The listing premium pull

Deccan Chronicle's IPO comes at the right time

Hyderabad-based Deccan Chronicle Holdings Ltd (DCHL) is shortly approaching the capital market with its IPO of approximately Rs 179 crore ( assuming the top end of the price band Rs 162 - 194 per share).

Earlier this year, television channels like TV Today had listed at a premium of 90.89 per cent while for NDTV it was 42 per cent.

DHCL intends to use the funds raised largely for starting an issue of its flagship newspaper Deccan Chronicle in Chennai and Trichy during the current financial year.

DCHL's key competitive advantage is its dominant position in the English daily market of its home state via Deccan Chronicle - Deccan Chronicle's net paid sales for Andhra Pradesh was 50 per cent higher than its nearest rivals. That enables Deccan Chronicle to command advertising rates that were almost triple its nearest rival in markets like Hyderabad.

As a result, for FY 04, DCHL's revenue (excluding other income) was Rs 116.93 crore and it earned a net profit of Rs 17.5 crore. The EPS was Rs 39.77 for FY 04. Comparison with the previous financial year, however, is not possible since the offer document has provided only details for Q4 of FY03.

The question, of course, is whether DCHL would be able to carve a viable market share in the neighbouring state dominated for decades by the Hindu group. The forthcoming issue would be at a trailing 12-month P/E of around 4.9 ( assuming the higher price band), which is lower than stocks like Mid-Day Multimedia or Sandesh.

While the company's plans of expanding in Tamil Nadu have a large element of risk, but in the current boom conditions, the obvious draw for investors would be the opportunity to earn a large listing premium.

Debt revamp for medium firms

The Reserve Bank of India's proposal to extend the benefits of the Corporate Debt Restructuring mechanism to medium-scale enterprises may be yet another tool to clean up bank balance sheets, but its timing may not be right.

The CDR mechanism has been very effective in enabling banks to shift accounts that would otherwise have become NPAs to the "restructured" category, thereby bringing down their NPA level. The amounts have been substantial and were, at last count, over Rs 50,000 crore.

The scheme has turned out be a success, because, while the restructuring was carried out at the bottom of the business cycle, steel prices thereafter climbed steeply, enabling a swift turnaround in the fortunes of steel companies who have been the main beneficiaries of the CDR. Corporates in other sectors too have benefited with the turning of the business cycle.

Will extending the CDR to smaller firms with loans between Rs 5 crore to Rs 20 crore help banks? Smaller companies are riskier, because they lack the financial muscle to tide over bad times.

That's the reason why the percentage of NPAs is higher in the small scale sector. The temptation for banks will be to restructure these loans merely for the purpose of avoiding NPAs, and that could boomerang on them once the cycle turns.

At the moment, India Inc is doing very well, and with smaller firms typically riding on the coattails of the larger companies, smaller firms too are doing well. The problem is that companies which are not performing now are unlikely to do much better, even after restructuring, and that's especially true for the smaller companies.

Biocon

Biocon Ltd has recently entered the insulin segment via its offering Insugen. Its initial price is the lowest in the domestic market but it is anticipated that the three existing players would take steps to protect their market share in this approximately Rs 200 crore market.

Exports of this product for Biocon are expected to pick up once the company gets the necessary regulatory approval in key markets. However, in the short term this business is not expected to significantly add to the total revenues of the company.

Meanwhile, Biocon's consolidated net profit for the last quarter have grown 52 per cent to Rs 58 crore. The company's key bio-pharmaceuticals division has grown 19 per cent to Rs 147 crore due to continued strong demand for active pharmaceutical ingredients or APIs for statins (cholesterol-lowering drugs).

Profitability of statins is high, because, unlike other product segments, they have not been commoditised in key markets like the US, and the company's facilities were the only ones approved by the US FDA in the country. Another important revenue stream for the company is its enzyme division which has grown by 50 per cent to Rs 24 crore due to an upsurge in demand from both global and Indian user industries.

Aided by the addition of 4 new clients, Biocon's contract research fee has grown 58 per cent to Rs 15 crore in the last quarter. Operating profit of the company however, grew at a slower pace of 21 per cent to Rs 62 crore in the last quarter and operating profit margins declined 67 basis points to 33.3 per cent, due to an increase in operating expenditure.

Expanding the market for API for statins will drive growth in the short term but Biocon's revenues in the medium term are expected to be driven by its increasing emphasis on the insulin market.

With contributions from Amriteshwar Mathur