No fun subscribing to IPOs this season..

Investors have lost around quarter of the amount raised by 18 IPOs this calendar year as 13 of them are trading below their issue prices, a top Finance Ministry official said on Saturday.

"Out of the 18 IPOs launched in 2008, 13 were trading at a discount last week implying losses to investors of about a quarter of the total IPO amount. I think, it must be larger today," Finance Secretary D Subbarao said at a seminar on Securities Contracts (Regulation) Rules here.

If the situation continues, it would be increasingly difficult for corporates to raise money from the capital market, he said.

The Finance Secretary attributed weak sentiment in the market to increasing risk-aversion among investors. "The stock market provided 15 billion dollars in 2007 to support investments of firms. But, as global risk aversion has risen in the past few months, this has dented investors sentiments in India too," he added.

Of the total IPOs listed on stock exchanges this year, 11 companies had an issue price above Rs 100. The aggressive pricing of the IPOs have led the companies to lose substantially being unable to sustain the prices in long-term.

In fact, reliance power launched with much fanfare, closed at Rs 372.50 on the opening day, much below its offer price of Rs 450 a share, forcing the company to issue three bonus shares for every five held by non-promoters.

However, state-run rural electrification corporation was trading higher at Rs 109.05 against its issue price of Rs 105 and GSS America at Rs 640.85 against an issue price of Rs 400.

The bearish sentiments in the market has led to 13 firms witnessing red in the market. The Sensex, which opened above 20,300 points in January, has dipped 4,000 points to about 16,400 points since then till yesterday.

IPOs go bust

The recent crash and subsequent volatility in the stock market has adversely affected IPO plans of India Inc. As many as 20 companies, which were planning to collectively raise Rs37.18bn have already deferred their IPOs. These companies are already holding approval from capital market regulator SEBI and are now waiting for better times to enter the market. This is as per the study done jointly by ASSOCHAM and Prime Database. These 20 companies include among others Acme Tele Power, Pride Hotels, Prince Foundations, Vascon Engineers and Xenitis Infotech.

"Plans of another 44 IPOs, collectively planning to raise Rs310bn, which are presently awaiting SEBI approval, may also be hit until the markets recover. These include the IPOs of Ashoka Buildcon, DB Corp, Future Ventures, Jaiprakash Power Ventures, JSW Energy, Mahindra Holidays, NHPC, Oil India and Reliance Infratel," says Prithvi Haldea, Co-Chairman of the Capital Markets Committee of ASSOCHAM. Haldea, however, adds that some of these 64 pending IPOs might still go ahead with their plans, though at reduced valuations, even in the present market conditions.

It may be mentioned here that at the beginning of the year, ASSOCHAM and Prime Database had estimated that, subject to stable secondary market conditions, the calendar 2008 would have seen mobilization of nearly Rs600bn through IPOs. The first three months of the year have seen 17 IPOs, totaling Rs149bn, and this amount may have been larger but for the crash in the secondary market in later part of January.

Gammon Infrastructure, Titagarh Wagons Grey Market

 Gammon Infra 167 5 to 8


Sita Shree Food Pro 30 4 to 7


Titagarh Wagons Ltd. 540 to 610 20 to 25


Kiri Dyes & Chemicals 125 to 150 10 to 12

Titagarh Wagons IPO review

 Titagarh Wagons is well positioned to benefit from the demand in the logistics space.

Kolkata-based Titagarh Wagons, a private sector manufacturer of railway wagons, is setting up a manufacturing centre to make electric multiple units (EMUs) and expanding its existing facilities at a cost of Rs 70 crore.

To fund its expansion as well as meet corporate expenses the company aims to raise Rs 111- Rs 126 crore through the IPO route, with each share priced between Rs 540 (lower band) and Rs 610 (higher band).

While the company has wagons, special projects and heavy earth moving and mining equipment divisions, over 80 per cent of its revenues accrue from the wagons division.

Rising freight demand
The opening up of India's container movement to private players (in 2006) as well as the move to allow corporates to invest in wagons (in 2005) has opened up the erstwhile Indian Railways monopolies.

With a large number of logistics service providers and manufacturers jumping into the fray, this nascent segment is expected to take off.

In 2004-05, freight handled was pegged at 6,000 lakh tones, while that for FY08 is estimated at 7,850 lakh tonnes. This is expected to move up further to 11,000 lakh tonne by the end of the 11th five-year plan in 2012.

Indian Railways plans to double its wagon purchase order from the estimated 10,200 wagons for the current fiscal to 20,000 wagons for FY09. This translates into a steady demand for players such as Titagarh Wagons, which along with nine other public, private and joint sector companies are eyeing the Rs 15,000 crore wagons market.

While the company is planning to expand its share in wagons, it is also targeting niche applications. It has tied up with US-based FreightCar America to manufacture aluminium coal hopper wagons and other wagon products.

Passenger segment
The company is also planning to expand its EMU production to cater to the passenger car and metro rail requirements of the railways. The unit to be set up at the Uttarpara facility in West Bengal will manufacture 24 rakes per annum with each rake consisting of nine EMU coaches.

