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PROJECT ON

“INVESTMENT IN IPO: AN ANALYSIS”

Submitted in partial fulfillment of the requirements

For the award of the degree of

Master of Business Administration

(2006-2008)

TABLE OF CONTENTS

ABSTRACT……………………………………………………2

INTRODUCTION ABOUT IPO………………………………..9

-EVOLUTION AND GROWTH OF INDIAN PRIMARY MARKET

-REGULATORY FRAMEWORK

-PROCEDURE FOR IPO

-BUY BACK OF SHARES

-ROLE OF INTERMEDIARIES

-IPO GRADING

REVIEW OF LITERATURE

RESEARCH METHODOLOGY

ANALYSIS AND INTREPRETATION

FINDINGS AND CONCLUSIONS

SUGGESTIONS

REFERENCES

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ABSTRACT

This project gave me a great insight about the IPO and its Process. The purpose of this

Project was to understand the IPOs that were issued in the last 2-3 months; buyback of

shares; IPO Grading and Reforms in IPO Process.

The IPO was an extensive learning experience in which I involved myself with the live

issues hitting the market. I began my study by going through the SEBI guidelines

regarding eligibility norms, pricing structure, requirements of the promoters and their

obligations, post issue obligations, book building guidelines etc.

I enhanced my understanding over IPO issues of various companies by going through

their Bid-cum application forms and the Red-Herring prospectus, which contained all the

information regarding the issue, purpose of the issue, all the financials and results for the

past 3-5 years and many other details which are required by an investor for a sound

analysis.

Proper study of few IPOs has been done by going through their past financials, business

structure, investments, expansion strategies, growth potential, valuations etc.

The Project report starts with defining the various public issues with the need for the

company to take out an IPO. It goes on further to explain the advantages of an IPO. It

analyses in detail the Indian IPO Scenario. It explains the evolution of the IPO in India

and explains how the scene has changed dramatically after liberalization esp. after the

introduction of book building process.

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CHAPTER 1 INTRODUCTION

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A company can raise capital through issue of shares or debentures. The various types of

issues are:

Public Issue, Rights Issue, Bonus Issue, Private Placement and Bought Out Deal

There can be two kinds of public issues, namely:

• Initial Public Offer (IPO)

• Further Public Offer (FPO)

Classification of Issues

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IPO

An Initial Public Offer (IPO) is the selling of securities to the public in the primary

market. It is when an unlisted company makes either a fresh issue of securities or an offer

for sale of its existing securities or both for the first time to the public. This paves way for

listing and trading of issuer’s securities. The sale of securities can be through book

building or normal public issue.

FPO

Further Public Offers are issued by companies or corporate bodies whose shares are

already being traded in the capital market and they are issuing fresh shares either to fund

the expansion of their existing business or to invest into other business activities.

Reasons for Going Public

Raising funds to finance capital expenditure programs like expansion,

diversification, modernization, etc.

Financing of increased working capital requirements

Financing acquisitions like a manufacturing unit, brand acquisitions, tender offers

for shares of another firm, etc.

Debt Refinancing

Exit Route for Existing Investors

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Advantages of Going Public

Facilitates future funding by means of subsequent public offerings

Enables valuation of company

Provides liquidity to existing shares

Increases the visibility and reputation of the company

Commands better pricing than placement with few investors

Enables the company to offer its shares as purchase consideration or as an

exchange for the shares of another company

Disadvantages of Going Public

Dilution of Stake makes co vulnerable to future takeovers

Involves substantial Expenses

Need to make continuous disclosures

Increased regulatory monitoring

Listing fees and Documentations

Cost of maintaining Investor relations

Takes substantial amount of management time and efforts

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1.2 EVOLUTION AND GROWTH OF INDIAN PRIMARY

MARKET.

Early Liberalization Phase: 1992-1995 (Fixed Pricing)

The initiation of the process of reform in India also would not have been possible without

changes in the regulatory framework. The New Economic policy (1991) led to a major

change in the regulatory framework of the capital market in India. The Capital Issues

(Control) Act 1947 was repealed and the Office of the Controller of Capital Issues (CCI)

was abolished. The Securities and Exchange Board of India (SEBI), established in 1988

and armed with statutory powers in 1992, came to be established as the regulatory body

with the necessary authority and powers to regulate and reform the capital market. SEBI

came to be recognized as a regulatory body for the capital market after the abolition of

the CCI. The control on pricing of capital issue has been abolished and easy access is

provided to the capital market. Initial Public Issue caught the attention of general public

only after the success of Reliance, when millions of small investors made huge returns

which were unheard of till then. Dhirubhai Ambani was the first promoter who raised

huge amounts through the public issue route to finance large facilities.

The issue process was smoothened, procedures were simplified and free pricing was

allowed, although with certain restrictions, The Indian market had the concept of par

value of equity shares, and anything above par was considered premium. The only

companies that were allowed to come with premium issues were those, which had a three

year profit-track record for the preceding five years. New companies without this record

could float premium issues if their promoting companies had the same track record and

they had to hold 50% of the post issue capital. Any new company floated by first

generation entrepreneurs could only issue equity at par. There was no restriction about

prices in a premium issue.

The offer was always at a fixed price, whether premium or par. The companies had to

appoint intermediaries like merchant bankers, registrars, bankers etc. Merchant bankers

had the responsibility of fixing the prices, in consultation with the company, carrying out

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with due diligence, preparing the prospectus (offer documents) etc. The prospectus had to

be submitted to SEBI for getting scrutiny.

The trend continued in the early nineties as many large projects were launched after the

economy was liberalised. Many of these companies came out with public issues and the

retail participation increased dramatically. But many of the companies which raised

money during this period just disappeared without a trace.

Late Liberalisation Period: 1996-2005 (Book Building)

The late nineties and the first few years of the current decade did not see much activity in

the primary market even though we saw a huge bull run led by technology stocks at the

turn of the decade. The bad experiences of retail investors kept them away from the

market and made it difficult for companies to launch successful issues. The corporate

sector was recovering from the damage caused by large capacity expansions and new

projects set up in the nineties.

The dormant primary issues market came alive after 2003 mostly because of the

divestment programme of the government. The issue of Maruti Udyog, through which the

government sold part of its stake in the company, rekindled retail investor interest in the

primary market. The issue was made at a very reasonable price and investors made very

good returns immediately.

The year 2004 saw the primary market activity at its historic peak as some large private

companies also came out with issues. Further divestment by the government; including

the largest ever issue by an Indian company from ONGC, attracted more retail investors

into the market. The IPO market continues to buzz in the current year as well. Taking

advantage of the strength in the secondary market, many high profle companies are lining

up to raise money from the market. The year started with the issue from Jet Airways

which attracted a lot of interest from investors. As a result of tougher regulations, the

quality of the issues has gone up substantially.

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2006 onwards scenario:

India's IPO market emerged as the eighth largest with $7.23 billion (Rs 30,000 crore) in

net proceeds through 78 public issues, global research and consultancy firm Ernst &

Young said in its Global IPO report. Across the world, the companies raised $246 billion,

up from $167 billion in 2005, through a total of 1,729 IPOs, led by Chinese companies at

the top with net proceeds of $56.6 billion. However, the biggest number of IPOs came

from the United States with 187 offerings, followed by Japan with 185 and China with

175 IPOs. According to the study, India's increasing number of larger deals has been

driven by the growth of Indian corporations and their need for additional capital for

potential acquisitions. In 2007 Indian IPOs continue to surge in numbers. Continued

strength is expected in the real estate and energy sector. "The rapid growth in emerging

market economies has resulted in a migration of capital from the developed economies

into the emerging markets," E&Y said.

The localisation trend in India is evidenced by several billion-dollar IPOs hosted by

Indian exchanges. In 2006, India's largest IPO, Reliance Petroleum raised $1.8 billion,

followed by the oil production and exploration company, Cairn Energy, which raised

$1.3 billion with both companies listing on domestic exchanges.

However, some Indian companies are also listing abroad, especially London, Singapore

and Luxembourg, primarily for higher valuations and visibility, the report noted.

The private equity rush into India is creating the potential for many IPO exits. In 2006,

private equity firms invested more than $7 billion in India. Top global private equity

funds as well as local funds, have been key drivers of Indian IPO markets.

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1.3 REGULATORY FRAMEWORK FOR IPOS

Eligibility Conditions for Companies Issuing Securities

The companies issuing securities offered through an offer document shall satisfy the

following at the time of filing the draft offer document with SEBI and also at the time of

filing the final offer document with the Registrar of Companies/ Designated Stock

Exchange:

Filing of offer document

No issuer company shall make any public issue of securities, unless a draft

Prospectus has been filed with the Board through a Merchant Banker, at least

30 days prior to the filing of the Prospectus with the Registrar of Companies

(ROC):

Provided that if the Board specifies changes or issues observations on the

draft Prospectus (without being under any obligation to do so), the issuer

company or the Lead Manager to the Issue shall carry out such changes in the

draft Prospectus or comply with the observation issued by the Board before filing

the Prospectus with ROC.

Companies barred not to issue security

No company shall make an issue of securities if the company has been

prohibited from accessing the capital market under any order or direction passed

by the Board.

