The IPOs that have stood the test of broader market correction would be the ones which have something unique either in terms of their business model or sheer growth or technology to sustain investor interest despite expensive valuations. Investors should carefully choose what they should buy and what they should avoid especially when external factors are driving markets to lower levels.
There are two types of markets that deal with buying and selling of shares in India. The primary market deals with the initial public offering (IPO) of new companies and the secondary market deals with transactions of the already listed companies in India. The secondary market indices namely the Sensex and the Nifty have declined 2.31% and 0.78% respectively on a year on year basis and 6.83% and 5.84% respectively year to date.
The primary market witnessed a good flow of new issues year to date with most of the companies launching offers in the month of August 2015 and all of them listing in the month of September 2015. The beginning of the year saw only a few companies launching their IPOs starting with Ortel Communications in the month of March 2015 followed by Adlabs Entertainment, Inox Wind and VRL Logistics in the month of April 2015. The IPO market has dried up in the month of September 2015 as no company launched their offer after Prabhat Dairy. Prabhat Dairy had infact extended the time of offer by a few days till 4th September 2015 on account of very poor response from investors.
There are various aspects to consider the performance of the newly listed companies. The fundamentals of the company, the trend of the market and the valuation at which the offer was made public are all very crucial for the post IPO performance. Basically a company with strong fundamentals with justified valuations and sound business model should stay strong and see buying in times of market correction. As a measure of performance it would be interesting to see how much above or below the offer price are the newly listed companies trading in the current scenario. We will list out the companies that have done well in current times of volatility as well as list out those that have failed to sustain interest of investors.
There are totally 15 companies that have come up with IPOs until September in the year 2015. Six companies out of 15 launched their IPOs in the month of August 2015. The month of August 2015 saw correction in the global equity markets due to growth slowdown in China and uncertainty over the timing of the interest rate hike by the Federal Reserve in the US.
9 companies are currently trading at a price that is below their issue price and the remaining 6 companies are trading at a price that is above their issue price. The table lists out the companies and their respective issue price and the current market price.
The companies that are trading way above their issue price are Ortel Communications, Inox Wind, VRL Logistics, PNC Infratech, Manapasand Beverages and Syngene International. The companies that are trading way below their issue price are Adlabs Entertainment, MEP Infrastructure Developers, UFO Moviez India, Pennar Engineered Building Systems, Power Mech Projects and Prabhat Dairy. The companies that are trading very close to their issue price are Sadhbhav Infrastructure, Shree Pushkar Chemicals and Fertilisers and Navkar Corporation.
Prabhat Dairy was the costliest IPO with the Issue Price to Earnings Ratio in the range of 45-47. Sadhbhav Infrastructure and MEP Infrastructure had negative earnings per share and hence the basis for valuation for the company was only the expected revenue growth for the next few years which would bring it in positive territory. Shree Pushkar Chemicals and Fertilisers issue price to earnings ratio was one of the cheapest in the range of 7-7.5.
Most of the other companies had issue price to earnings ratio in the range of 25 to 37 approximately.
Prabhat Dairy now trades at a Price to Earnings ratio of 36 in the current market scenario. The timing of the IPO along with the valuations did not enthuse retail as well as institutional investors.
Manpasand Beverages now trades at a Price to Earnings ratio of 44 in the current market scenario which is one of the most expensive and has in fact become more costly after the recent broad market correction. Beverages operates as a fruit drink manufacturing company. The Company offers mango, apple, guava, and litchi juices in India. Investors are giving the company a premium valuation as they think the high growth rate in the earnings is likely to translate in better returns in the time to come.
Inox Wind trades at a Price to Earnings ratio of 24 as the growth in the earnings for the year FY 2014-15 has led to discounting of valuations as the company is already booked with orders for the FY 2015-16. Inox Wind provides wind power solutions and manufactures and distributes wind turbine generator components such as nacelles, hubs, rotor blade sets, and tubular towers, as well as offers wind resource assessment, site acquisition, infrastructure development, and operations and maintenance of wind power projects to customers in India.
Syngene International is an India-based contract research organisation (“CRO”), offering a suite of integrated, end-to-end discovery and development services for novel molecular entities (“NMEs”) across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health and cosmetic and nutrition companies. The company’s services in discovery and development cover multiple domains across small molecules, large molecules, antibody-drug conjugates (“ADC”) and oligonucleotides. The stock has no similar company for comparison as it has a unique business model. The IPO price was at 35-37 times its earnings per share and now it trades at 48 times its FY 2013-14 earnings.
UFO Moviez India operates as a digital cinema distribution network and in-cinema advertising platform. The Company operates satellite delivered digital cinema network and online ticketing systems. UFO Moviez provides its services worldwide. The stock has not corrected significantly in the recent volatility as it continues to trade at price to earnings ratio of 31 as compared to the issue price to earnings ratio of 35. The stock trades below its IPO price but has not fallen sharply since its debut in the month of May 2015.
Adlabs Entertainment manages a theme park with rides, shopping, dining, accommodation, and other entertainment services and serves customers near Mumbai, India. The company had reported negative earnings per share in the trailing twelve months and now trades way below the IPO price. The company was not able to sustain investor interest as it corrected to levels as low as Rs.111 as against an IPO price of Rs.180.
MEP Infrastructure Developers Limited is a toll management company. The Company operates and maintains roads, highways, bridges, and toll plazas and serves customers in India. The nature of the business compels the company to manage large amount of debt. High debt has inevitably resulted in heavy interest outgo for the company ultimately translating into negative profits for reported earnings from the FY 2009-10 onwards. This has resulted in the current price trading below the IPO price. If we consider the business model and the nature of debt that has to be managed, makes it unattractive for investors to sustain interest in times of correction.
IPOs amounting to Rs.200 billion are expected to hit the market, which includes big names such as Café Coffee Day, Matrix Cellular and GVK Airport. Most of the companies have already received the approval to launch their respective IPOs and while only a few are under the process to receive the same. The offering to the public might get delayed due to the current correction phase in the equity markets.