The company has received an order for supply of 9-car rake from Indian Railways and hopes to expand its presence in the sector once its Uttarpara facility is completed by December 2008.

In addition to the EMU facility, the company wants to set up an axle machining and wheelset assembly unit with an annual capacity of 10,000-12,000 wheelsets.

The expansion will allow Titagarh Wagons to integrate backwards and reduce dependency on Indian and foreign suppliers.

With only two Indian manufacturers of wheelsets, which constitute 35 per cent of a wagon's selling price, and continued increase in prices over the last two fiscals due to global shortage, Titagarh's move to backward integrate makes sense.

Special projects/euipment segment
The special projects business, which contributes 11 per cent to total revenues, makes modular bridges, equipment for nuclear power plants and special purpose wagons for the defence sector.

Defence equipment sales to Defence Research and Development Organisation (DRDO) have increased from 1.6 per cent in FY07 to 4.4 per cent in the first half of FY08.

The heavy earth moving and mining equipment division manufactures hydraulic excavators, cranes and forklifts and accounts for 5 per cent of revenues. To ramp up its facilities and improve cost efficiencies in the equipment division, the company plans to invest Rs 4 crore.

Healthy order book
The company's order book as on January 31, 2008 stands at Rs 753 crore, which is over 2.5 times its FY07 revenues. Of this, 90 per cent is accounted for by wagons and EMU sales.

Though Indian Railways continues to be Titagarh's single largest customer, its share of revenues and wagon sales is declining. While Indian Railways' share in Titagarh Wagons' total revenues has come down from 61 per cent in 2005 to 11 per cent in FY2007, its share of wagon sales has also declined from 75 per cent to 49 per cent in the same period.

Strategic moves
Over the last nine months, two strategic investors--GE Capital International and JP Morgan have bought 15.5 per cent (August, 2007) and 5 per cent stakes (January 2008) in the company at Rs 509 per share and Rs 610 share, respectively.

The vendor financing agreement with GE Equipment Services on May 2007 will help Titagarh's customers finance their wagon purchases. JP Morgan, on the other hand, is helping Titagarh Wagons acquire a majority stake in Cimmco Birla. JP Morgan owns a significant portion of Cimmco Birla's debt.

As part of the restructuring programme, Titagarh will be investing Rs 35 crore in Cimmco for a 51 per cent stake. This acquisition is expected to double Titagarh Wagons' current manufacturing capacity of 5,000 wagons per year.

nvestment rationale
With rising demand from corporates such as Adani Ports, Hind Terminals and logistics service providers, replacement and new wagon requirement of Indian Railways and the cost advantage for rail transport over road, the macroeconomic outlook for the logistics sector manufacturers and service providers looks bright.

While there are 10 players in the wagon manufacturing space, competition for Titagarh Wagons comes from Texmaco. Going by Titagarh's half-year FY08 numbers, with revenues at Rs 211 crore and a bulging order book, revenues should top Rs 350 crore in FY08.

If the company is able to maintain its 20 per cent operating margins and 12 per cent net profit margins in future, the stock is available at 17 times FY09 earnings of Rs 36.93 at the higher end of the band and 15 times at the lower end.

While Texmaco trades at a premium of 20 times its FY09 earnings of Rs 85 due to its leadership position, Titagarh could bridge the gap thanks to its growth prospects and higher operating margins, and at this price can fetch good returns over the short- to medium-term.

Issue opens: March 24
Issue closes: March 27

Titagarh Wagons IPO Analysis

Investments with a two-three year perspective can be considered in the initial public offering of Titagarh Wagons (TWL). Our optimism stems from the opening up of business opportunities in the rail sector by way of setting up of dedicated freight corridors, participation of private players in rail logistics and the introduction of the wagon leasing scheme.

Titagarh Wagons appears well placed to ride this growing demand for wagons, given its established relationship with the Indian Railways (IR). At the price band of Rs 540-610, the stock is valued at about 15-17 times its likely FY-09 per share earnings on a diluted equity base. This is at a marginal discount to Texmaco, which trades at about 17 times its likely FY-09 per share earnings. This discount is justified as Texmaco commands a higher share in wagon supplies and has a more diversified business mix. Growth prospects notwithstanding, we would be more comfortable if the offer were priced at the lower end of the price band.
Railways, demand booster

The demand for wagons is set to increase given the Railways' renewed focus on increasing its share of freight traffic. This is reflected in the latest Rail Budget, which aims to procure an all-time high of about 20,000 wagons for the coming year. While railway orders are generally procured only through an open tendering process, TWL's already established relationship with the Railways and the expansion and de-bottlenecking of present capacities may lend it greater credence. Besides, TWL's proposed entry into EMU (electric multiple unit) may also expand its potential market. It plans to invest about Rs 19 crore to set up the EMU unit, which will have the capacity to manufacture two rakes (nine EMU coaches) per month.

Revenue contribution from the Railways, one of TWL's largest customers, has reduced over the years, despite an increase in the supply of wagons. This is because the Railways typically provides a bulk of raw materials as 'free supply' items to wagon manufacturers.