Application for listing

No company shall make any public issue of securities unless it has made

an application for listing of those securities in the stock exchange

Issue of securities in dematerialized form

No company shall make public or rights issue or an offer for sale of

securities, unless:

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a. The company enters into an agreement with a depository for

dematerialization of securities already issued or proposed to be

issued to the public or existing shareholders; and

b. The company gives an option to subscribers/ shareholders/

investors to receive the security certificates or hold securities in

dematerialized form with a depository.

IPO Grading

No unlisted company shall make an IPO of equity shares unless the

following conditions are satisfied as on the date of filing of Prospectus with

ROC:

a. the unlisted company has obtained grading for the IPO from at

least one credit rating agency

b. Disclosures of all the grades obtained, along with the rationale/

description furnished by the credit rating agency(ies) for each of

the grades obtained.

Eligibility Norms for IPO

An unlisted company may make an initial public offering (IPO) of equity shares only if :-

• The company has net tangible assets of at least Rs. 3 crores in each of the

preceding 3 full years (of 12 months each), of which not more than 50% is held in

monetary assets.

• The company has a track record of distributable profits in terms of Section 205 of

the Companies Act, 1956, for at least three (3) out of immediately preceding five

(5) years.

• The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full

years (of 12 months each).

• In case the company has changed its name within the last one year, atleast 50% of

the revenue for the preceding 1 full year is earned by the company from the

activity suggested by the new name.

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• The aggregate of the proposed issue and all previous issues made in the same

financial year in terms of size (i.e., offer through offer document + firm allotment

+ promoters’ contribution through the offer document), does not exceed five (5)

times its pre-issue networth as per the audited balance sheet of the last financial

year.

1.4 PROCEDURE FOR IPOS

Fixed Pricing versus True Pricing (Book- Building)

The traditional method of doing IPOs is the fixed price offering. Here, the issuer and the

merchant banker agree on an “issue price”. Then the investor has a choice of filling in an

application form at this price and subscribing to the issue. Extensive research has

revealed that the fixed price offering is a poor way of doing IPOs. Fixed price offerings,

all over the world, suffer from `IPO underpricing'. In India, on average, the fixed-price

seems to be around 50% below the price at first listing; i.e. the issuer obtains 50% lower

issue proceeds as compared to what might have been the case. This average masks a

steady stream of dubious IPOs who get an issue price which is much higher than the price

at first listing. Hence fixed price offerings are weak in two directions:

dubious issues get overpriced and

Good issues get under priced.

1.4.1 BOOK-BUILDING

A mechanism where, during period for which the IPO is open, bids are collected from

investors at various prices which are above or equal to the floor price (the minimum

price). The final price of the share is determined after the bid closing date, based on

certain evaluation criteria.

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The SEBI (Disclosure and Investor Protection) Guidelines, 2000, define the term

`book-building' in a rather complex language as "a process undertaken by which a

demand for the securities proposed to be issued by a body corporate is elicited and built-

up and the price for such securities is assessed for determination of the quantum of such

securities to be issued by means of a notice, circular, advertisement, document or

information memoranda or offer document.''

Book building process is a common practice used in most developed countries for

marketing a public offer of equity shares of a company. However, Book building acts as

scientific as well as flexible price discovery method through which a consensus price of

IPO’s may be determined by the issuer company along with the Book Running Lead

Manager (i.e. merchant banker) on the basis of feedback received from individual

investors as well as most informed investors (who are institutional and corporate

investors like, UTI, LICI, GICI, FIIs, and SFCI etc). The method helps to make a correct

evaluation of a company’s potential and the price of its shares.

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The Book-Building Process (Fig 1.1)

In simple terms, book-building is a mechanism by which the issue price is discovered on

the basis of bids received from syndicate members/brokers and not by the

issuers/merchant bankers.

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ISSUER

BOOK RUNNING LEAD MANAGERS

MUTUAL FUNDS

UNDERWRITERSMERCHANT BANKERS STOCK

BROKERS

I N V E S T O R S

MFs Financial Foreign Financial NRIs Corporations HNIs Retail Investors Institutions Institutions

An Issuer Company can issue capital through book building in following two ways:

75% Book Building process

–

Under this type of public offer, the issue of securities has to be categorized into:

Placement portion category

Net offer to the public

The option of 75% Book Building is available to all body corporate that are otherwise

eligible to make an issue of capital to the public. The securities issued through the book

building process are indicated as 'placement portion category' and securities available to

public are identified as 'net offer to public'. In this option, underwriting is mandatory to

the extent of the net offer to the public. The issue price for the placement portion and

offers to public are required to be same

100% of the net offer to the public through Book Building process - In the 100% of

the net offer to the public, entire issue is made through Book Building process. However,

there can be a reservation or firm allotment to a maximum of 5% of the issue size for the

permanent employees, shareholders of the company or group companies, persons who, on

the date of filing of the draft offer document with the Board, have business association, as

depositors, bondholders and subscribers to services, with the issuer making an initial

public offering.

The number of bidding centres, in case of 75% book building process should not be less

than the number of mandatory collection centres specified by SEBI. In case of 100%

book building process, the bidding centres should be at all the places where the

recognised stock exchanges are situated.

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Book Building Process in India

The steps which are usually followed in the book building process can be summarized

below:

The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.

(2) Initially, the issuer company consults with the BRLM in drawing up a draft

prospectus (i.e. offer document) which does not mention the price of the issues, but

includes other details about the size of the issue, past history of the company, and a price

band. The securities available to the public are separately identified as “net offer to the

public”.

(3) The draft prospectus is filed with SEBI which gives it a legal standing.

(4) A definite period is fixed as the bid period and BRLM conducts awareness

campaigns like advertisement, road shows etc.

(5) The BRLM appoints a syndicate member, a SEBI registered intermediary to

underwrite the issues to the extent of “net offer to the public”.

(6) The BRLM is entitled to remuneration for conducting the Book Building process.

(7) The copy of the draft prospectus may be circulated by the BRLM to the

institutional investors as well as to the syndicate members.

(8) The syndicate members create demand and ask each investor for the number of

shares and the offer price.

(9) The BRLM receives the feedback about the investor’s bids through syndicate

members.

(10) The prospective investors may revise their bids at any time during the bid period.

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(11) The BRLM on receipts of the feedback from the syndicate members about the bid

price and the quantity of shares applied has to build up an order book showing the

demand for the shares of the company at various prices. The syndicate members must

also maintain a record book for orders received from institutional investors for

subscribing to the issue out of the placement portion.

(12) On receipts of the above information, the BRLM and the issuer company determine

the issue price. This is known as the market-clearing price.

(13) The BRLM then closes the book in consultation with the issuer company and

determine the issue size of (a) placement portion and (b) public offer portion.

(14) Once the final price is determined, the allocation of securities should be made by the

BRLM based on prior commitment, investor’s quality, price aggression, earliness of bids

etc. The bid of an institutional bidder, even if he has paid full amount may be rejected

without being assigned any reason as the Book Building portion of institutional investors

is left entirely at the discretion of the issuer company and the BRLM.

(15) The Final prospectus is filed with the registrar of companies within 2 days of

determination of issue price and receipts of acknowledgement card from SEBI.

(16) Two different accounts for collection of application money, one for the private

placement portion and the other for the public subscription should be opened by the

issuer company.

(17) The placement portion is closed a day before the opening of the public issue through

fixed price method. The BRLM is required to have the application forms along with the

application money from the institutional buyers and the underwriters to the private

placement portion.

(18) The allotment for the private placement portion shall be made on the 2nd day from

the closure of the issue and the private placement portion is ready to be listed.

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(19) The allotment and listing of issues under the public portion (i.e. fixed price portion)

must be as per the existing statutory requirements.

(20) Finally, the SEBI has the right to inspect such records and books which are

maintained by the BRLM and other intermediaries involved in the Book Building process

Pricing

Before establishment of SEBI in 1992, the quality of disclosures in the offer documents

was very poor.

The main drawback of free pricing was the process of pricing of issues. The issue price

was determined around 60-70 days before the opening of the issue and the issuer had no

clear idea about the market perception of the price determined.

In Book Building the price is determined on the basis of demand received or at price

above or equal to the floor price.

The Allotment Process through Book-building:

Step1-The Company will 'discover' its price

Earlier, the company determined a fixed price for the stock issue. The issue was marketed

to the general public through advertisements and a media campaign.

Today, companies prefer a book building process. Book building is the process of price

discovery. That means there is no fixed price for the share. Instead, the company issuing

the shares comes up with a price band. The lowest price is referred to as the floor and the

highest, the cap. Bids are then invited for the shares. Each investor states how many

shares s/he wants and what s/he is willing to pay for those shares (depending on the price

band). The actual price is then discovered based on these bids.

Step2-Players of the game

Three classes of investors can bid for the shares:

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• Qualified Institutional Buyers: QIBs include mutual funds and Foreign

Institutional Investors. At least 50% of the shares are reserved for this category.

• Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor.

At least 25% is reserved for this category.

• The balance bids are offered to high networth individuals and employees of the

company.

Individuals who apply for the IPO put in their bids.

The process is transparent. One can check on the issue subscription at the BSE and

NSE Web sites.

