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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.