The recipe that’s working: strong fundamentals, attractive pricing and recent listing gains
Retail investors have lapped up the recent initial public offerings (IPOs) of Man Infraconstruction Ltd (ManInfra) and DQ Entertainment (International) Ltd (DQE) that has completely changed the complexion of the IPO market.
ManInfra’s IPO has been oversubscribed 10.26 times out of the 16.2 lakh shares kept aside for the retail quota, while DQE saw its shares being oversubscribed by 19 times out of the 47,18,100 shares kept aside for the retail quota.
According to market experts, the sudden change in investors’ mood is due to the stellar listing of ARSS Infrastructure Projects Ltd and Jubilant Foodworks. ARSS Infrastructure was listed at Rs650—a hefty premium of 44% above its issue price (Rs450). Jubilant Foodworks opened at Rs161.60 on the Bombay Stock Exchange (BSE)—at 11% premium above the issue price. It is currently quoted at Rs276.80—a listing gain of 91%, which has attracted a number of punters back into the IPO market.
Following these successes, ManInfra opened at Rs335 on the BSE, on Thursday, at a 33% premium over the issue price of Rs252. It touched a high of Rs374.90 and closed at Rs348.25. Jubilant Foodworks received a subscription of 3.78 times (from a quota of 71,41,191 shares) in the retail category and 0.0025 times under the employee category (out of a total quota of 22,67,044 shares).
One other factor that is responsible for the success of DQE and ManInfra is the lesson promoters and investment bankers seem to have learnt when NTPC Ltd and several other high-profile IPOs failed to attract the retail investor. Both DQE and ManInfra were priced reasoanbly and had strong fundamentals.
ManInfra’s basic earnings per share (EPS) was Rs28.30 in 2008-09 and is expected to increase to Rs18 by 2010. On the 2010 EPS and offer price of Rs252, its expected price/earning ratio (P/E) is 14. However, after today’s gains, the stock has already become expensive. ManInfra’s return on capital employed was a humungous 48% in 2008-09—up from 34.2% in FY08.
However, DQE is not a cheap stock. The IPO is probably enjoying a rub-off effect. Its EPS is expected to be Rs2.60 in FY10 after the issue. On the 2010 EPS and offer price of Rs80, its expected P/E is 31. DQE’s return on net worth (RoNW) was 25.24% for the nine months ended 31 December 2009. The company’s revenues stood at Rs605.26 crore for the same period. Its revenue of Rs624.38 crore in FY09 was up 99% compared to Rs313.67 crore in FY08. It registered a net profit of Rs50.08 crore for the nine months ended 31 December 2009. Net profit had jumped 90% to Rs51.04 in 2008-09 from the Rs26.80 crore reported in FY08.
“The recent IPO pricings have been attractive. These issues are doing well because there is enough money left on the table for investors. The bigger IPOs and real-estate IPOs were highly priced and so they were shunned by retail investors,” said an official from IDFC, lead book-running managers for the ManInfra IPO.
However, while IPOs are getting heavily oversubscribed and offering listing gains, one interesting aspect is that employees are still staying away. ManInfra’s IPO saw only 0.0055 times subscription from its quota of 2,25,150 shares for employees. DQE’s employees also steered clear of the IPO which saw only 0.3636 times subscription out of the 3,21,011 shares reserved under the employee category.
The sharp move upwards towards the end of the day shows a momentum that should favour the bulls, if international market sentiments remain positive
The Sensex has been struggling for the past three days in a tight 150-point range of 17,030 and 17,180. It has finally broken out of this range and hit a high of 17,215 towards the end of the session, although the adjusted closing level was 17,168 points. The index closed up by 69.63 points. This is the highest close since the Budget. More importantly, it is the highest close for the Sensex since 20th January. It was on 21st January that the Sensex had crashed by about 400 points— the first day of a sharp decline of 2,000 points over the subsequent two weeks.