After evaluating the bid prices, the company will accept the lowest price that will

allow it to dispose the entire block of shares. That is called the cut-off price.

The process can be illustrated with an example:

Number of shares issued by the company = 100.

Price band = Rs 30 - Rs 40.

If individuals have bid for prices as follows:

Bid Number of

shares

Price per share

1 20 Rs 402 10 Rs 383 20 Rs 374 30 Rs 365 20 Rs 356 20 Rs 337 20 Rs 30

The shares will be sold at the Bid 5 price of 20 shares for Rs 35.

Why?

• Because Bidders 1 to 5 are willing to pay at least Rs 35 per share.

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• The total bids from Bidders 1 to 5 ensure all 100 shares will be sold (20 + 10 + 20

+ 30 + 20).

The cut-off price is therefore Bid 5's price = Rs 35.

Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't get an allotment

because their bids are below the cut-off price.

The bids are first allotted to the different categories and the over-subscription (more

shares applied for than the shares available) in each category is determined.

Retail investors and high networth individuals get allotments on a proportional

basis.

If a retail investor has applied for 200 shares in the issue, and the issue is over-

subscribed five times in the retail category, he qualify to get 40 shares (200

shares/5).

Sometimes, the over-subscription is huge or the issue is priced so high that the

bidder can't really bid for too many shares before the Rs 50,000 limit is reached.

In such cases, allotments are made on the basis of a lottery.

If a retail investor has applied for 5 shares in an issue, and the retail category has

been over-subscribed 10 times, the investor is entitled to half a share.

Since that isn't possible, it may then be decided that every 1 in 2 retail investors will

get allotment. The investors are then selected by lottery and the issue allotted on a

proportional basis among.

ILLUSTRATION EXPLAINING THE PROCEDURE OF ALLOTMENT

1. Total shares on offer@ Rs. 600 per share: 10 crore shares

2. Shares on offer for retail category: 2.5 crore shares

3. The total issue is over subscribed 4 times whereas the retail category is over

subscribed 8.25 times

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4. Issuer decides to fix the minimum application / bid size as 9 shares (falling

within the range of Rs. 5000- 7000). Application can be made for a minimum of 9

shares and in multiples thereof.

Assume three retail investors A, B & C. A has applied for 81 shares. B has applied for 72

shares and C has applied for 45 shares. As per allotment procedure, the allotment to retail

individual investors would be on proportionate basis i.e., at 1/8.25th of the total number of

shares applied for. The actual entitlement shall be as follows:

1.5 Reverse Book Building

Reverse book-building is a mechanism by which companies listed on a stock exchange

can delist their shares. The reasons for delisting may be several and sometimes

intentional.

The reverse book building is an efficient price discovery mechanism of de-listing of

securities, which is provided for capturing the sell orders on online basis from the

shareholders through respective BRLM. In the reverse book-building scenario, the

acquirer or promoter of a company offers to get back shares from the shareholders. It is a

mechanism where, during the period for which the reverse book building is open, offers

Sr.

No.

Name of

Investor

Total Number of

shares applied for

Total number of shares eligible to be allotted

(No. of shares applied for / 8.25)1 A 81 81/8.25 = 9.82 shares rounded off to 10 shares 2 B 72 72/8.25 = 8.73 shares rounded off to 9 shares (i.e.

minimum application size). 3 C 45 shares 45/8.25=5.45 shares.

Application liable to be rejected. (as the

entitlement is less than the minimum application

size). However, the successful applicants out of

the total applicants shall be determined by

drawal of lots.

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are collected at various prices, which are above or equal to the floor price from the share

holders through trading members appointed by the acquirer or promoter of a company.

The reverse book building price (i.e. final price/ exist price) is determined by BRLM in

consultation with the acquirer or promoter of the company after the offer closing date in

accordance with the SEBI (De-listing of Securities) Guidelines, 2003. which desires to

get de-listed, in accordance to book building process. The offer price has a floor price,

which is fixed for de-listing of securities below which no offer can be accepted. The floor

price is the average of 26 weeks traded price quoted on the stock exchange where the

shares of the company are most frequently traded preceding 26 weeks from the date of

public announcement is made. There is no ceiling on the maximum price.

1.6 Buy Back Of Shares

It is a process whereby a company purchases its own shares or other specified securities

from the holders thereof for improving the earnings per share (EPS), or to improve return

on capital or return on net worth and to enhance the long-term shareholder value, among

other things.

OBJECTIVES OF BUY BACK

To increase promoters holding

Increase earning per share

Rationalize the capital structure by writing off capital not represented by available

assets

Support share value

To thwart takeover bid

To pay surplus cash not required by business

COMMENT – It is an interesting fact to note that MNCs are using buyback process as

the best strategy to maintain their share price in a bear run by buying back the shares

from the open market at a premium over the prevailing market price.

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Procedure for Buy Back

Where a company proposes to buy back its shares, it shall, after passing of the

special/Board resolution make a public announcement at least one English

National Daily, one Hindi National daily and Regional Language Daily at the

place where the registered office of the company is situated.

The public announcement shall specify a date, which shall be “specified date” for

the purpose of determining the names of shareholders to whom the letter of offer

has to be sent.

A public notice shall be given containing disclosures as specified in Schedule I of

the SEBI regulations.

A draft letter of offer shall be filed with SEBI through a merchant Banker. The

letter of offer shall then be dispatched to the members of the company.

A copy of the Board resolution authorizing the buy back shall be filed with the

SEBI and stock exchanges.

The date of opening of the offer shall not be earlier than seven days or later than

30 days after the specified date

The buy back offer shall remain open for a period of not less than 15 days and not

more than 30 days.

A company opting for buy back through the public offer or tender offer shall open

an escrow Account.

COMMENT – MNCs are taking advantage of the depressed market conditions to

mop up the shares. There is nothing legally wrong in buying back shares, but it

should be by paying a fair price to minority shareholders.

1.7 Difference between Delisting and Buyback

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De-listing is different from “buy back” of securities in which the securities of a company

are extinguished with consequent reduction of capital of the company. In the case of de-

listing there is no reduction of capital. It is needless to mention that in the case of buy

back securities, the company itself is the acquirer and hence provides the funds for buy

back. In the case of de-listing, the securities are acquired by a person other than the

company and who could be the promoter, majority shareholder or a person in control of

the management and the funds have to be provided by that acquirer.

1.8 ROLE OF VARIOUS INTERMEDIARIES IN IPO

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Intermediary’s help corporations design securities that will be attractive to investors, buy

these securities from the corporations, and then resell them to savers in the primary

markets.

Merchant Bankers/ Lead Manager

Merchant bankers play an important role in issue management process. Lead managers

have to ensure correctness of the information furnished in the offer document. They have

to ensure compliance with SEBI rules and regulations as also Guidelines for Disclosures

and Investor Protection. To this effect, they are required to submit to SEBI a due

diligence certificate confirming that the disclosures made in the draft prospectus or letter

of offer are true, fair and adequate to enable the prospective investors to make a well

informed investment decision. The role of merchant bankers in performing their due

diligence functions has become even more important with the strengthening of disclosure

requirements and with SEBI giving up the vetting of prospectuses. Their functions are:

To act as intermediaries between the company seeking to raise money and the

investors. They must possess a valid registration from SEBI enabling them to do

this job.

They are responsible for complying with the formalities of an issue, like drawing

up the prospectus and marketing the issue.

If it is a book building process, the lead manager is also in charge of it. In such a

case, they are also called Book Running Lead Managers.

Post issue activities, like intimation of allotments and refunds, are their

responsibility as well.

Underwriters

Underwriters are required to register with SEBI in terms of the SEBI (Underwriters)

Rules and Regulations, 1993. In addition to underwriters registered with SEBI in terms of

these regulations, all registered merchant bankers in categories I, II and III and

stockbrokers and mutual funds registered with SEBI can function as underwriters. Part III

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gives further details of registration of underwriters. In 1996-97, the SEBI (Underwriters)

Regulations, 1993 were amended mainly pertaining to some procedural matters.

Bankers to an Issue

Scheduled banks acting as bankers to an issue are required to be registered with SEBI in

terms of the SEBI (Bankers to the Issue) Rules and Regulations, 1994. These regulations

lay down eligibility criteria for bankers to an issue and require registrants to meet

periodic reporting requirements. Part III gives further details of registration of bankers to

an issue.

Portfolio managers

Portfolio managers are required to register with SEBI in terms of the SEBI (Portfolio

Managers) Rules and Regulations, 1993. The registered portfolio managers exclusively

carry on portfolio management activities. In addition all merchant bankers in categories I

and II can act as portfolio managers with prior permission from SEBI. Part III gives

further details of the registration of portfolio managers.

Registrars to an Issue and Share Transfer Agents

Registrars to an issue (RTI) and share transfer agents (STA) are registered with SEBI in

terms of the SEBI (Registrar to the Issue and Share Transfer Agent) Rules and

Regulations, 1993. Under these regulations, registration commenced in 1993-94 and is

granted under two categories: category I - to act as both registrar to the issue and share

transfer agent and category II - to act as either registrar to an issue or share transfer agent.