While this may dwarf the Railways' contribution to wagon manufacturers' revenue pie, Railway orders yield higher margin and provide greater flexibility in working-capital management. With a likely ramp up in Railway orders in TWL's books, the latter may enjoy greater operational freedom.
Private participation

Entry of 14 new private players in container rail logistics is also likely to keep the demand for wagons strong. Since these players are required to invest in their own wagons, the introduction of wagon leasing policy and investment scheme offers support.

The wagon investment scheme provides a 10 per cent rebate on normal freight charges to wagon owners and a guaranteed supply of rakes every month. The wagon-leasing scheme, on the contrary, allows third-parties to invest in wagons and lease them. These schemes, introduced to attract more private participation, may help keep the order books of domestic wagon manufacturers buoyant.
Strategic sourcing of components

TWL's proposal to set up an axle machining and wheel set assembling plant appears strategic, given the supply constraints of domestic railways-approved wheel set manufacturers. With an investment of about Rs 13 crore, TWL plans to set up a unit to assemble wheel sets through procurement of loose machined-wheels and axles from global suppliers. This unit, which will have the capacity to assemble over 10,000-12,000 wheel sets annually, will give TWL better control over its cost and greater operational continuity.
Financials

TWL witnessed a compounded earnings growth of about 74 per cent during the last four years on the back of 57 per cent growth in revenues. Operating margins have also expanded from over 10 per cent in FY-03 to the current levels of about 17 per cent. Its order-book of about Rs 750 crore, with Rs 670 crore for the rolling stock division, also reflects the strengthening demand scenario.

However, since IR fixes the price of wagons on the basis of the lowest bid (L1) it receives, there is little scope for a drastic improvement in TWL's realisations. This may be compensated by way of expansion in margins, considering the likely ramp up in IR orders and its backward integration initiatives.

Going forward, we expect the bulk of revenue growth to come from TWL's wagon manufacturing division only. While its casting division may help on the margin front, the HEMM (heavy earth moving and mining equipment) division may take a couple of years to make significant earnings contribution.
Offer details

The offer is open from March 24-27. Kotak Investment Banking is the book running lead manager. The company plans to raise about Rs 126 crore through a combination of fresh issue of shares and offer for sale by the promoters.

Titagarh Wagons IPO Analysis

Investments with a two-three year perspective can be considered in the initial public offering of Titagarh Wagons (TWL). Our optimism stems from the opening up of business opportunities in the rail sector by way of setting up of dedicated freight corridors, participation of private players in rail logistics and the introduction of the wagon leasing scheme.

Titagarh Wagons appears well placed to ride this growing demand for wagons, given its established relationship with the Indian Railways (IR). At the price band of Rs 540-610, the stock is valued at about 15-17 times its likely FY-09 per share earnings on a diluted equity base. This is at a marginal discount to Texmaco, which trades at about 17 times its likely FY-09 per share earnings. This discount is justified as Texmaco commands a higher share in wagon supplies and has a more diversified business mix. Growth prospects notwithstanding, we would be more comfortable if the offer were priced at the lower end of the price band.
Railways, demand booster

The demand for wagons is set to increase given the Railways' renewed focus on increasing its share of freight traffic. This is reflected in the latest Rail Budget, which aims to procure an all-time high of about 20,000 wagons for the coming year. While railway orders are generally procured only through an open tendering process, TWL's already established relationship with the Railways and the expansion and de-bottlenecking of present capacities may lend it greater credence. Besides, TWL's proposed entry into EMU (electric multiple unit) may also expand its potential market. It plans to invest about Rs 19 crore to set up the EMU unit, which will have the capacity to manufacture two rakes (nine EMU coaches) per month.

Revenue contribution from the Railways, one of TWL's largest customers, has reduced over the years, despite an increase in the supply of wagons. This is because the Railways typically provides a bulk of raw materials as 'free supply' items to wagon manufacturers.

While this may dwarf the Railways' contribution to wagon manufacturers' revenue pie, Railway orders yield higher margin and provide greater flexibility in working-capital management. With a likely ramp up in Railway orders in TWL's books, the latter may enjoy greater operational freedom.
Private participation

Entry of 14 new private players in container rail logistics is also likely to keep the demand for wagons strong. Since these players are required to invest in their own wagons, the introduction of wagon leasing policy and investment scheme offers support.

The wagon investment scheme provides a 10 per cent rebate on normal freight charges to wagon owners and a guaranteed supply of rakes every month. The wagon-leasing scheme, on the contrary, allows third-parties to invest in wagons and lease them. These schemes, introduced to attract more private participation, may help keep the order books of domestic wagon manufacturers buoyant.
Strategic sourcing of components

TWL's proposal to set up an axle machining and wheel set assembling plant appears strategic, given the supply constraints of domestic railways-approved wheel set manufacturers. With an investment of about Rs 13 crore, TWL plans to set up a unit to assemble wheel sets through procurement of loose machined-wheels and axles from global suppliers. This unit, which will have the capacity to assemble over 10,000-12,000 wheel sets annually, will give TWL better control over its cost and greater operational continuity.
Financials

TWL witnessed a compounded earnings growth of about 74 per cent during the last four years on the back of 57 per cent growth in revenues. Operating margins have also expanded from over 10 per cent in FY-03 to the current levels of about 17 per cent. Its order-book of about Rs 750 crore, with Rs 670 crore for the rolling stock division, also reflects the strengthening demand scenario.

