Sweet and sour

GUEST COLUMN/ TORCH-LIGHT

Many investors believe that investing in the primary market is risk-free. While one may agree that it is often less risky, it is by no means risk-free as the asset class in question remains equity with all its attendant risks.

To buttress this point, let us cast a glance at the contrasting post-listing fortunes of Bharti Shipyard (BSL) and Deccan Chronicle (DCL) that made IPOs (initial public offerings) recently.

BSL entered the market on December 2, 2004, with a book-built public issue of 1.25 crore equity shares of Rs 10 each with a price band of Rs 55 to Rs 66 per share.

The price was eventually fixed at the higher end of the band. Given the over-subscription the IPO evoked, it was hardly any surprise that the stock listed and soared to Rs 150 plus before shedding some weight and settling around the Rs 120 mark, which still translates into 90 per cent gains.

BSL is a three-decade-old company engaged in the construction and repair of inland, coastal and ocean-going ships and vessels. The issue proceeds will be used for expanding the company's capabilities for repairing ships in addition to providing working capital margin.

With the shipping industry and associated sectors enjoying the fruits of a cyclical upswing, BSL, too, has performed well over the past 18 months.

It has had an extra-ordinarily large exposure to one company (GE Shipping) in recent times and the debtors figure has risen sharply during the six-month period ended September 30, 2004. A healthy order-book position of Rs 310 crore at the end of FY04 suggests that the good times could last a while longer.

On the flip side, competition from Chinese firms looms large as do the volatility of freight rates and the possibility of a cool-off in oil prices.

Furthermore, there is no escaping the fact that the shipping industry is a cyclical one where investors have to time their entry and exit to perfection to avoid being caught wrong-footed.

In fact, after the company's listing, the prospects of the shipping industry have weakened. The fact remains that BSL's proposed expansion involves a fairly long gestation period.

The government's 'sagar mala' project that aims at the development of the domestic maritime sector is a positive for BSL as also is the cost advantage that India is beginning to enjoy in the ship-building segment over Japan and South Korea. The likelihood of old vessels being compulsorily scrapped and replaced by new ones also augurs well for the company.

The fact that the promoters have issued themselves shares at face value twice over the past eight months is offset by the relatively sound financials of BFL. The forward P/E of around 13 suggests that barring unforeseeable positive developments, the stock appears fully priced for now. It is unlikely that the scrip would go into a vertical free fall from here.

DCL entered the market on November 25, 2004, with a book-built public issue of 80.13 lakh shares of Rs 10 each. The price band was fixed at Rs 162-194, and the signs of trouble ahead for those who invested appeared when the company was constrained to close the book at the lower end of the price band.

It seemed that the company and its advisors had got the pricing equation wrong. Given the lukewarm response to the issue, especially against the backdrop of a booming market, it was a surprise that DCL got listed at around Rs 200.

It came as no surprise that its share price sank close to the issue price within the first couple of days. It then went on to suffer the ignominy of being perhaps the only private sector listing in 2004 to sink below the issue price.

DCL's pluses include its brand equity, albeit a regional variety as it is unlikely that many people outside Andhra Pradesh would readily recall its name. It has recently started a new print facility in Hyderabad whereby colour printing capacity has increased four fold.

This could prove to be another leg of margin growth as the rates for colour advertisements are at a premium over that for black and white advertisements.

On the flip side, DCL's move to the Chennai involves high risks, given the domination of The Hindu newspaper group in this market. The success of the venture in Tamil Nadu is dependent on the company's ability to achieve the desired level of circulation/readership and to leverage the existing relationship with advertisers.

In the short to medium term, carving a niche for itself in the new geographies may not be that easy, and it could be a drag on earnings as fixed expenses increase.

It is noteworthy here that larger media groups have hesitated to take on the Hindu group on its home ground. The fact that DCL runs the risk of being outflanked on its own home turf by the Times of India group, which has more than established a foot-hold in that market, makes things worse for the company.

The newsprint market is a suppliers' one where pricing pressures persist. Prices of newsprint have been volatile for the last one year and at present are at quite high levels.

High prices of newsprint coupled with any delay in pick-up in circulation from the new geographies could dent DCL's future profitability. The last straw on the IPO investor's back came in the form of a 7:1 bonus issue in September, 2004, which stripped the reserves of the company.

Little wonder then that the company sank like a heavy stone post-listing. The only saving grace appears to be the government's possible move to relax the cap on foreign direct investment in media that could benefit and trigger a re-rating of all media stocks, including this one.

The message for IPO investors is: there is no guarantee that the post-listing experience will not leave a bitter after taste.

(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.)