With the setting up of the depository and the expansion of the network of depositories,

the traditional work of registrars is likely to undergo a change.

1.9 IPO Grading

27

IPO grading (initial public offering grading) is a service aimed at facilitating the

assessment of equity issues offered to public. The grade assigned to any individual issue

represents a relative assessment of the ‘fundamentals’ of that issue in relation to the other

listed equity securities in India. IPO grading is positioned as a service that provides ‘an

independent assessment of fundamentals’ to aid comparative assessment that would

prove useful as an information and investment tool for investors. Moreover, such a

service would be particularly useful for assessing the offerings of companies accessing

the equity markets for the first time where there is no track record of their market

performance.

IPO grade assigned to any issue represents a relative assessment of the ‘fundamentals’ of

that issue in relation to the universe of other listed equity securities in India. This grading

can be used by the investor as tool to make investment decision. The IPO grading will

help the investor better appreciate the meaning of the disclosures in the issue documents

to the extent that they affect the issue’s fundamentals. Thus, IPO grading is an additional

investor information and investment guidance tool.

Credit Rating agencies (CRAs) like ICRA, CRISIL, CARE and Fitch Ratings who are

registered with SEBI will carry out IPO grading. SEBI does not play any role in the

assessment made by the grading agency. The grading is intended to be an independent

and unbiased opinion of that agency. IPO grading is not mandatory but is optional and the

assigned grade would be a one time assessment done at the time of the IPO and meant to

aid investors who are interested in investing in the IPO. The grade will not have any

ongoing validity.

SEBI GUIDELINES ON IPO GRADING

No unlisted company shall make an IPO of equity shares or any other security

which may be converted into or exchanged with equity shares at a later date,

unless the following conditions are satisfied as on the date of filing of Prospectus

(in case of fixed price issue) or Red Herring Prospectus (in case of book built

issue) with ROC:

28

• The unlisted company has obtained grading for the IPO from at least one

credit rating agency;

• Disclosures of all the grades obtained, along with the rationale/description

furnished by the credit rating agency(ies) for each of the grades obtained,

have been made in the Prospectus (in case of fixed price issue) or Red

Herring Prospectus (in case of book built issue); and

• The expenses incurred for grading IPO have been borne by the unlisted

company obtaining grading for IPO.

Most of the market analysts have welcomed this move of SEBI as it will help the

investors in a volatile market to know whether the merchant banker has carried the

exercise in determining the price of an issue in a proper manner or not. It will also help

the investors in knowing whether the price of the issue is justified or not. They even said

that management of a good company will never get afraid of getting graded of their IPOs

if they are good. The only demerit of this step by the SEBI as said by many experts is that

there will be a slowdown in the number of IPOs coming out as grading will be a bit

lengthy process and there will be a cost-factor attached to it also.

FEATURES OF IPO GRADING

IPO grading covers both internal and external aspects of a company seeking to make an

IPO in general. The internal factors include competence and effectiveness of the

management, profile of promoters, marketing strategies, size and growth of revenues,

competitive edge, technology, operating efficiency, liquidity and financial flexibility,

asset quality, accounting quality, profitability and hedging of risks. Among external

factors, the key one is the industry and economic/business environment for the issuer.

Here, it is important to note that internationally, the global rating agencies such as

Standard & Poors and Moodys do not perform grading of IPOs at all. While Standard &

Poors is the majority stakeholder in CRISIL Ltd, Moodys is the single biggest

stakeholder in ICRA Ltd. Similarly, the third global player Fitch IBCA (which acquired

another rating agency Dun & Bradstreet in 2000) also does not grade IPOs as yet. The

29

IPO grading is indicated on a five point scale and a higher score indicating stronger

fundamentals.

An IPO grading Scale

IPO grade Assessment

5/5 Strong fundamentals

4/5 Above average fundamentals

3/5 Average fundamentals

2/5 Below average fundamentals

1/5 Poor fundamentals

30

Data-flow diagram showing the entire IPO-grading

procedure

This process will ideally require 2-3 weeks for completion, so it may be a good idea for

companies to initiate the grading process about 6-8 weeks before the targeted IPO date to

provide sufficient time for any contingencies.

31

Cost Involved In IPO Grading

Though nothing has been declared officially but most of the credit rating has said that

IPO-grading would not cost much to the issuers. They would be charging 10 basis points

of the amount to be raised with a ceiling of about Rs 10-15 lakhs. Thus, even in the case

of a mega IPO, there would be a cap on fees, he noted. Around 100 IPOs hit the market

on an average every year. However, despite this seemingly big number, the total receipts

for the entire rating industry on account of grading fees would be only about Rs 10-15

crore.

Benefits of IPO Grading

There are various positive sides of an IPO grading. The most significant factors that go in

favor of IPO grading are:

(a) Professional and Independent Appraisal: IPO grading will create awareness about

the fundamentals of the company’s IPO and will provide focused company information

as a key input to prospective investors that will be helpful in taking an investment

decision, in a manner similar to what a credit rating is for debt investors.

(b) Removal of Information Burden: Where disclosures of issues are large and

complex, a service analyzing and interpreting these disclosures independently and

quickly will be extremely useful in cutting through the clutter. Thus, the usefulness of

IPO grading would be particularly high for small investors as it will serve as a guide

about the company coming out with the issue.

(c) Impediment for Weak Companies: While fundamentally sound companies will gain

from the market, companies whose fundamentals are not very strong will be impeded in

building up speculative demand among investors. Such weak companies will need to

offer pricing, which will adequately compensate investors for the risks they take.

Therefore, IPO grading provides disincentives for weak companies planning to come to

the market to raise easy capital.

32

(d) Improved Investors’ Sophistication: It is perceived that an independent and

informed opinion on the fundamental quality of the company will bring about greater

level of investor sophistication in a scientific manner. In fact, investors may take

investment decisions in a better way on the basis of opinion of CRAs regarding IPO

grading. However, the assessment is not a recommendation to buy or not buy a stock. It

is, instead, a powerful tool to assist the investors in making up their mind about the

quality of a company proposing to offer an IPO investment option.

33

CHAPTER 2

REVIEW OF LITERATURE

34

2 LITERATURE REVIEW

The literature review on IPOs can be divided in the following main heads-

a) Reason and timing of going public

Going public marks a watershed in the life cycle of the firm. While increased

equity can support the firm’s future plans of growth, the trade off for the firm is that of

increased public scrutiny.

• Brealy and Myers (2005) state that in the context of USA the firms may seek

private equity in their initial years and only later go for public issues.

• Pagano, Panetta and Zingales (1998) in their study of Italian firms, find that

firms going public are not seeking money for growth but are rebalancing their

accounts after high investment and growth.

• Lerner (1994) found that there are times (windows of opportunity) when the

markets could be extremely optimistic about a particular industry and it may be a

good time for the firms in that industry to go public.

The post IPO period sees a reduction in leverage as well as investment. They state that

going public is a conscious choice that some firms make while some others prefer to

remain private. Thus going public is not a natural element in the life cycle of a firm.

b) Valuation of IPOs

• Benveniste and Spindt (1989) find that under writers try to resolve the

information asymmetry problem between the firm and the investors by providing

an incentive to the investors to reveal their private information about the firm.

• Kim and Ritter (1999) in their study of 190 firms find that under writers forecast

the next years earnings numbers and multiply them with PE ratios of comparable

35

firms in the industry to get the approximate price of the IPO. However they also

found that PE ratios using historical earnings numbers do not give accurate results

whereas when forecasted earnings numbers are used then the valuation is much

more accurate.

• Purnanandam and Swaminathan (2002) say that IPOs are priced 50% higher

than industry peers. Also they find that more the IPO is overpriced with respect to

its peers, worse is its long term performance.

c) Allocation mechanism

The allocation mechanisms are specified by the regulators in

different countries. Loughran, Ritter and Rydqvist (1994) find 3 main categories across

countries-Auctions, Fixed price offers and Book Building. Sherman (2005) finds that

Book building is a superior mechanism for selling IPOs rather than auctions.

36

CHAPTER 3


37


1. Descriptive Research

Descriptive research is used to obtain information concerning the current status of the

phenomena to describe “what exists” with respect to variables or conditions in a situation.

Descriptive research, also known as statistical research, describes data and characteristics

about the population or phenomenon being studied. Descriptive research answers the

questions who, what, where, when and how. Although the data description is factual,

accurate and systematic, the research cannot describe what caused a situation

2. Analytical Research

Analytical research takes descriptive research one stage further by seeking to explain

the reasons behind a particular occurrence by discovering causal relationships. Once

causal relationships have been discovered, the search then shifts to factors that can be

changed (variables) in order to influence the chain of causality.

38

3.1.1 OBJECTIVE OF THE STUDY

Main Objective:

An attempt has been made to analyze the various IPOs and recommend others to

invest in good initial public offerings after thorough research of financial

statements of the companies.

Sub objectives:

To understand various dimensions and problems in IPO process and to suggest

recommendations.

To understand post IPO performance.

To analyze financial position of Companies as depicted in its Annual report as it

serve an important basis for investors to judge company performance and future

prospects.

