in Bengaluru, despite the fact that it has expanded its operations in Chennai, Kochi, Goa and Hyderabad. As of 20 March 2010, the company’s seven ongoing projects and four forthcoming projects comprised a combined saleable area of 3.64 million sq ft, out of which 2.65 million sq ft or 72.8% was located in Bengaluru. The company is also developing a hospitality project in Bengaluru and a residential and an office project in Kochi.
As on 20 March 2010, the promoters have pledged 3.01 crore (42%) pre-issue shares to lenders under a debt agreement. The lenders can sell these shares in the open market in the event of a default and can dilute the shareholders’ stake. As of 31 December 2009, the company’s total borrowings on a consolidated basis were Rs194 crore.
According to the prospectus filed with SEBI, the proceeds of the IPO will be utilised to acquire joint development rights for the company; fund existing subsidiaries and the associate company; for repayment/prepayment of loans; redemption of debentures; finance ongoing projects and financing the acquisition of joint development rights and to repay certain loans of the company.
ICICI Securities Ltd, Enam Securities Private Ltd, Kotak Mahindra Capital Company Ltd and JM Financial Consultants Pvt Ltd are the lead book-running managers to the issue.
The company plans to mop up Rs450 crore from the issue with a 100% book-building issue. The price band has been fixed at Rs54-Rs56 per share. The issue opens for subscription on 23 April 2010 and closes on 27 April 2010. Credit ratings agency CRISIL has assigned an ‘IPO Grade 2’ to the IPO, indicating ‘poor fundamentals’.
Spot iron ore prices are showing no signs of easing. The rise in prices, triggered by a supply bottleneck, may continue for some time
Iron ore spot prices are unlikely to ease anytime soon. Prices have touched a high of $192 per tonne, moving closer to the all-time high of $200 per tonne reached in 2008. According to the Metal Bulletin, spot iron prices traded at a high of $192 per tonne on 22 April 2010.
Iron ore prices have moved up significantly in the past few months from $115 per tonne in December 2009 to the current $192 per tonne. Stalled mining activities in India and Australia are believed to be a major contributor to the rise in spot prices.
As supply bottlenecks in the Indian ore market stand unresolved, there are no signs of softening in spot prices. With this supply deficit, what used to be a buyer’s market has now turned into a seller’s market. India is a major contributor to the global iron ore spot market. Indian exports alone contribute around 80 million tonnes (MT) to the total 120MT traded in the spot market globally. However, during the period of January 2010- March 2010, Indian exports have declined due to issues involving mines in the country.
The closure of the Oballapuram mines has severely affected Indian iron ore output. In addition, mining activities have been disrupted due to government action against illegal mining, along with environmental concerns.
On the other hand, supply from Australian mines is also believed to have declined. When ore prices fell to $60 per tonne in late 2008, a number of mines in Australia were believed to have been closed. This supply shortage issue coupled with a marginal demand of 4% globally has turned the tables, turning a buyer’s market into a seller’s market.
With spot prices shooting up, long-term prices are also likely to witness a similar trend. The increase in spot prices is expected to have a direct effect on quarterly contracts. The global iron ore market is controlled by a handful of producers such as CVRD of Brazil and the Anglo-Australian companies Rio Tinto and BHP Billiton.
The major buyers are Chinese companies. Big miners are now insisting on quarterly contracts against the earlier yearly iron ore supply contracts.
Most steel companies have agreed to this model, except for Chinese companies. However, China’s stance is not expected to change the demand-supply dynamics significantly. According to industry sources, a further increase of 10%-20% in iron ore prices is likely. If the prices were to rise beyond this point, it might place buyers in a tight position, leading to a situation similar to the one witnessed in 2008.
The government has said that it will look into the accounts of some companies on the basis of an early warning system it had previously developed, to detect possible corporate frauds
The government today said that it has asked the Registrar of Companies (RoC) to look into accounts of some companies on the basis of alerts put out by an early warning system (EWS), which has been installed to check corporate frauds.
The ministry of corporate affairs (MCA) in September had developed the EWS to detect corporate frauds. The software-based fraud detecting system scans firms based on 10 financial parameters set by the ministry.
“To start with, certain companies have been identified. The RoC has been advised to carry out technical scrutiny of documents filed by these companies to check any irregularity,” corporate affairs minister Salman Khurshid informed Parliament today.
The ministry is also looking at fine-tuning the new Companies Bill, which is pending in Parliament, to firmly deal with financial frauds, he said.
“Identification of companies through the EWS is a continuous process. This system is applicable to all types of companies,” Mr Khurshid said.
On the effectiveness of the system to prevent a Satyam-like fraud which went on undetected for years, Mr Khurshid had earlier said, “Essentially, I put it like a medical test—lipid profile test to tell if your lipid profile is going wrong so that we step in immediately.”
The objective of the EWS would be to develop a permanent system for scanning everybody, he said.
In a related development, the government today said that it is not possible to quantify the amount involved in the Satyam fraud, which came to light in January 2009, till the completion of the CBI inquiry.
“As the investigation by CBI is still in progress, it is not possible to quantify the amount involved in the scam,” Mr Khurshid told the Lok Sabha in a written reply.
“The investigation of the Satyam scam by CBI with regard to diversion of funds from the company is still in progress,” the minister added.