Party's over?

Dizzying heights and underlying volatility of the market may disappoint the investors looking for listing gains of IPOs.

Recent IPO listings indicate a mixed bag of sorts, with some listing well, some poorly and some moderately. It marks a change from the 'no-brainer' listing days of 2005, when almost every listing was well above the issue price.

It is also a clear reflection perhaps, of the qualitative deterioration visible among the primary market offerings as also the over-aggressive issue pricing that has become the norm.

In this column, let us turn the torchlight on two companies that completed successful IPOs and one that completed a successful FPO before getting listed recently. The companies under the torchlight are Indo Tech Transformers, Gujarat State Petronet and JK Cement.

Indo Tech Transformers (ITTL) entered the market with a fixed price public issue of 39.4 lakh equity shares (Rs 10 FV) at Rs 130 per share, inclusive of an offer for sale of three lakh shares. The issue size was Rs 51.2 crore and ITTL's shares have been listed on the NSE and BSE.

Engaged in the manufacture of power and distribution transformers, ITTL raised funds to relocate and modernise one of its plants, set up new power transformer and dry transformer plants and meet working capital requirements. ITTL is one of the few organised players in the Indian transformer segment, but dependent on TNEB (Tamil Nadu Electricity Board) for a large slice of its revenues.

ITTL's Canadian tie-up facilitates its exports into North and South America though its exposure to SEB's in the domestic market reflects in its HY06 topline, of which nearly 50 per cent comprise receivables.

The company's USP lies in its expertise in designing transformers at optimal costs, with the only concerns there being raw material price volatility and external dependence.

ITTL's financials are satisfactory even if unexceptional. Of course, the mandatory quantum jump in profits in FY05 and HY06 was apparent, as also was rising inventories and the 3:2 bonus issue prior to the IPO.

The offer for sale by a promoter and 21st Century Management was obviously a dampener, but at a revised post-bonus and merger - with ITEL (Indo Tech Electric) in September 2005 - historical P/E multiple of around 15, ITFL still offered some icing for punters to cream off on listing.

Expectedly, the listing was satisfactory, but barring institutional interest that might boost it in the short-term, it appears unlikely that this stock could turn out to be a multi-bagger.

Gujarat State Petronet (GSPL), a PSU, entered the market on 24 January 2006 with a book-building public issue of 13.8 crore equity shares (Rs 10 FV). The discovered price Rs 27 per share, yielding an issue size of Rs 372.6 crore. GSPL's shares have been listed on the NSE and BSE.

A natural gas transmission company, GSPL has laid a 433 km pipeline network in the industrially progressive state of Gujarat and currently operates a medium-to-high pressure gas transmission segment. Its issue was made to raise funds for the expansion of the pipeline network.

By 2007, GSPL proposes to construct an additional natural gas pipeline of around 742 km in Gujarat. Its primary clients are from the power and fertilizer segments, which contribute over 70 per cent of the entire natural gas demand in India.

Given that demand for alternative fuels are on the ascent and the demand-supply gap is widening, GSPL's biggest advantage is the fact that the expansion will take place at a marginal cost even as tariffs improve.

The flip side, though unlikely, could come from any demand downturn that could hit GSPL hard, given its high fixed overheads.

GSPL also enjoys locational advantage as well as the influential parentage of GSPC (Gujarat State Petroleum Corporation). Like all capital intensive projects, depreciation weighs heavily over GSPL's numbers and the resultant P/E multiple of 27 which seemed on the higher side, did not do justice to the immense potential that this segment and resultantly, GSPL held out.

Expectedly, the listing was good, though profit booking has pulled down its price. Those with patience could back this stock as it could be a multi-bagger albeit over a longer time frame.

JK Cement ( JKCL ) entered the market on 21 February 2006 with a follow-on book building public issue (discovered price Rs 155 ) of two crore equity shares (FV Rs 10) aggregating to Rs 310 crore. The fresh shares have been listed on the NSE and BSE.

JKCL ranks among the larger grey cement manufacturers in northern India, where the off-take is high and is the second largest Indian white cement manufacturer.

The primary issue objective was to install a waste heat recovery plant, petcoke based captive power plant and a new turbine besides enhancing production capacities at its grey and white cement plants.

The company's financials indicated two major cost heads, viz. interest on debt and power. While the former is being addressed and brought down to more reasonable proportions, the installation of the captive power plant will facilitate substantial power cost savings.

Hence, the project makes good economic sense though the cyclicality of cement demand remains a concern area, especially given the long gestation period. Resultantly, the TTM P/E of over 50 and P/B of around two may not have been the ideal indicators.

The listing was modest and this was only expected, especially on account of the secondary market overhang that FPO's invariably face. The upswing in the cement cycle has firmed up margins for now, but this stock is clearly for those investors backing the infrastructure boom to last for at least 18 months and more.

To conclude, picking IPO winners has become a tougher business. Sebi's solution of thrusting ratings down the throat of investors, especially with rating agencies indicating a clear aversion to any comment on the pricing has become a non-starter.

Recent reports indicate that, of the 40 odd companies hitting the market with an IPO, only 10 sought a rating and having seen what was on offer, even they chose not to take the ratings on board.

The bottomline then is, 'caveat emptor' "� Let the Buyer Beware - in the primary market. After all, ratings or not, no one, including Sebi can reimburse you if your stock lists poorly.

(Ashok Kumar heads Lotus Knowlwealth, a knowledge driven consulting company in Mumbai-India and can be contacted at ceolotus@hotmail.com )