39

3.1.2 DATA COLLECTION

Secondary data has been collected. This kind of data has been previously collected. This

is the kind of data that should always be collected first. I have taken this data from

different web sites and newspapers.

40

CHAPTER 44.1 ANALYSIS AND INTERPRETATION

41

KIRI DYES AND CHEMICALS LTD

Issue DetailsIssue Opens March 25.2008Issue Closes April 02,2008Price Band Rs. 125-150Face Value Rs. 10Issue Size 3,750,000 sharesListing NSE, BSEQIBs 1,875,000 sharesNon Institutional 5,62,500 shares

Retail 1,312,500 shares

Company Background

Incorporated in 1998, Kiri Dyes and Chemicals Limited is engaged in the business of

manufacturing of reactive dyes which are called synthetic organic dyes used for cotton

fabrics like garments, dress materials, bed-sheets, carpets etc. The dyes are of basically

colours like black, blue, and red, orange, yellow and numerous variants of these basic

colours identified by color index number internationally. The product range of company

caters to textiles, leather, and paint and printing-ink industries with total production

capacity of 10800 MTPA.

With plans for further backward integration, the IPO is to fund capital expenditure to set

up a plant to manufacture sulphuric acid, oleum and chloro sulphonic acid, with a

combined capacity of 1, 80,000 tonnes, and a dyes and intermediates unit. A 2.9-MW

power plant that can run from the steam generated by the sulphuric acid plant is also on

the anvil. The electricity generated will be sufficient not only to run the sulphuric acid

plant but also the intermediate plants of VS and H-Acid.

42

Following the expansion, the capacity to manufacture sulphuric acid will be 1, 00,000

tonnes, oleum 43,200 tonnes and chlorosulphonoic acid 36,000. The plant to manufacture

sulphuric acid and its sub-products is to be completed by December 2008. Around 25%

of the capacity of sulphuric acid, oleum and chlorosulphonic acid will be used to produce

dye-intermediates: H-Acid and V.S. The remaining produce will be marketed directly to

bulk end-users in the detergent and chemical industry and other large consumers.

The capacity to produce dyestuff will be increased 3,000 tonnes to 15,000 tonnes by the

fiscal ending March 2010 (FY 2010). The capacity to manufacture dyes intermediates VS

will become 4,200 tonnes in FY 2009 and then further increase to 4,800 tonnes in FY

2010. The capacity to produce H-acid will increase to 4,200 tonnes in FY 2010.

The Industry produces a wide spectrum of products, which include Pharmaceuticals,

Dyes, Man-made Fibers, Plastics, Pesticides, Fertilizers, Cosmetics and Toiletries, Paint,

Auxiliary Chemicals and wide range of organic and Inorganic compounds for

applications ranging from automobiles, textile industry, engineering industry,

construction chemicals and food additives to veterinary and health care products.

The company is engaged in the business of manufacturing and marketing of:

1. Reactive Dyes – Synthetic Organic Dyes (S. O. Dyes)

2. Dyes Intermediate: Vinyl Sulphone

3. Dyes Intermediate: H-Acid

Purpose of the Issue:

43

1.To fund the capital expenditure for setting up of a plant to manufacture Sulphuric Acid,

Oleum and Chloro Sulphonic Acid with a combined capacity of 500 M.T. per day

adjacent to its existing unit at Village Dudhwada, Taluka Padra, District Vadodara;

2. To fund the capital expenditure for Dyes and Intermediates Unit located at GIDC,

Vatva, Ahmedabad;

3. To fund the additional working capital margin;

4. To meet Issue expenses;

5. To meet expenses of the Issue in order to achieve the benefits of listing on the Stock

Exchanges.

Strengths:

1. OPM has increased from 7.9% in FY 06 to 10.7% in FY 07. For half year ended

September 2007, OPM stands at 15%.

2. KDCL’s source of revenue is well diversified. Therefore, the company’s revenue will

not be majorly affected if any of the markets slow down.

3. KDCL’s source of revenue is well diversified. Therefore, the company’s revenue will

not be majorly affected if any of the markets slow down.

4. Stringent environmental laws in the western countries have led to discontinuance of

production of certain dyes for textiles and leather. This has led to shift in manufacturing

capacity from the US and the European Union to South East Asia. Climatic conditions in

India are favorable for the manufacture of such products. Also, the new usage of

dyestuffs in electronic, high-tech printing, and bio medical applications augurs well for

the high-valued dyestuff products.

5. Backward integration and JV with global giants will help to save cost and strengthen

research and development facility.

Weaknesses:

44

1. Operates in a highly competitive and unorganised business environment with many big

and small players exporting and manufacturing dye and dyestuff. The increased

competitive pressure may adversely affect margin.

2. Had negative cash flows of Rs. 4.88 crore and Rs.9.42 crore from operating income in

FY 2007 and FY 2006.

3. Currently paying MAT (minimum alternate tax) on account of benefits of exemption

received under Section 10 B of the Income-Tax Act, 1961, as it is a 100% export-oriented

unit (EOU). This status will expire in March 2010. The withdrawal of tax incentives

would increase the tax liability and adversely impact profitability.

4. The debt-equity ratio of the company increased from 1.10 times in FY 05 to 1.76 times

in FY 07 due to increase in the long term debt taken by the company from Rs. 19.64 crore

in FY 05 to Rs. 59.67 crore in FY 07.

Fundamental Analysis

The booming Indian Economy has had a favorable impact on the business of the

company for the year 2006-07.The growth in the economy as well as manufacturing

sector has thrown up substantial opportunities in the company’s core sector of operation

such as Manufacturing Dyes and Intermediates, which has helped the company perform

well during the year 2006-07.

Opportunities

• The company is one of the leading players in the manufacturing and exports of

Dyes in India in terms of revenue and profits.

45

• The company also got expertise in Domestic and International trading of its

products.

• It provides all the technical services of its products as well as all application

information to improve customization of its products.

Threats

• Frequent and unexpected changes in the EXIM Policies

• Entry of new competitors in the same line of activities.

Ratio Analysis

As on 31-Mar-07 31-Mar-06 31-Mar-05

OPBIT/Prod.cap.empl.(%) 15.25 11.52 14.84

PBIT/Cap. Employed (%) 15.13 11.50 14.88

PAT/Networth (%) 25.49 18.02 17.45

Tax/PBT (%) 4.27 5.93 4.74

Total Debt/Networth (x) 1.76 1.45 1.10

Long Term Debt/Networth (x) 0.44 0.23 0.04

PBDIT/Finance Charges (x) 3.00 3.39 2.61

Current Ratio (x) 4.75 4.90 2.78

RM Inventory (days consumption) 0.00 0.00 0.00

FG inventory (days cost of sales) 0.00 0.00 0.00

Receivables (days gross sales) 88.69 109.90 101.98

Creditors (days cost of sales) 0.00 0.00 0.00

Op. curr. assets (days OI) 195.00 209.00 223.00

• The ideal current ratio is 2:1.but the current ration of both the years exceeds the

ideal ratio which indicates that funds are not used efficiently and lying idle.

46

• An ideal debt equity ratio is 2:1.but the debt equity ratio of both the years is low

which implies the use of more equity than debt, which means a larger safety

margin for creditors since owners equity is considered as a margin of safety by

creditors and vice-versa.

• Inventory is one area where management has achieved constant success. It has

tried to reduce operating cycle of the division for which it was imperative to

reduce the inventory storage periods consisting of the three components --- raw

material, work in progress, and finished goods. The inventory turnover ratio has

increased from previous year from 9.517 times to 13.766 times. A very high

inventory turnover indicates that overtrading and it may leads to shortage of the

working capital.

• The ideal quick ratio is 1:1. But the quick ratio of both the years i.e. 3.296 times

and 2.878 times exceeds the ideal ratio. Higher quick ratio means excessive

amount of liquid assets have been invested.

• Fixed Assets Turnover ratio has decreased from 4.9399 times to 3.1603 times so

it is not a good sign, it indicates that fixed assets remained idle and therefore, the

management should investigate and determine the reasons for the decline.

• Return on investment of kiri dyes first decreases in year 2006-07 but then slightly

increase in year 2007-08.The reason for such a low return is that more than half of

the total capital employed used in calculating return on capital hardly yield any

return.

Company Analysis

• Kiri Dyes & Chemicals Ltd. (KDCL) was incorporated as a private limited

company in May 1998 and was converted into a public ltd co. in May 2006.

• KDCL is engaged in the business of manufacturing and marketing of:

1. Reactive Dyes- Synthetic Organic Dyes (S.O. Dyes)

47

2. Dye Intermediates- Vinyl Sulphone and H-Acid

• KDCL’s production hub is centrally located in Gujarat. S.O. Dyes are

manufactured and processed in three plants located in Vatva, Ahmedabad and dye

intermediates are being produced at Padra plant in Vadodara.

• The installed capacity for dyestuff (S.O. Dyes) was 10,800 MT per annum with

capacity utilization of 77.37% in FY 07.

• The installed capacity for dye intermediates (Vinyl Sulphone and H-Acid) was

3,600 MT per annum each with capacity utilization of 42.94% and 4.17%

respectively in FY 07.

• KDCL’s product range comprises of more than 120 dyestuffs used by textiles,

leather, and paint and printing-ink industries.

