Look before you leap

INVESTMENT COUNTER/ TORCHLIGHT

Investors needs to be choosy and discerning when new issues get listed

At a time when stocks like ABG Shipyard and AIA Engineering have brought back some cheer to the primary market investors who had seen a spate of poor listings, it is time for us to introspect over some of the issues that did not get off to a flying start on listing and their prospects going ahead.

Three such companies which we shall bring under the 'Torchlight' this week are Piramyd Retail which made a modest listing recently, 3i Infotech which bounced back after a lukewarm beginning and Jindal Poly Films which continues to struggle.

Piramyd Retail: Piramyd Retail Ltd. (PRL) is an upcoming retail player with presence in the lifestyle and food, home and personal care (FHPC) segments, PRL carries on its businesses under the 'Piramyd Megastore' and 'TruMart' brand names.

PRL aims to provide a seamless shopping experience, with the prime target being repeat sales on its loyalty programme. In addition to having to cope with the dearth of quality personnel in this segment, top personnel retention could also prove challenging. The fact that the company's premises are leased is also noteworthy.

Having posted losses in FY05, PRL has just about slipped out of the red in the last quarter. Though the growth from here on could gather momentum, even assuming an EPS of Rs 2 going ahead, the stock still quotes at a P/E of 70. It does seem that PRL entered the market sooner than it should have. Moreover, the promoters helping themselves to shares at par just eight months ago, is hardly likely to enthuse investors.

The long and short of its aggressive pricing lay in the fact that there is a retail boom on in India and the same has been exaggerated, to some extent at the bourses.

Those with risk appetite and the willingness to bet that the market upswing continues unabated, can still punt on this stock while the more discerning might derive better value among one of PRL's contemporaries.

3i Infotech: 3i Infotech Ltd. (3IL) had earmarked its IPO proceeds primarily towards repayment of high-cost debt approximating Rs 94 crore. The net proceeds after issue expenses aggregating Rs 80-130 crore had been earmarked for redeeming preference capital.

To start with, on implementation of the issue objectives, the interest burden on the company will dip in FY06. Having undertaken the expenditure curve and survived, 3IL is now positioned to reap the rewards of the inevitable income curve that normally follows. Its business model is interesting, with almost an equal contribution from the product and services space of the software segment.

While 3IL's latter segment is well patronised by its parent, ICICI Bank, the former is a stand-alone and a potential winner. On the flip side, 3IL is vulnerable to the same industry weaknesses as its contemporaries, namely, exchange rate fluctuation risks and increasing wages amidst growing margin pressures.

The company has also received a one-time extra-ordinary income in the form of termination settlement from its parent that has enhanced its financials.

Overall though, the longer-term positives score over the negatives, which bring us to the pricing. Based on historical figures, the pricing does appear stretched even as of today. But, if one were to factor that the interest burden will dip sharply in FY06 as also will selling costs while income flows get enhanced, the picture looks different.

That perhaps is what triggered its sudden upward re-rating after a sluggish listing. Long-term investors can keep an eye on this stock and consider pouching it at declines.

Jindal Poly Films: Jindal Poly Films Ltd. (JPFL) made a follow-on public issue and the issue proceeds have been earmarked for JPFL's plants at Nasik and Khanvel. At the outset itself, it must be noted that the expansion project that was undertaken is a highly capital intensive one with a cost tag of Rs 650 crore.

Given the relatively long gestation period of a minimum of fifteen months from the issue date, the high probability of a time and cost overrun must be factored in.

The weaknesses of this company include JPFL's inherent business risks like the threat of obsolescence, the increasing possibility of the European Union and the USA imposing or increasing anti-subsidy and ant-dumping duties, the high possibility of customs duties for its key products being lowered and environmental regulations.

Then, there is the disturbing fact that the promoters have not always lived upto their promises after past public issues, and had issued a liberal 1:1 bonus for preference shareholders just prior to the issue.

The positives include satisfactory demand growth expectations, possible contract manufacturing opportunities, fair international market-reach and state of the art manufacturing facilities.

Overall then, the negatives far overshadow the positives and the real bait on offer at the time of the public issue was the approximately 20 per cent arbitrage on the prevalent market price. Sadly for investors who took the bait, the arbitrage vanished and they have been left poorer, albeit perhaps, a lot wiser too.

Given that there is no dearth of better investment opportunities on offer in both, the primary and secondary market, investors would do well, to train their eyes elsewhere.

To conclude, the bottomline here is that while there are big bucks on offer for the taking in the primary market and even thereafter, when these stocks list in the secondary market, the fact is, one needs to be choosy and discerning, especially about the price tag. It more often than not, makes the difference between winning and losing.

(Ashok Kumar heads Lotus Knowlwealth in Mumbai, India and can be contacted at ceolotus@hotmail.com )

Disclosure: The author has no outstanding interest in the shares of the companies discussed in this column.