The sharp move upwards towards the end of the day shows a momentum that should favour the bulls. This is provided we don’t see a sharp reversal in overseas markets. If the momentum continues, we are likely to hit 17,400. A continued advance after this would be hard. The market will give up a lot of its recent gains. The index is effectively rallying from an intraday low of 15,652 on 8th February. It is already up by almost 1,500 points.
If the Sensex reaches 17,400, it would be time for a reversal which may take the index all the way down to 16,800-16,600.
During the day, Asia’s key benchmark indices in Singapore, Hong Kong, China, Japan and Indonesia were mostly flat. On Wednesday, 10th March, US markets were up. At the time of writing, European markets were trading lower and US futures were in the negative. Foreign institutional investors have continued to pour money into India. Yesterday they had put in a net Rs418 crore. In the current month, net flows have been positive on every single day of trading.
Stripped off their legalese, prospectuses of mutual funds are prone to misrepresentations and inadequate disclosures. As a result, the investing community continues to be short-changed. A two-part analysis
Mutual fund prospectuses are fat documents that can turn off even the most intrepid investor. There are pages and pages of legally mandated disclosures but they have absolutely no truck with what the investors really need to make an informed decision. Stripped off their legal content, these documents are essentially a few pages of paper filled with bland information of little substance.
Whether a fund wants to invest in mid-cap stocks or Brazilian stocks or infrastructure stocks, the quality of disclosure is the same. Disclosures on what has gone into the portfolio design are non-existent. Explanations as to what distinguishes the stock-selection process of the fund managers are non-existent. Even the disclosures that appear don’t reveal the full facts.
Recently, HSBC Mutual Fund has filed a prospectus to launch a fund of funds that would invest in Brazilian stocks. This is an exotic fund. Who has ever heard of a name like Companhia Vale do Rio Doce (CVRD), one of the world’s largest producers of iron ore? If HSBC wants to pick your money to invest in CVRD, the least it should do is have a long section devoted to explaining the structure of the Brazilian economy, its corporate sector, how these companies and their stocks have performed in different market cycles, what are their current prospects, the level of governance, the likely political change after the coming elections and so on. And finally, investors need to know whether HSBC has any experience in navigating this market with multiple products over different cycles. Even then, one would like to know who is managing the money for HSBC, whether he is a local or not and how long this fund manager has been around doing this same job. Or, will HSBC’s giant asset-gathering machine merely suck the money from somewhere and funnel it somewhere else, collecting money for its various services along the way?
We don’t recall for how long the current format of fund prospectuses has been around. It was designed badly ab initio and it continues. If the market regulator has satisfied itself that fund prospectuses are fine documents, it should think again. Today, there is nothing to distinguish one scheme from another on the most vital aspects such as process of stock selection, track record of the fund manager and most importantly, back-tested results of a new fund idea.
Of all these factors, it is the third aspect that is most worrying. Fund companies are happily launching funds with different flavours but they have absolutely no obligation to show how these ideas would have performed under different market cycles in the past. But we have just discovered to our horror that there is a regulatory issue here as well. Nitin Rakesh, chief executive of Motilal Oswal Asset Management Company tells us that even if fund companies wanted to show back-tested results, they would not be able to do it. The Securities and Exchange Board of India (SEBI) does not allow it. A few days ago, we wrote about Motilal Oswal’s new fund idea ‘MOSt50’, which will be an exchange-traded fund and invest in 50 stocks according to their weights in a proprietary index called MOSt50, derived from the Nifty. This is called enhanced indexing.
The prospectus gives you no clue on how MOSt50 will be calculated. It wants you trust the fund blindly that it will give returns superior to Nifty’s returns. Maybe it will. But you have no way of knowing. A new simple idea like this can be easily back-tested. But no. “SEBI does not allow us to show back-tested results,” avers Mr Rakesh.
While an obviously valuable piece of information is kept out, funds are allowed to spike their offerings with any kind of flavour they like, no matter how ridiculous they sound.
Tomorrow: Bizarre fund ideas and what SEBI should do to control them