• KDCL supplies reactive, acid, and direct dyes as well as dye-intermediates in

various forms like standardized spray dried/tray dried - powder/granular, crude

and reverse osmosis.

• KDCL has seen increase in the % share of the domestic market from 0.80% in FY

03 to 33.55% in FY 07. For half year ended September 2007, the same has

increased nearly to 49%.

• KDCL’s major chunk of export revenue comes from Turkey (18%) and Korea

(18%) followed by Bangladesh (17%), USA (15%), Taiwan (7%) and Indonesia

(6%).

• Some of KDCL’s top customers includes both Indian and global companies such

as, Dystar (India) Pvt ltd (India), Kyungin Synthetic Corporation (Korea), Sen Er

Boya Kimya (Turkey), Biddle Sawyer Corporation (USA), Befuwell Enterprise

Co Ltd (Taiwan) and Shangyu Yide Chemical Co. Ltd (China).

• On November 1, 2007, KDCL entered into the Memorandum of Understanding

with M/s. Zhejiang Lonsen Group Stock Co. Ltd. with the objective to establish a

joint venture manufacturing facility in India for the production of reactive dyes.

• Post issue promoter and promoter group shareholding will reduce from 88.76% to

66.57%.

48

Valuation of IPO

• Kiri Dyes and Chemicals ltd earning per share (EPS) works out to be 8.91.

• Post issue EPS is Rs 11.87 (based on PAT of year ending on March 31st, 2008).

• Post issue PE at upper price band is 12.64 and at the lower price band is

10.53.The shares have been offered at a price band of Rs. 125/- to Rs. 150/- per

share.

• It is clearly shown from the table given above that P/E ratio of KDCL is quite

high. Even the P/BV of KDCL is on the higher side in comparison to its peers.

The company has shown a good top line, but there are other listed companies

whose top line is far better than that of KDCL and they are available at relatively

cheaper P/E multiple than KDCL.

• On the other hand the company has registered negative cashflows from its

operating activities of Rs 94.20 million and Rs 48.87 million during FY06 and

FY07.

• Another major drawback is the industry in which the company operates as it is

highly competitive and there are several unorganized players. This has led to

49

lower margins enjoyed by the players which in turn have affected the profitability

of the companies in this sector.

• Hence it is recommended to “AVOID” to the Issue.

RECOMMENDATION OF KIRI DYES AND

CHEMICALS LTD IPO

50

Industry: Chemicals Industry

Price Band: Rs. 125-150

Recommendation: Avoid

TITAGARH WAGONS LTD.

Issue Details

51

Issue Opens March 24.2008Issue Closes March 27,2008Price Band Rs. 540-610Face Value Rs. 10Issue Size 4,063,158 sharesListing NSE, BSE

Company Background

Incorporated in 1997, Titagarh Wagons Limited is one of the leading private sector

wagon manufacturers in India. It is in the business of manufacturing railway wagons,

Bailey bridges, Heavy Earth Moving and Mining equipment, steel and SG iron castings

of moderate to complex configuration etc.

They also manufacture other products for the Indian defence establishment, such as

special purpose wagons, shelters and other engineering equipments. They had

approximately 16.9% market share in the wagon manufacturing segment in Fiscal 2006,

which has further increased to approximately 22.1% in Fiscal 2007.

Titagarh Wagons Limited is the only private sector company registered with the Ministry

of Defence, Government of India to manufacture Bailey bridges and other related

accessories in India. Titagarh Wagons Limited aspires to be a leader as a manufacturer of

heavy engineering equipment and a world-class service provider for the infrastructure

sector. They operate two manufacturing facilities located at Titagarh and Uttarpara, in

West Bengal.

Titagarh Wagons Limited operates two manufacturing facilities located at Titagarh and

Uttarpara, in West Bengal. The Uttarpara unit functions as its second manufacturing plant

for wagons, in addition to manufacturing heavy earth moving and mining equipment. As

an “Industry Partner” to the Defence Research and Development Organisation, Ministry

of Defence (“DRDO”), the Company also manufactures other products for the Indian

Defence establishment, such as special purpose wagons, shelters and other engineering

equipments. The Company is structured along three broad business lines: a) wagon

52

manufacturing division, b) special projects division (includes defence, bailey bridges and

other fabricated equipment) and c) heavy earth moving and mining equipment division

Purpose of the Issue

The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to

raise capital to:

1. Set up an EMU manufacturing facility at our Uttarpara unit;

2. Modernize and expand our existing facilities at our Titagarh and Uttarpara units;

3. set up an axle machining and wheel set assembly facility at our Uttarpara unit;

4. Construct a corporate office and a design cum research and development office;

5. Strategic acquisition or investments;

6. Brand building exercise;

7. General corporate purposes.

Strengths

1.On the financial front, TWL‘s performance has been impressive with net sales

registering a CAGR growth of over 60% and net profits up at a CAGR of close to 65%

during 2005-07. The net profit margins (% of net sales) increased from 9% in FY 2005 to

12.50% for the half year ended 30th September, 2007. The current size of the order-book

53

as on 31st January 2008 stood at Rs 7531.13 million which translates into 2.65 times FY

2007 revenues thus rendering good growth visibility for future.

2. It receives 20-30% of the basic value of contract in advance, which is reflected in

higher current liabilities thereby decreasing the requirement of working capital, again,

reflected by lower interest cost as a percentage of sales, thereby positively affecting the

profitability of the company.

3. The company is isolated against the risk of increasing steel prices as orders placed by

Indian Railways usually include free supply of materials of high value such as steel,

bogies and wheel sets. Moreover, the company has a price-escalation for its orders,

thereby isolating it from increasing pressure on the margins incase of rise in its raw-

materials or labor expenses.

4. Entry of competitors into the sector is restricted due to higher entry barrier on account

of qualification and pre-qualification criteria for manufactures and huge capital

expenditure requirement.

5. The Indian Railways in anticipation of strong freight traffic is expected to place order

for procurement of 20,000 wagons for the year and plans to introduce steel coaches in

trains from 2010. This could be expected to lead to further swelling of the company’s

order-book thereby enhancing its bottom-line.

Weaknesses

• The company is greatly dependent on its suppliers for critical components such as

wheel sets which also constitute 35% of the sales price of wagons manufacture for

Non-Indian Railway clients.

54

• TWL has proposed an investment of Rs 350 million Cimmco Birla, a loss making

company under the BIFR scheme, which is subject to necessary approvals from

BIFR. The ability to successfully turn around the company still remains a

challenge and can adversely impact the performance of TWL.

• Another negative for the company is the low capacity utilization as it stood of

45% and 20% for wagons and steel bridges in FY07 respectively.

• The average collection period has increased to 46 days in FY07 from 30 days in

FY06.


• India railway budget 2008-09 planned to manufacture 20,000 wagons, which

would be the highest level of wagon productions so far.

• Movement of cargo via rail account for approximately 30% of the total cargo

transported in volume terms and 11% in value terms.

• The freight loading expected for FY 2008 has been pegged at 785 million

tonnes, and by the terminal year of the 11th Five Year Plan, the Railways

are targeting a freight loading of 1,100 million tonnes

Ratio Analysis

55

As on 31-Mar-07 31-Mar-06 31-Mar-05



PAT/Networth (%) 27.66 18.76 49.57

Tax/PBT (%) 38.29 33.39 28.66










• The ideal current ratio is 2:1 and the current ratio of the year 06-07 has improved

as compared to previous year which indicates that the funds are utilized

efficiently.





56

• The ideal quick ratio is 1:1. But the quick ratio of both the years slightly increases

than the ideal ratio. Higher quick ratio means excessive amount of liquid assets

have been invested.

• Fixed Assets Turnover ratio has increased from 4.34 times to 9.35 times so it is a

good sign for the company.

• Gross profit has increased which is plus point for the company. This ratio should

be adequate to cover the administrative and marketing expenses and to provide for

fixed charges, dividends and building up reserves.

Valuation of IPO

• Titagarh Wagon limited earning per share on post-IPO fully diluted equity

works out to be Rs 28.23.

• At the offer price band of Rs 540 – Rs 610, the IPO is available at 19.13 at the

lower price band and 21.61 at the upper price band to its FY08 annualized

post-issue EPS.

• The comparable listed peer for the company is Texmaco Ltd., which is now

ruling at Rs.1, 300. Texmaco is likely to have a topline of Rs.700 crore, with

PAT of Rs.55 crores, translating into an expected EPS of Rs.55 for FY 08, on

an equity of Rs.10.44 crores. Book value per share of Texmaco is likely to be

Rs.200 as at 31-03-08. This means share is presently ruling at a PE of 24 for

Texmaco.

• While comparing Titagarh with Texmaco, its book value post issue, would be

close to Rs.200, if shares are issued at Rs.610 per share. The same would be at

Rs.192, if shares are issued at Rs.540. Considering an expected EPS of Rs.31

for FY 08, share at the upper band is issued at a PE multiple of close to 20.

Even post issue stake of promoters at 49% is close to 53% of Texmaco. FII

stake of 38% in pre-issue instills confidence.