However, since IR fixes the price of wagons on the basis of the lowest bid (L1) it receives, there is little scope for a drastic improvement in TWL's realisations. This may be compensated by way of expansion in margins, considering the likely ramp up in IR orders and its backward integration initiatives.

Going forward, we expect the bulk of revenue growth to come from TWL's wagon manufacturing division only. While its casting division may help on the margin front, the HEMM (heavy earth moving and mining equipment) division may take a couple of years to make significant earnings contribution.
Offer details

The offer is open from March 24-27. Kotak Investment Banking is the book running lead manager. The company plans to raise about Rs 126 crore through a combination of fresh issue of shares and offer for sale by the promoters.

IPOs - not profitable always

Investors who subscribed to the initial public offer, in the first quarter of 2006, of shares by Sadbhav Engineering are a fortunate lot. Against an investment of Rs 185, the stock closed at Rs 1,080 on Wednesday, an appreciation of more than five-fold in the space of just two years.

So, is investing in initial public offerings (IPO) a safe bet? The answer is no, if we go by the performance of the IPOs of the last two years. Actually there is one in two chance that you wouldn't have made any money at all. According to data available on NSE Web site, around 181 companies had come out with IPOs to raise money since the commencement of the bull-run that began in early 2006. Of these, about 50 per cent – 92 stocks to be precise – are quoting below the issue price. Seventy companies approached the market for funds in 2006. The number increased to 89 in 2007 and it is 13 in the year to date.

IPOs have been punished across sectors and irrespective of the subscription levels. For instance, shares of companies as diverse as Reliance Power, Future Capital, MindTree Consulting and Sobha Developers which had evoked strong response from investors at the time of initial placement are currently ruling below their issue prices. Even ICICI Bank which came out with a follow-on public issue at Rs 940 is currently quoting well below that price.

A Mumbai-based broker said: "When a stock first starts trading, its price moves up to higher level on pent-up demand. Investor demand is often unusually heavy due to the hype surrounding an IPO, particularly for high-profile companies."

But even among those that did not evoke a frenzy in the run-up to the IPO on the scale of Reliance Power, there have been significant losers. Uttam Sugar Mills (81 per cent), Broadcast Initiatives (80 per cent) and Raj Rayon (79 per cent) are some of the companies that registered major losses.

For investors, the sentiment had turned so adverse in recent times towards any fresh commitment that many companies were forced to withdraw their IPO plans. Among the few that postponed their plans for mobilisation of capital from the public included such high-profile issues as Emaar MGF and Wockhardt Hospitals.

But there have been a few notable exceptions among the IPO stocks besides Sadbhav Engineering that have emerged unscathed despite the Sensex losing 6,000 points in just two months. Though they have declined from their peaks, are still quoting higher than the offer price even while the market has been under a strong bear hug. MIC Electronics is one such. As against the issue price of Rs 150, the share closed at Rs 703.7 on Wednesday, a return of 369 per cent over cost.

According to analysts, investing in IPOs is also as risky as investing in secondary markets. Investors must go beyond the allure and hype of IPOs and educate themselves about the company's fundamentals, they said.

Via Businessline

Gammon Infrastructure, Sita Shree Food Products, Titagarh Wagons, Kiri Dyes and Chemicals

 Gammon Infra 167 10 to 12


Sita Shree Food Pro. 30 6 to 8


Titagarh Wagons Ltd. 540 to 610 50 to 60


Kiri Dyes & Chemicals 125 to 150 12 to 15

Kiri Dyes and Chemicals IPO Analysis

Kiri Dyes and Chemicals manufactures reactive dyes and dye intermediates. Promoted by Pravin A. Kiri and incorporated on 14 May 1998, the company's production plant is located in Gujarat: three units in Ahmedabad and one unit in Vadodara.

The product range comprises more than 120 dyestuffs used by textiles, leather, paints and printing-ink industries. Production capacity totals10,800 tonnes per annum. Integrating backward, Kiri Dyes and Chemicals commenced manufacturing vinyl sulphone (VS) in April 2006, with a capacity of 3,600 tonnes, and H-acid from March 2007, with capacity of 3,600 tonnes, giving it a presence in the dye intermediate business.

With plans for further backward integration, the IPO is to fund capital expenditure to set up a plant to manufacture sulphuric acid, oleum and chloro sulphonic acid, with a combined capacity of 1,80,000 tonnes, and a dyes and intermediates unit. A 2.9-MW power plant that can run from the steam generated by the sulphuric acid plant is also on the anvil. The electricity generated will be sufficient not only to run the sulphuric acid plant but also the intermediate plants of VS and H-Acid.

