A B C of IPO---Unravelling the Mystery !!!

The term IPO is by far the most cliched word used in Indian financial system . Its users range from veteran market participants to overzealous youngsters , from novice housewives to barely teen adolescents . While first time investors use it as an entry vehicle for getting into markets , its the seasoned investors that know how to milk it the right way without missing the woods for trees !!!

My purpose of writing this post is to cater to the needs of first time investors in IPOs . As it is we have a clutch of new issues hitting the markets every fortnight from now , so it becomes imperative to help separate the wheat from the chaff !

For the first time investors or those lacking enough experience , the tough part is to assess the fair value of shares on offer in an IPO . An offer price or market price is actually a company's expected or total market value divided by the number of shares. Thus with different number of shares on offer , companies with similar mcap may trade at different prices . Thus the catch is the number of shares .

Oflate investors have been astonished by the sheer variance in the offer price and market price in the same peer group . A case in point is the Adani Power issue price at Rs. 100/share compared to its peer Tata Power market price at Rs. 1200/share . Then there is NHPC at Rs. 30-36/share as compared to NTPC at Rs. 210/share. To novice market participants it would appear that the offers are at throwaway discounts but then they fail to realise that even at its lower price band NHPC is 30 times EPS while NTPC is traded at just 20 times. The moot question that comes to mind is then how to evaluate an IPO ? Firstly read the fine print given in RHP(red herring prospectus) . Know the face value of share on offer , paid-up capital and the number of shares .

Adani Power

paid-up equity capital : Rs. 2180 crore

no. of shares : 218 crore

face value : Rs 10 each

Tata Power

paid-up equity capital : Rs. 222 crore

no. of shares : 22.2 crore

face value : Rs 10 each

Thus as can be seen Adani power has nearly 10 times more equity shares than Tata power . In other words , for same mcap Adani Power will trade at 1/10th of Tata Power . Now Adani Power at its issue price of Rs 100/share has mcap of Rs.21800 crore , if Tata Power gets same mcap then its share price would be Rs. 982 !!!This shows that there are listing gains on offer in Adani Power IPO .

Now the question arises what determines mcap ? At the basic level mcap is a function of company's earnings in previous year . More the profits , more is the mcap . The parameter used is called EPS (earning per share) .

NHPC

PAT : Rs 1244 crore

no. of shares : 1230 crore

face value : Rs. 10

EPS : Rs 1.01

P/E : 30x at lower price and 36x at upper price

NTPC

PAT : Rs. 8201 crore

no. of shares : 824 crore

face value : Rs 10

EPS : Rs 9.9

P/E : 21 times

A company with lower P/E offers more upside if its up n running already rather than a company that promises to use the proceeds to set-up a business that will generate cash-flow in future !

However if markets were so simple in its function then even my maid would have been in it !

Its to be noted that the issue is priced between 1.7x-2x post-money book value that is at a discount to the listed utilities in the space (for instance, JP Hydro trades at 3.7x FY2009 book value). This discount is justified on account of the lower return on equity (RoE) of NHPC and the higher risk of delays in the execution of its projects. Importantly, NHPC’s lower RoE is attributable to the higher capital work in progress, which results in lower component of equity which the company earns its returns on .

Considering this the issue should be subscribed .

No wonder then that NHPC IPO overbid 3.5 times on day 1

...And The Wait Is Over !!!!

I know its been a long while since i updated the blog , caught as i was with various activities . The spate of mails that keep pouring in my mailbox every fortnight range those from seasoned market players to bored housewives who have taken to markets to show hubby dearest that they can earn from cool confines of home itself to straight out of college junta to barely teen guys/gals ! The pet peeve of everyone remains "Why don't you update your blog on regular basis ? " . Well i have always believed that quality takes precedence over quantity . Its not the number of posts that your blog carries but the quality of matter that counts. In this regard I'm akin to Amir Khan(for lack of better comparison !) who does few movies but boy when he does then everyone sits up and takes notice . It makes me immensely satisfied when straight into A-grade MBA college junta uses the matter from this blog to understand the finer nuances of financial markets. Their mails expressing their gratitude makes for enlightened reading :)

Its interesting as well as scary to see that demographic profile of investor fraternity now encompasses people from all walks of life and with such diverse backgrounds. Interesting because the machineries of financial markets work well when it involves a wider range of market participants . But then its scary too because in the absence of proper guidance people can be easily misled in these market conditions and end up burning their fingers .

While through this blog i have made an earnest attempt to decode/unravel the financials and i believe i have met with moderate success too in the light of mails/calls i continue to receive , there still remains a major chunk of investing fraternity that remains uncovered . Its the participants who are tapping the markets via the IPO route . In my next post i will unravel the A B C of IPO !