Primary gains

PENNY WISE

Several initial public offers have recorded handsome gains in recent times but investors need be cautious about valuations.

The line-up of IPOs and follow-up public issues in the primary market for just the first quarter of calendar year 2006 is formidable.

Given the extraordinary listing and post-listing performance of some of the companies that recently made IPOs, the level of interest and more importantly, participation is remarkably high.

In this column let us turn the torchlight on three companies "� Suzlon Energy, Everest Kanto and PVR "� that have fared well post-listing.

Suzlon Energy Limited (Sel) entered the market in September, 2005 with a book-building public offer comprising 29.34 million equity shares of the face-value of Rs 10 each. Of these, 26.76 million shares comprised a fresh issue while the rest comprises an offer for sale. The discovered price was Rs 510 per share.

Its issue proceeds were primarily earmarked for setting up manufacturing facilities, capitalization of subsidiaries, construction of a new corporate office, redeeming preference shares and exploring growth opportunities in India and overseas.

SEL is India's leading manufacturer of wind turbine generators and ranked sixth globally in terms of annual installed capacity. Its global footprint encompasses Europe, Australia, North America and Asia.

SEL's positives include its proven ability to jointly execute large-scale wind power projects in India, the design capabilities of its subsidiaries and its maintenance service abilities.

On the flip side, SEL transacts often with associate companies, is vulnerable to not only technological but also nature-driven changes like wind pattern reversals and finally, has substantial debt on its books.

The financials pass muster notwithstanding the depletion of reserves through two liberal bonus issues in September 2004 and June 2005. Considering its USP of being an alternative energy provider at a time when oil prices are rising vertically, SEL was always going to merit a look-in.

Currently quoting at a P/E of well over 50, SEL's shares are not exactly going cheap. Though its potential cannot be disputed, the moot question here is "� have all the positives already been captured into the price?

Everest Kanto Cylinder Limited (EKCL) entered the market in November, 2005 with a book-building public issue aggregating Rs 900 million. The discovered price was Rs 160.

Engaged in the manufacture of high pressure seamless steel gas cylinders that find usage across industrial segments, EKCL has plants located in Aurangabad, Tarapur and Dubai. The issue proceeds have were earmarked for setting up a new unit in Gandhidham.

EKCL has displayed innovativeness and the ability to adapt to market demands, which should stand it in good stead against the impending Chinese onslaught. The growth of CNG as an accepted alternate fuel opens up further growth possibilities, though fluctuating oil and steel prospects could have an adverse impact.

EKCL's exports to Iran and its related party transactions could cause concern, though its dominant position in the Indian market is undisputable and will go a long way towards insulating its financials. The financials pass muster with fair growth being recorded over the last 2 years, notwithstanding the increase in interest outflows, inventories and receivables.

Considering as it is be the only listed company of its kind, EKCL's shares were always likely to be well-received, both at the time of its IPO and on listing.

Currently quoting at a P/E multiple of a shade over 20, there still might be some steam left at this counter, though given its spectacular run-up post-listing, one needs to tread cautiously.

PVR entered the market in December, 2005 with a book-building public issue of 7.7 million equity shares (Rs 10 FV) inclusive of an offer for sale of 2 million shares. The discovered price was Rs 240.

A prominent film exhibition company and largest multiplex cinema operator, PVR enjoys fair brand equity with presence across northern India, that has now spread across to southern and western India. Focussed on film exhibition, PVR's key strengths include cinemas in prime locations and sound marketing skills.

It uses the internationally followed leased property management model, thus optimizing usage of capital for expanding its geographies. Its brand equity gives it leveraging strength as a preferred anchor tenant among mall developers.

PVR faces the possibility of a time and cost overrun in its project to set up new cinemas which was the prime objective of raising funds through the IPO.

Similarly, the industry being dynamic in nature, exposes it to technological obsolescence risks and finally, the space is getting increasingly competitive.

Overall, the positives override the negatives, and there can be no mistaking the possibility of a sharp revenue and resultantly, bottomline ramp-up in FY07. Again though, the question must be asked - have the valuations already covered future positives. Here too, one's investment approach to this stock will have to be based on the answer to this key question.

To sum up, the post-listing gains recorded by these and many other IPOs have whetted the appetite of retail investors. However, while the business models of these companies appear robust and promising, one must also keep an eye on valuations before timing the plunge. Therein lies the key to successful investing in the stock market, be it the secondary or primary segment.

(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.