Following the expansion, the capacity to manufacture sulphuric acid will be 1, 00,000 tonnes, oleum 43,200 tonnes and chlorosulphonoic acid 36,000. The plant to manufacture sulphuric acid and its sub-products is to be completed by December 2008. Around 25% of the capacity of sulphuric acid, oleum and chlorosulphonic acid will be used to produce dye-intermediates: H-Acid and V.S. The remaining produce will be marketed directly to bulk end-users in the detergent and chemical industry and other large consumers.

The capacity to produce dyestuff will be increased 3,000 tonnes to 15,000 tonnes by the fiscal ending March 2010 (FY 2010). The capacity to manufacture dyes intermediates VS will become 4,200 tonnes in FY 2009 and then further increase to 4,800 tonnes in FY 2010. The capacity to produce H-acid will increase to 4,200 tonnes in FY 2010.

Kiri Dyes and Chemicals entered into a memorandum of understanding with the Zhejiang Lonsen Group on 1 November 2007 to establish a manufacturing facility in India to produce reactive dyes. Both the parties have agreed to start with a production capacity of 20,000 tonnes of reactive dyes and to increase it further to 50,000 tonnes when the opportunity arises after successfully implementation and operations of the initial production capacity. The new plant is to be set up by end 2008. The initial capital investment would be US $ 10 million. Of this, Lonsen is to invest US $ 6 million and Kiri Dyes and Chemicals US $ 4 million to establish a new manufacturing plant in India.

Strengths:

1. Stringent environmental laws in the western countries have led to discontinuance of production of certain dyes for textiles and leather. This has led to shift in manufacturing capacity from the US and the European Union to South East Asia. Climatic conditions in India are favourable for the manufacture of such products. Also, the new usage of dyestuffs in electronic, high-tech printing, and bio medical applications augurs well for the high-valued dyestuff products.
2. Backward integration and JV with global giants will help to save cost and strengthen research and development facility.

Weaknesses:

1. Operates in a highly competitive and unorganised business environment with many big and small players exporting and manufacturing dye and dyestuff. The increased competitive pressure may adversely affect margin.
2. Had negative cash flows of Rs. 4.88 crore and Rs.9.42 crore from operating income in FY 2007 and FY 2006.
3. Currently paying MAT (minimum alternate tax) on account of benefits of exemption received under Section 10 B of the Income-Tax Act, 1961, as it is a 100% export-oriented unit (EOU). This status will expire in March 2010. The withdrawal of tax incentives would increase the tax liability and adversely impact profitability.

Valuation

At a price band of Rs 125-Rs 150, the P/E works out to 10.5-12.6 times on half-yearly annualised EPS of Rs 11.9 on post-issue equity of Rs 15 crore, The average TTM P/E for dyes and pigment industry is around 6.

Titagarh Wagons IPO Analysis

Promoted by J P Chowdhary and his family, Titagarh Wagons (TWL) is one of the leading manufacturers of railway wagons. The company also manufactures bailey bridges, heavy earth moving and mining equipment (HEMM). It is an approved and registered supplier with the Ministry of Defence, supplying bailey bridges and wagons.

Incorporated in 1997, TWL purchased land and machinery from Titagarh Steels (now Titagarh Industries, a listed promoter group company) in 1998 to set up a wagon manufacturing unit at Titagarh. In 2005, it acquired the loss-making Heavy Earth Moving equipment division of Hyderabad Industries at Uttarpara, West Bengal.

The wagon manufacturing business of the company primarily caters to Indian Railways. Its clients also include Container Corporation of India (Concor), National Thermal Power Corporation (NTPC), Wagon Investment Scheme (WIS) customers and private container transport players. The current wagon-manufacturing capacity at both Titagarh and Uttarpara aggregates 5,000 numbers of railway wagons. Product range of railway wagons consists of wagons meant for carrying and discharge of coal and ballasts, wagons for transport of cement, food grains, coal, iron ore, stone and containers, and specialised wagons such as merry go round (MGR). On 22 January 2008, the company entered into a joint venture (JV) agreement with FreightCar America Inc to jointly promote and incorporate a private limited company to develop, design, manufacture, service and distribute railcars and other wagon products. The wagon division accounted for a lion's share of 78.9% and 83.7% of the total income of the company for the fiscal ended March 20'07 (FY 2007) and six month ended September 2007.

Acquisition of the Uttarpara unit from Hyderabad Industries in 2005, apart from augmenting its wagon capacity, and addition of earth-moving and mining equipment into the product portfolio has also facilitated backward integration into steel forgings required to manufacture wagon. The Uttarpara unit consists of a 5,000-tonne steel foundry, and a machine and a fabrication shop. TWL has the capability to manufacture various types of hydraulic excavators ranging from one cubic meter to 14 cubic meters and crawler cranes with capacity varying from 75 tonnes to 92 tonnes. With an installed capacity to manufacture 50 equipments per annum, the HEMM division contributed about 4.8% and 5% of the total income in FY 2007 and six months ended September 2007.

In 2007, TWL entered into a tie-up with JP Morgan Mauritius Holdings to propose a scheme to revive and rehabilitate Cimmco Birla to the Board of Industrial and Financial Reconstruction (BIFR). Cimmco Birla has a wagon-manufacturing unit in Rajasthan.

