When pricing mars gains

GUEST COLUMN/ TORCH-LIGHT

Investors with risk-bearing appetite and patience can keep an eye on 3i Infotech.

Why do merchant bankers kill the goose that lays the golden egg? At a time when aggressive pricing has become the norm in the primary market, resulting in poor listings, investors must be asking themselves this question.

Incidentally, investors are the proverbial golden goose and aggressive pricing is what kills their interest in investing.

Once primary market investors start losing on initial public offerings (IPOs) they tend to turn their backs on every issue, sending the primary market into a tailspin.

Furthermore, once an investor applies for shares of a company, he must remember that the issue price is then a sunk cost and the decision to sell or hold on listing should be primarily based on the price that they are listed at and the road ahead.

One company that listed extraordinarily well at a time when the markets have been wobbly was Gokaldas Exports (GEL) which entered the market on March 30, 2005, with a book-built public issue comprising 31.25 lakh equity shares with a face value of Rs 10 each. GEL's shares have been listed at the NSE and the BSE. Its price band ranged from Rs 375 to Rs 425 per share, translating into an issue size of Rs 130 crore plus, and the discovered price was at the higher end of the band.

GEL would use the issue proceeds to set up four new facilities, repay working capital loans, and modernise and expand.

Among the older companies existing in the apparel manufacturing segment, GEL's positives include its scale of operations, supply-chain management abilities and design and sampling capabilities.

Its USP is its client list which includes some internationally renowned fashion houses.

The flip side, however, includes client concentration risks, engagement in a dynamic and intensely competitive scenario, dependence on raw material imports with the attendant exchange-rate risks, rising wage scenario in the textiles segment and the absence of long-term selling contracts.

Financials pass muster, though it must be noted that the quantum jump in debtors prior to the IPO somewhat skews the picture. Furthermore, as recently as March 2004, the promoters allotted themselves 90 lakh shares of the company at Rs 10 each.

Given that the stock listed close to Rs 625, fundamental valuations do appear stretched. However, till the strong hands sell, it is unlikely that the scrip will go into a tailspin.

Notwithstanding this fact, given the kind of prevalent uncertain market condition, the smart thing to do would be to take some profits off the table.

After all, stocks like TV Today, too, had listed with a bang, and what happened to its share-price thereafter is well known.

3i Infotech, too, had entered the market on March 30, 2005, with a book-built public issue comprising 2 crore equity shares with a face value of Rs 10 each. The company's shares have been listed at the NSE and the BSE.

The price band ranged from Rs 90 to Rs 100 per share, translating into an issue size of Rs 180-230 crore. This company, too, closed its issue book at the higher end of the price band. 3i would use the proceeds mainly to repay high-cost debt of Rs 94 crore.

Net proceeds after issue expenses aggregating Rs 80-130 crore were earmarked for redeeming preference capital.

Let's take a look at the positives. The interest burden on the company will dip in FY06. Having survived the expenditure curve, 3i is positioned to reap the rewards of the income curve that follows.

Its business model is interesting, with almost equal contributions from products and services of the software segment. While the latter segment is well patronised by the company's parent, ICICI Bank, the former is stands alone and is potential winner.

However, on the flip side, 3i is vulnerable to the same industry weaknesses as its contemporaries - that is, exchange rate fluctuation risks and increasing wages amidst growing margin pressures.

The company has also received a one-time extra-ordinary income in the form of termination settlement from its parent that has enhanced its financials.

Why then, did this seemingly promising company list just above its issue price and dip below thereafter.

The flaw lay in its pricing. Based on historical figures, the pricing still appears stretched. However, if one factors in the fact that the interest burden will dip sharply in FY06 as also will selling costs while income flows get enhanced, the picture start to look different.

So overall, longer-term positives score over negatives. To conclude, investors with risk-bearing appetite and patience can keep an eye on this scrip while existing shareholders can keep their fingers crossed for the positives to manifest in FY06.

(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.)