57

• Share at lower band of Rs.540 is quite attractive and at the upper band of

Rs.610 also, leaves room for gain, as FY 09 performance of the company

would be quite good.

Hence it is recommended to subscribe to the issue.

RECOMMENDATION OF TITAGARH WAGON LTD IPO

58

Industry: Wagon Manufacturer


Recommendation: Subscribe

GAMMON INFRASTRUCTURE PROJECTS

59

Issue DetailsIssue Opens March 10.2008Issue Closes March 13,2008Price Band Rs. 167-200Face Value Rs. 10Issue Size 16,550,000sharesListing NSE, BSE

Company Background

Incorporated in 2001, Gammon Infrastructure Projects Limited ('GIPL') is an

infrastructure project development company promoted by Gammon India Limited, to

participate in the development of infrastructure projects on a public private partnership

("PPP") basis. GIPL is among the first company in India to be modeled as an

infrastructure developer holding company with investments spread across various sectors.

GIPL currently undertake and development of infrastructure projects on PPP basis across

sectors such as Roads & Expressways, Ports, Hydro Power, Urban infrastructure,

Airports, Special Economic Zones, Water and Wastewater management, Railways,

Power Transmission lines, and Agricultural Infrastructure.

GIPL is present in the following areas of Infrastructure development:

• Project Development

• Project Advisory

• Sector Specific Operations & Maintenance

Currently infrastructure project development business includes thirteen projects, of which

four are already in the operations phase, five are in the development phase and four are in

the pre-development phase.


The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to

raise capital:

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• To contribute to a part of the investment required by KBICL, subsidiary formed

for design, construction, finance & maintenance of 1.8 kilometer long four-lane

bridge across river Kosi;

• To contribute to a part of the investment required by GICL, subsidiary formed for

design, construction, finance & maintenance of 32 kilometer long four-lane

bypass to Gorakhpur town on NH-28 in the state of Uttar Pradesh;

• To contribute to a part of the investment required by SHPVL, subsidiary formed

for developing the Rangit-II hydroelectric power project in the state of Sikkim;

• Infusion of funds into MNEL, subsidiary formed for the four-laning of the 99.5

kilometers Vadape-Gonde section (between Mumbai and Nasik)

• Meet general corporate purposes;

• Meet expenses of the Issue in order to achieve the benefits of listing on the Stock

Exchanges.

Strengths

• Operational BOT projects are a balanced mix providing assured return projects

(annuity projects) and capturing market upside, i.e., traffic (toll projects). Of the

three operational road projects, two are annuity projects providing assured return.

The New Mattencherry bridge project in Cochin is a toll-cum-annuity-based

project with the toll fully linked to the wholesale price index. Of the three road

projects under development, two are annuity projects and one is a toll project.

• With GIL, a leading construction company, as parent, has strong project execution

capability with a timeline that can be counted/ leveraged on bidding. Has

completed two of its BOT projects in Andhra Pradesh well ahead of schedule and

earned a bonus of around Rs 16 crore from the National Highway Authority of

India for early completion.

Weaknesses

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• Two multipurpose berths developed by Vizag Seaport (VSPL) have long-term

take or pay clause with Sail covering the entire concession period. However, as

Vizag Port is a major port covered under the Major Port Act, there is only limited

freedom for fixing tariff as the Tariff Authority for Major Ports (TAMP) caps the

tariff for private operators. Similarly, the offshore container berth and terminal

project and Ballard Pier Container Terminal will also come under TAMP, leaving

little pricing freedom for port operations. VSPL is in the red, with a loss of Rs

5.84 crore in the half year ended September 2007 and Rs 15.06 crore in the fiscal

ended March 2007.

• Though has the backing of a strong parent with long operational experience in the

construction sector, the group has little experience in development and operation

of power projects. Also, the long gestation of hydel-power projects with attendant

issues ranging from rehabilitation, acquisition of forest land, and other

environment factors are also a concern. Further, due to intense competition, the

ability to win bids in consortium in verticals such as Mass Rapid Transit System

(MRTS) and airports remains to be seen.

• The Securities and Exchange Board of India (Sebi) conducted an investigation

into certain alleged irregularities in the rights issue of GIL in 2001. It was alleged

funds of promoter GIL were used by Chairman and Managing Director Abhijit

Rajan, the promoter of GIL, for subscription to the rights issue. Based on the

findings, Sebi passed an order prohibiting GIL and Abhijit Rajan along with two

other companies controlled by Rajan from accessing the capital markets directly

or indirectly. As a result, this IPO has already suffered a delay of over a year.

• The Mumbai offshore container berth and terminal project and biomass project in

Patiala and the cogeneration power project in Maharashtra are yet to achieve

financial closure. Similarly, SHPVL has not achieved financial closure. The

deadline for achieving financial closure has expired and this could land the project

in rough weather as the government of Sikkim or any other nodal agency has the

option to terminate the agreement.

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• As GIL is the parent company and the construction contracts of the SPVs are

handled by GIL, the collapse of a flyover constructed by GIL in Hyderabad in

September 2007 has the potential to damage credibility during future biding.


Industry

Rising Demand for steel pipes is expected to be higher in the medium term on account of

increased exploration activities and thrust on setting up infrastructure to transport oil and

gas. In India, rapid economic growth faces an urgent need to develop and improve water

supply, which would also increase demand for SAW pipes. Depleting oil reserves have

led to increased exploration efforts, resulting in more wells in the exploratory rig.

Demand for seamless pipes is directly proportional to the increase in digging of wells

which is also expected to remain high.

India is expected to see a spurt in construction of pipeline infrastructure as the country’s

spending on exploration and production (E&P) and gas related pipeline capex increases.

It is expected that water and irrigation offer a very strong business opportunity in India,

which will benefit Indian HSAW, ERW and DI pipe manufacturers, in addition to the

opportunity from the energy sector.

Company

The Company follows a multi-product approach to pipes - offering a full product

portfolio of LSAW (longitudinal submerged are welded), HSAW (helical submerged are

welded), seamless, DI pipes, anti-corrosion coatings, connector casings and Hot reduction

Bends. Its product portfolio allows it to comfortably straddle between value-driven

products (DI and seamless pipes, which are high-margin segments) and volume-driven

ones (SAW pipe business).

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Besides LSAW and HSAW, It is increasing its focus on the water infrastructure sector in

India. Your Company is currently one of the very few pipe manufacturers capable of

offering a complete pipe solution to the water sector (ie, spiral pipes, ductile pipes and

accessories). The DI pipe business gives your Company an opportunity to take advantage

of the strong domestic capital expenditure cycle seen in the water transportation segment

in India. A combination of increasing government focus to build water infrastructure and

rising support from multilateral agencies (such as the World Bank and the Asian

Development Bank) is likely to result in a strong demand for the DI pipes. Your

Company is implementing capacity expansion in all the three key segments with

expectation and targets for overall margin expansions.

RATIO ANALYSIS\

As on 31-Mar-07 31-Mar-06 31-Dec-04



PAT/Networth (%) 3.94 1.41 2.76

Tax/PBT (%) 27.45 45.34 46.49










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• The ideal current ratio is 2:1 and the current ratio of both the years exceeds the

ideal ratio which indicates that the funds are not utilized efficiently.

• Inventory is one area where management has achieved constant success. It has

tried to reduce operating cycle of the division for which it was imperative to

reduce the inventory storage periods consisting of the three components --- raw

material, work in progress, and finished goods. The inventory turnover ratio is

very high i.e70.2 which indicates overtrading and it may lead to working capital

shortage.

• The ideal quick ratio is 1:1. But the quick ratio of both the years increases than

the ideal ratio. Higher quick ratio means excessive amount of liquid assets have

been invested.

• Fixed Assets Turnover ratio has very low in the year 2007-08 i.e. 0.74 which

indicates that fixed assets remained idle and therefore management should

investigate and determine the reason for decline.

• Gross profit has increased which is plus point for the company. This ratio should

be adequate to cover the administrative and marketing expenses and to provide for

fixed charges, dividends and building up reserves.

• Similarly net profit ratio also increases which is a good sign for the company.

Valuation of IPO

• In Gammon Infrastructure projects one fails to understand the logic of valuing the

company at an expected market capitalization of Rs 2,500 crore even at the lower

price band of Rs 167 per share and at Rs 2900 crore at the upper price band of Rs

200 per share. This is despite the fact that the books of the company show a debt

of Rs 700 crore on completed projects and would be assuming a debt of Rs 1,886

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crore for two road projects of 132 kms, one 66MW hydro power project and one

bridge on river Kosi. Of these, a 100 kms road project has got just a 70% stake of

the company.

• The company is now going in for 10 more projects of which seven are in

development phase and three are in pre-development phase. Of these 10 projects,

financial closure has been made for four projects only. This implies that the

balance sheet of the company, on consolidated basis, would keep ballooning with

debt.

• If we go by the comparative peers IRB Infrastructure, a company recently having

gone public, have 512 kms of road, on toll basis in operation, including Mumbai

Pune Expressway of 206 kms. Even this company has market capitalisation of just

Rs 6,200 crore. Apart from this, IRB has 66% interest in a 1,400 acre realty

project being developed near Pune. GVK Power, a player developing the Mumbai

Airport, as also having interest in various road and power projects has a market

capitalization of Rs 5,300 crore. Even the promoter of the company, Gammon

India market capitalization is Rs 4,100 crore. So, on all the parameters, the

valuation of the company looks quite stretched and over valued.