The proceeds from issue of new shares to fund the capex to set up an electric multiple units (EMU)-manufacturing unit, expand and modernise existing units, establish axle and wheel-set unit at Uttarpara, and build a new corporate office and for strategic acquisition. The setting up of the EMU unit and modernisation of the existing units are expected to be completed by FY 2009.

Strength

Order book stood at Rs 753. 11 crore end Janaury 2008. Current order book translates into 2.7 times FY 2007 revenue, lending revenue visibility. Order book also consists of order for manufacture and supply of nine car rakes of EMU from Indian Railway, depicting the successful foray into passenger EMU vehicles.

Though Indian Railways continues to be a significant customer, the business of wagons to non-railway clients is growing with the entry of private players in container movement through railway, ending Concor's monopoly along with schemes such as wagon investment scheme. Moreover, economic growth provides strong support. Sales of wagons to non–railway clients and their share in total revenue by value increased to 68.26% in FY 2007 compared with nil in FY 20'04. This results in better utilisation of capacity and insulation to a large extent from the risk of delay in placement of orders or delivery of free items by Indian Railways.

Orders placed by Indian Railways usually include free supply of materials of high value such as steel, bogies and wheel sets. There is a price-escalation clause linked to the wholesale price index (WPI) for labour, thus insulating margin. Similarly, orders from public sector undertakings (PSUs) such as Concor and NTPC also have price- escalation clause for iron and steel and labour linked to the WPI.

Weakness

Has to source Dispatch Memo (DM) components from Research and Development Standard Organisation (RDSO)- approved vendors. There are global supply constraints for wheel sets. Thus, operation/ production of wagons depends on supply of critical components. Penalty has to be paid for missed delivery schedule.

In addition to the bogies and couplers manufactured at the Uttarpara foundry unit, not running to its full capacity, these components are procured from Titagarh Industries, a group company, resulting in clash of interest.

Titagarh Industries (formerly Titagarh Steel (TSL)), one of the promoter-group company, along with its directors was declared a willful defaulter by the Reserve Bank of India.. Subsequent to a one-time settlement, it was removed from the list in 2007.

Propose to invest Rs 35 crore in Cimmco Birla, a company under BIFR scheme of revival and rehabilitation, subject to necessary approvals from BIFR. Signed an agreement with JP Morgan to propose a joint revival scheme. Though the takeover of Cimmco Birla brings additional wagon-manufacturing capacity, specially at a different geographical location in Rajasthan, the ability to successfully turn around it has to be seen as quite a few promoter group companies are in the red.

The share of Indian Railways by value in total revenue has come down to about 10%. But in terms of volume it is significant. Any delay in placement of orders may hit operations and margin.

Valuation

The first-half (ended September 2007) annualised EPS works out to Rs 28.2. On the offer-price band of Rs 540-Rs 610, the PE works out to 19.1 times at the lower price band and 21.6 times at the upper price band. In comparison, peer player Texmaco quotes at a PE of 27.6 times its first-half annualised standalone earning.

Via CM

FIIs sell IPOs on listing

If you have tracked book-built initial public offers on the stock exchange Web sites, you would have noticed that retail investors typically rush in at the last hour.

This is because most lay investors are looking out for the subscription numbers for the QIB (Qualified Institutional Bidders) portion of the IPO, especially of FIIs, before they decide to take the leap.

Retail investors often rely on the extent of over-subscription in the QIB portion when deciding to invest or refrain from IPOs. This is built on the premise that FIIs have a much better understanding of new businesses or untested business models when it comes to evaluating IPOs.

Now for the detour. What if the big guys you were tracking were in the issue for the short term? What if they flipped on listing day itself, after securing the much-sought-after allotment?

Business Line looked up large transactions (bulk and block deals) that occurred on both the BSE and the NSE platforms for the 35 IPOs listed from mid-October. The evidence of institutional investors making a short-term profit on the day of listing (known commonly as 'flipping') was strong.

Of the 62 transactions (both buy and sell) that occurred on the listing days, 34 were "sell" trades. Of these, institutional investors exited the stock with substantial profits on 25 occasions.

The numbers may be small but the trend reveals that FIIs too have not been averse to taking a short-term view with their IPO investments.
Cashing in

Mauritius-based investment firms or arms of well-known investment banks feature prominently on the list of investors that made a killing on listing.

Right from BSMA (affiliate of Bear Stearns), Mavi Investment Fund (sub-account of Switzerland-based M.M. Warburg Bank) to less known entities such as Prime India Investment Fund, ITF Mauritius, Amas India Investments; all have been regular investors in IPOs, who have taken profits on listing.

Could it be the overall market mood that caused FIIs to rush in on the day of listing and cash in on their profits? Maybe not. True, the Sensex lost around 22 per cent in value since the first week of January, with many volatile ups and downs in between. However, even through this period, FIIs did keep up steady buying in shares of companies such as Maytas Infrastructure, Edelweiss Capital, Consolidated Construction Consortium (CCCL) and BGR Energy Systems, on Day One.

When it comes to a fancy for newly listed stocks, FIIs do not seem to be very different from the small investor.

