Perils of aggressive IPO pricing

GUEST COLUMN/ TORCH-LIGHT

Jet and PNB have the potential to survive and thrive once happier days return to the market. But pricing appears aggressive in both the cases.

One question a viewer posed me while doing a TV show revolved around what he termed as the post-issue failure of two recent public issues - Jet Airways and Punjab National Bank (PNB). The query seemed interesting as both the issues have actually managed to stay afloat - that is, above their issue prices - to date.

While Jet made an IPO, in the case of PNB, it was a public issue. The share price of the former slipped post-listing, while that of PNB dropped on closure of the issue. The moot question now is: what will happen to the share prices of these companies?

Jet Airways entered the primary market with a book-built public issue, comprising 1.73 crore shares with a face-value of Rs 10. Of this, 1.42 crore were through a fresh issue while the rest comprised an offer for sale by the promoter company. Jet's shares have been listed on the NSE and the BSE.

The IPO price band ranged from Rs 950 to Rs 1,125 per share, translating into an issue size of around Rs 1,650-1,950 crore. The final discovered price was Rs 1,100 per share. Jet has earmarked the proceeds to repay debt aggregating Rs 792 crore while Rs 460 crore will be used for creating capital assets.

Positives for Jet include its market leadership in the domestic aviation sector and brand equity, and the fact that the aviation sector is still at a nascent stage in India.

The biggest positive, however, is the fact that the absence of adequate infrastructure at Indian airports will prevent any emerging competitor from matching Jet's fleet size and the scale of its domestic operations for some time to come.

On the flip side, there could be the double whammy of rising input (fuel) costs and margin pressures exerted by new entrants, especially no-frills airlines. The fact that aviation sector stocks have not fared spectacularly in international markets is also disturbing.

Overall, it is an even-stevens situation which takes us to valuations. Whereas traditional quantitative parameters suggest that even at the issue price, the stock appeared stretched in terms of valuations, EV/EBITDA ratio, which remains around 10, suggests it merits a second glance.

However, the fact that Jet will be the only large aviation firm listed at domestic bourses with a substantial market capitalisation can turn the tide in favour of investing in the company even at the current market price of Rs 1,200 plus. That alone should arouse FII interest, at least for some time.

Meanwhile, PNB re-entered the market on March 7, 2005, with a book-built public issue comprising 8 crore equity shares of Rs 10 each (PNB's shares are already listed at the BSE and the NSE). Its price band ranged from Rs 350 to Rs 390 per share, translating into an issue size of around Rs 2,800 to Rs 3,100 crore. The discovered price was Rs 390.

PNB planned to use the proceeds to augment its capital base. It must be noted that the proceeds of 3 crore equity shares will go into the government's kitty and the bank's equity capital to that extent will stand extinguished. The tax treatment of the premium transfer to the government's kitty remains a potential source of worry, though logically, an adverse eventuality appears unlikely.

PNB ranks third among domestic banks in terms of assets and enjoys a pan-Indian presence. It must also be understood that PNB, like its contemporaries, is cleaning up its NPAs, using the asset-reconstruction-company route, with the attendant risks.

At the end of FY04, PNB's gross NPA ratio was 7.65 per cent while its net NPA ratio stood at 0.98 per cent. For the same period, its average cost of funds stood at 5.1 per cent which dipped to 4.6 per cent during the first half of the current financial year. The overall financial health of the bank, thus, passes muster.

However, the shadow of IFCI looms large over PNB ever since the government thought aloud about merging the two entities. However, given that PNB, too, is a government entity, it is unlikely that it will be given a raw deal, if the merger materialises.

Furthermore, with banking reforms gathering momentum, the bank, with its superior performance and better market acceptance, could figure high on the M&A stakes. With a topline of Rs 5,193 crore and a bottomline of around Rs 850 crore for the first half of FY05, PNB stands second only to SBI among PSU banks at the bourses as far as discounting of its earnings is concerned. It is clear that those backing this stock are banking on the reform process in the sector.

Both JAL and PNB have the potential to not only survive but even thrive once happier days return to the market. However, pricing of both the issues borders on the aggressive. That perhaps explains why the IPO listing fever could be cooling off. Contrary to popular perception, I believe, it could be a boon for investors. Why? Simply because, they will then be constrained to start looking at the investment-worthiness of companies rather than merely listing price bump-up possibilities.

(The author heads Lotus Knowlwealth, Mumbai, and can be contacted at ceolotus@hotmail.com .
Disclosure: He has no outstanding interest in the shares of the companies discussed here.)