HT Media: Money matters

The first day's price action suggests that HT Media buyers were mostly interested in listing gains

The HT Media stock listed with a bang, but ended the day with a whimper. It initially traded at close to Rs 700, or a 32 per cent premium to its issue price of Rs 530, but declined gradually to Rs 545, a mere 2.8 per cent premium.

IPO allotees who haven't sold their shares yet could, therefore, be sitting on losses considering that many of them take loans to subscribe to IPOs. Spare a thought for traders who bought the stock at close to the Rs 700 levels in early trade on Thursday.

The huge response to HT Media's IPO - the issue was oversubscribed by over 18 times - indicated that investors were placing a big bet on significant listing gains. It's not that all IPOs in the recent past have provided block-buster listing gains.

In fact, stocks such as India Infoline, Shringar Cinema, 3i Infotech and Allsec Technologies had even lower returns at the end of trading on their respective listing dates. Fortunately for investors in these companies, their stock prices have risen considerably hence.

HT Media investors may not be that lucky. Even at current prices, it trades at a trailing PE of 77 times. For these levels to make sense, HT would have to grow earnings by 70-80 per cent at the least in the near term. Analysts feel that's a very tall task given the pressure on both prices and cost.

It's also important to note that 14.45 million shares changed hands on Thursday, double the issue size of about 7 million shares.

The high amount of churn on the first day of trading indicates that a large chunk of IPO allotees may have invested only for listing gains and not for the long-term potential of the company.

Welspun India

The Chinese domination of the global textile sector may be well documented, but one segment where players such as Welspun India enjoy a competitive advantage is home textiles, which comprises bed, bath and kitchen linen.

That has enabled the company to become one of the largest terry towel producers in Asia. It's no surprise, therefore, that the company is planning to add additional capacity in towels, bed sheets and spinning facilities.

The company's expanded capacity is expected to come on stream in the next 24 to 28 months. To fund the expansion, the company would borrow Rs 400 crore from the Textile Upgradation Fund and it has already raised about Rs 165 crore through a 14.01 per cent preferential allotment to Temasek.

The remainder would be financed via internal accruals (cash flow or profits +depreciation for FY 05 was Rs 64 crore.)Most of the company's sales are in overseas markets, and the company has been a prime beneficiary of the scrapping of the quota regime, with export turnover reaching about Rs 110 crore in the last quarter, a y-o-y growth of 45 per cent. Exports to America constituted about 68 per cent of total exports in the last quarter.

Marketing the expanded product capacity should pose no problems, with the company leveraging its existing client base like Wal-Mart and Tommy Hilfiger.

For all these reasons, the stock has outperformed the broader market over the past two months - Welspun had appreciated about 24.5 per cent as compared with a 11 per cent gain in the Sensex.

Going forward, margins could come under pressure if staff costs continue to rise sharply. However, analysts highlight that home textiles category has a definite advantage thus far as price realisations are concerned- this segment is viewed as an essential home item and it limits the possibility of the companies' customers demanding price cuts.

Iron Ore prices

Despite the recent hike in steel prices, small steel mills will be hit once again, what with prices of spot Indian iron ore reaching about $74-77 (approximately Rs 3200) per tonne, a growth of around 4 per cent in the past two weeks. Iron ore typically accounts for about 20 per cent of total cost of HRC production for a small steel company.

Higher prices of this key input for the steel industry is being attributed to a pick-up in demand from Chinese steel mills. Steel production in China was 193.8 million tonne in the first seven months of 2005, or 28.1 per cent higher on a y-o-y basis.

However, integrated steel mills such as SAIL and Tata Steel are not affected by higher spot iron ore prices given their captive resources of iron ore.

Global iron ore exports are expected to increase 9 per cent in CY05 to 691 million tonne, lagging behind demand by about three million tonne. This deficit is expected to reach eight million tonne next year given strong demand conditions from China.

As a result, analysts have forecasted that iron ore prices could remain firm till CY07, a change from their previous forecast of prices remaining string till CY06. Earlier, spot prices of iron ore had fallen to about $55- 57 (approximately Rs 2400) per tonne in June and that was attributed to a build up of this commodity at Chinese ports.

With contributions from Mobis Philipose and Amriteshwar Mathur