Just as a small investor would try to buy shares in the secondary market for a company in whose IPO he/she did not get allotment, foreign investors too seem to follow this practice. This may partly explain the bulk deals in Maytas, Edelweiss, CCCL and BGR, whose issues were oversubscribed over 50 times during their IPOs!
Taking chances

What about other constituents of the QIB group who are allocated around 50-60 per cent of a company's net issue? Apart from FIIs, mutual funds and financial institutions, insurance companies also are included in this list.

An analysis of the reported transactions shows that domestic mutual funds have not engaged in 'flipping', as much as the foreign investors. They feature prominently in the buyers list on the day of listing, with funds such as JM Financial, Franklin Templeton MF, ICICI Prudential and HDFC MF actively engaged in buying shares.

India's largest bank, the State Bank of India, also seems to be a participant in the IPO segment, making quick gains with investments in IPOs of Barak Valley Cements and Renaissance Jewellery.

But could it happen that daily market movements too influence these deep-pocketed investors? They do not, as an analysis for the October-February period shows. 'Sell' transactions in IPO stocks were roughly the same in number whether the Sensex finished lower or higher on listing day.

While most transactions by institutions on listing day appeared to be motivated by the chance to make quick gains, a few also helped limit the downside. DB International, India Diversified Mauritius, Ultra India Mauritius, Deutsche International and Elara India Opportunities were some institutional sellers on day one, in stocks such as Empee Distilleries, KNR Constructions and Bang Overseas.

Their move to exit was well-timed, as each of these IPOs lost as much as 20 per cent on listing day. Cords Cable Industries was among the exceptions, which managed to close at a 3 per cent premium after listing at a discount.
What's in it for you

Many small investors take cues from strong QIB subscription numbers to subscribe to and project listing gains on IPOs.

Strong institutional interest during an IPO is taken as a sign that the stock may attract buying post-listing. However, if above trends are any evidence, it is possible that institutional investors too (at least a few of them) are in the game for the short term.

Remember the hype surrounding Reliance Power IPO? Overall, the IPO was oversubscribed 62 times, while the QIB portion was over-subscribed a massive 83 times. But the stock still closed Day One well below its offer price.

Although there is no record of bulk/block deals related to the Reliance Power stock on listing day, one must remember that quite a bit of institutional selling may escape the "bulk deals" net, if transactions are broken into smaller trades, thus escaping notice.

Apart from 'flipping' being a risky game (refer 'Flipping your stock is a risky game', Business Line, September 30, 2007), these trends are reason to take IPO subscription numbers with a pinch of salt.

Large investors too are driven by profit motives and their mere presence in an IPO may not be a vote of confidence in the company or its long-term prospects.

Via Businessline

Sita Shree Food Products IPO Analysis

Investors can refrain from subscribing to the initial public offer from Sita Shree Food Products.The risks associated with the company's new business foray are high and may outweigh the return potential from this offer.

The company, which has been engaged in making wheat products such as atta, rava and sooji, proposes to raise Rs 31.5 crore through this book-built IPO to fund the setting up of new manufacturing facilities for soya oil and deoiled cake (500 tonnes per day) and to expand flour milling capacities (additional 275 tpd). The offer is being made in a price band of Rs 27-30, valuing the company at a stiff 24-27 times its earnings, without considering the equity expansion due to the offer.
Business

Sita Shree Foods makes wheat products which are sold mainly in bulk form. It has managed a steady ramp up in its sales from Rs 23 crore to Rs 82 crore between FY-04 and FY-07.

Operating profit margins in this business, however, have been thin, hovering in the 3 per cent range in recent years and net profits have risen from Rs 16 lakh to Rs 92 lakh over the same period.

The company has in the past been one of the suppliers to Godrej Pillsbury and Unilever and also counts retail chains such as Pantaloon Retail and Reliance Retail among its clients. Going forward, the opportunity for supplying wheat products in bulk or packaged form to retail chains may continue to expand as these players lay a greater thrust on dry groceries and private label sales.

Though the company's expansion plans for wheat products may come in handy in this respect, margins may continue to be wafer thin, given competition from much larger and unorganised players in the flour milling segment.
Risk factors

The company's foray into soya oil and soyameal business (used and exported as animal feed) comes at an opportune time, when global demand and prices for soya products are firm. Though good location advantages and the promoter's experience in commodity trading may translate into procurement advantages, the lack of scale (competitors such as Ruchi Soya and Gujarat Ambuja Exports control capacities of over a million tonnes per annum) and an overseas presence pose risks to the company's ability to find and sustain a market for its products. Though the company also plans to establish its own brands as well as a marketing network in the domestic market, it will face competition from players with much deeper pockets. The stiff pricing also pegs up the risk element.

Via BL

Grey Market - V Guard, Gammon Infrastructure, Rural Electrification

Rural Electrification 105 12 to 14


V. Guard Ind. 82 4 to 5


Gammon Infra 167 to 200 16 to 18


Sita Shree Food Pro. 27 to 30 2 to 4

Gammon Infrastructure Projects IPO Analysis

Investors can stay away from the initial public offer of Gammon Infrastructure Projects Ltd. (GIPL). While the company's unique positioning as a developer in the infrastructure space does provide long-term potential, the offer appears stiffly priced. At the price band of Rs 167-200, the offer values the company at 33-40 times the expected per share earnings for FY 2010. We, therefore, advocate revisiting the stock at a later date either when the secondary market offers better entry opportunities or when the company's projects under development start contributing significantly to cash flows.

There is unlikely to be significant upside in GIPL's earnings in FY 2009 as three of the seven projects under development are expected to become operational only by FY-10. The rest of the projects, mostly in the power segment, may have a longer gestation period before contributing to revenues. Besides, a number of other players in this business (not necessarily with the same business model) such as, IRB Developers and IVRCL, offer higher visibility for returns and have attractive valuations.
On the company and offer

GIPL is a holding company with subsidiaries and associates that are engaged in infrastructure project development. The company is a subsidiary of Gammon India. The parent will hold 73 per cent, post-issue. The company plans to raise Rs 270-330 crore through this offer, the proceeds of which would be invested in projects of subsidiaries and repayment of loan to the parent company. Post-issue, the market capitalisation of the company would be Rs 2,400-2,900 crore at the two ends of the price band.
Current projects

GIPL can be termed as one of the few pure infrastructure developers in the country as against a good number of players which remain part contractors. The company's operations are clearly demarcated from its parent, as all infrastructure development projects are routed through GIPL.

The company also has a diversified basket of projects ranging from roads to power and ports with substantial holding in each of these. However, only four of the 11 projects are currently operational with the rest in the development phase (excluding the SEZs).

Of the operational projects, GIPL has two annuity road projects that provide a steady stream of revenues (by way of annuity and operation and maintenance) based on fixed long-term concession agreements. However, the fixed agreement rules out any scope for significant ramp up in revenues from these projects. Income from annuity constituted 70 per cent of revenues for the six months ended September 2007.

While the third subsidiary — Cochin Bridge Project — is toll-based, the project's contribution to the revenue stream is minimal. Further, the Government has stipulated fixed toll rates, thus reducing the scope for any significant acceleration in revenues. The possibility of any surge in traffic also appears unlikely given the location of the bridge.

The fourth project — management of two berths in Visakhapatnam Port — now accounts for 12 per cent of revenues. While this subsidiary is yet to become profitable, we believe that the project holds high earnings visibility and lower risk, with favourable clauses such as take-or-pay. GIPL's stake in this project is, however, restricted to 42 per cent at present as the project is in consortium with Portia Management Services of the UK. Of the four operational projects through subsidiaries, we expect the Vizag Sea Port to be the key revenue driver.

Revenue on a consolidated basis was Rs 147 crore for FY 2007 and Rs 77 crore for the half-year ended September 2007. Consolidated net profits for the above period stood at Rs 30 crore and Rs 11 crore respectively.
Future holds potential

GIPL's more recently formed subsidiaries which have seven projects under development offer a diversified basket with toll and annuity road projects as well as hydro and bio-mass projects. Of these, the hydropower projects have longer gestation periods with operations expected to commence in FY 2011 and FY 2012. The renewable energy and container terminal projects are yet to witness financial closure and, therefore, not considered by us for valuation purposes.

The power projects could well hold potential what with a judicious mix of projects with power purchase agreements and those that can be sold as merchant power. For the biomass projects, while steady supply of raw materials such as rice straw or bagasse could be a constraint, the company is likely to be supported with good power tariffs in States such as Punjab and Haryana. Hydro and bio fuel projects hold the potential to improve the company's profitability over the long term.

Similarly, the Mumbai Offshore Container Terminal Project in which the company has a 50 per cent stake holds favourable revenue sharing and exclusivity terms. The operation and maintenance clause is yet undecided with financial closure also pending. The business per se holds potential given the extreme congestion in the Mumbai harbour. Revenue flow from this stream has to be watched before assessing profitability.
Advantage of developer model

While the infrastructure space is generally known to offer low operating and net profit margins, infrastructure development lends potential for earning superior margins. Once the initial expenditure on building the asset is complete, such projects could provide a regular/accelerated stream of revenues.

As O&M cost of such assets are also paid for by the concessionaire, the profit margins are different from what are typically derived in a construction contract. GIPL's operations currently earn margins of over 70 per cent on a consolidated basis. However, high interest costs (as each project involves significant debt-financing) can lead to more moderate net profit margins.

Though debt-free on a stand-alone basis, GIPL, on a consolidated basis, has a debt equity ratio of close to three. While the funds from the issue would strengthen the networth, the proceeds appear insignificant compared to the size of projects under implementation. Hence the subsidiaries would have to either tap debt avenues or look at further equity expansion at a later date. Such expansion over the medium term could dilute earnings, given that the payoff profiles for the company's projects are fairly long.

The offer is open from March 10-13. Retail and non-institutional investors have the option of applying through a part-payment of Rs 50.

Via Businessline

Grey Market - GSS, Rural, VGuard

Rural Electrification 90 to 105 20 to 22


GSS America InfoTech 400 to 440 Discount


V. Guard Ind. 80 to 85 9 to 10