• The expanded equity base of the company would be Rs 144.55 crore, which also

looks quite high considering its level of activity. Even performance is not good

enough to attract investors. Total income was at Rs 84 crore with PAT of Rs

10.95 crore. During FY07, total income was at Rs 109 crore with a PAT of Rs

29.85 crore.

Hence it is recommended to avoid to the issue

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RECOMMENDATION OF GAMMON INFRASTRUCTURE

PROJECTS IPO

67

Industry: Infrastructure Development

Price Band: Rs.167-200


FUTURE CAPITAL HOLDINGS LTD.

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Issue DetailsIssue Opens January 11.2008Issue Closes January 16,2008Price Band Rs. 700-765Face Value Rs. 10Issue Size 491.3 croresListing NSE, BSE

Company Background

FCH is the financial services arm of the Future Group; whic h is a business group

focusing on consumption-led businesses in India and is also one of India's leading

organized multi-format retailers. It was established in the year 2005 and is promoted by

Pantaloon Retail India Ltd (PRIL) (the flagship company of the Future Group),

Mr.Kishore Biyani (CEO and MD of PRIL) and Mr.Sameer Sain (a former MD of

Goldman Sachs International). Och-Ziff, an international hedge fund, has invested in

FCHL in June 2007. FCHL has three primary lines of business; investment advisory

services, retail financial services and research.

Investment Advisory Services

It provides private equity and real estate investment advisory services to onshore and

offshore clients. These investment advisory services include investment analysis,

research and recommendations

Retail Financial Services

Its retail financial services ‘Future Money’, as a retailer offers financial products and

services in India. It holds rights to provide financial products and services through the

retail outlets which are owned, controlled or managed by PRIL and its subsidiaries. Its

primary credit products currently include consumption loans, which are loans to finance

the purchase of durables, furniture and other consumer goods, and personal loans.

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Research

Future Capital Research conducts and publishes economic research on India with the

objective of enhancing value creation across other businesses.


• To expand its retail financial services business, in particular, the growth of loan

portfolio.

• To meet the long term working capital requirements of the company.

• To meet issue related expenses and general corporate purpose.

Strengths

• FCHL is promoted by Pantaloon Retail (India) Ltd.(PRIL), the flagship company

of the Future Group which is a business group focusing on consumption led

businesses in India.

• Within two years of operation the company’s operating income stood at Rs.38.96

crores in FY07. Till 30th September, 2007 (half-year) its operating income stood

at Rs.31.2 crores...

Weaknesses

• Two of its subsidiaries had a negative net worth in the past three years. In division

Investment Advisors Ltd. had a negative net worth of Rs.2.14 crores in FY06.

Myra Mall Management Co. Ltd. had a negative net worth of Rs.0.65 crores as of

September 30, 2007 and Rs.0.29 crores in FY07.

• FCHL is having negative cash flow from operations amounting to Rs.9.74 crores

for FY07.

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Strong background of Indian retail sector

One of the pioneering groups to participate in the early stage of India’s retail story,

Future group has over a decade experience and has developed understanding of the retail

and consumption-led sectors. FCHL launched Future Money in June 2007, which offers

financial products and services to individuals. Currently, it has a presence in 26 cities

through 95 outlets across India. Its two main retail financial services products are

consumption loans and personal loans. It also intends to distribute life and non-life

insurance products in near future.

Strong research division covering macro factors

Company’s research business, Future Capital Research (FCR), conducts and publishes

research on macro-economic trends in India. It has also developed proprietary indices to

highlight trends in consumer behavior. Its reports are also utilized by its advisory

division. In their recent publication ‘XX Factor: The Impact of Working Women on

India’s Growth, Incomes and Consumption’, it analyzed the recent rise in women’s

participation in the work force and the impact of this phenomenon on growth and

consumption trends. Other publication included ‘Is Urban Growth Good for Rural India?”

studying the urban demand could be an important engine, which would help to drive a

shift from farm to non-farm employment in rural India. Its in-house research business

would help FCHL to invest in the right segment and right locations.

Dual role of advisory and managing real estate fund

Currently, FCHL is the investment manager of the Rs3.5bn Kshitij Fund and also advisor

to the investment managers of Rs13.7bn Horizon Fund and Rs7.8bn Indus Fund. It has

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also recently entered into a joint venture to create expertise in warehousing logistics.

Their real estate investment activities are in two separate areas of retail/ mixed use and

hotels.

Risks

• Posted a net loss of Rs124mn in FY08.

• Any downturn in Indian retail and consumption-led sectors would affect their

business.

RATIO ANALYSIS

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• The ideal current ratio is 2:1 and the current ratio of both the years is almost near

to the ideal ratio which indicates that the funds are utilized efficiently.





• Return on Capital Employed shows a negative in the current year which is not a

satisfactory one.

• Operating Profit Margin also decreases in the current year.

Valuation of IPO

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• FCH is demanding for huge premium on its shares, when compared with

companies such as Reliance Capital, India bulls Financial Services, and IL&FS

Investment Managers, based on price to earnings (P/E) multiple.

• The company offers shares at P/E multiple of 137.79 at the floor price and 150.59

at the cap price (based on annualized earnings per share for first half of FY08, on

pre issue capital of the company).

• On the other hand, shares of its peers, Reliance Capital, India bulls Financial

Services, and IL&FS Investment Managers were trading at P/E multiple of 64.72,

27.02 and 41.41(based on annualized earnings per share for first half of FY08 and

share price as on Jan. 10, 2007) while the industry average is 42.8.

• In addition, the limited financial history, together with losses of Rs 124 million in

its books for first half of FY08 is cause of concern.

• The business undoubtedly offers huge room for scalability; earnings visibility is

extremely low at this juncture.

• At Rs 765, the higher end of the price band, the offer values the entire business at

a price-book value (P/BV) of about 6.6 times and Entrenched peers in

banking/financial services with similar opportunities for growth — India bulls

Financial, ICICI Bank and IDFC — are available at comparable valuations.

Considering the above factors, it is recommended to avoid the Issue.

RECOMMENDATION OF FUTURE CAPITAL HOLDINGS

LTD IPO

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Industry: Financial



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CHAPTER 55.1 FINDINGS AND SUGGESTIONS

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FINDINGS AND CONCLUSIONS

The pro-rata system of allotment favors investors who bid for relatively large

numbers of shares. Perhaps, the process should be changed such that those

applying up to 1,000 shares are allotted in full and beyond this number on pro-rata

basis.

Book-building is preferred because the allotment of shares is generally done at a

price determined by the lead merchant banker and issuer within the price band.

Since QIBs are the dominant players and bid at somewhat higher prices within the

band, the issuer and merchant banker fix the price at the higher end such that

retail investors have to accept it. Thus, investors chipping in 35 per cent of the

capital have little role in price discovery. As a matter of fact, the IPO demand

curve is skewed by differing demands at different prices by various bidders. This

indicates the need to use multiple pricing for allotment.

There is considerable amount of difficulties for an investor today in the IPO

market starting from sourcing the application to filling it and submitting it along

with cheques. When we have one of the world's best trading and settlement

infrastructure available why can't we use that infrastructure rather than insisting

on a parallel market for IPOs? This will be a good time to provide a direction to

the IPO market as well to attract new investors into the market.

The grading process will not take into account price valuation, a key parameter in

any stock investment decision. Said Prime Database MD Prithvi Haldea, The

market does not work on fundamentals. A good company is a bad investment at a

high price. The small investors, for whom the grading exercise is basically meant,

would despite disclaimers expect a high graded IPO to quote above the offer

price. The whole purpose of grading an IPO would be defeated if it cannot help an

investor decide what stock to choose and at what price.

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SUGGESTIONS

Keys to a Successful IPO: At the end to make its IPO effective, some important

considerations that should be kept are:

Obviously, having a successful company to offer to the public marketplace is essential.

Beyond that, it is important to recognize this in not a place for do-it-yourselfers. While

the road show represents the formal coming out of the firm, its success will partially

depend on the groups selected for the audience, and this, in turn, depends upon the lead

investment banker/underwriter in the IPO. Choosing the right underwriter is probably

second in importance to choosing the right time to go public. The essential elements to

look for in the ideal lead underwriter are as follows:

1. The underwriter is focused on your industry: The IPO marketplace is a crowded

marketplace and the significant sums you are spending for professional advice to go

public need to be targeted to a firm with real expertise in your industry. Partial evidence

of appropriate expertise would be having an analyst devoted to your industry.

2. The market relies heavily on analyst projections and recommendations: Specifically,

the underwriting firm's analyst in your industry must:

• Have the capacity to cover your company with sufficient attention.

• Understand your company, customers, and competition.

• Indicate sincere commitment to covering your company.

3. Due to the importance of a successful road show, the underwriter must have the ability

and contacts to identify the right investor groups for your presentation and get them

committed to attend. References from previous IPO successes are essential.

4. There must be sufficient evidence of being able to build a quality "book" of potential

orders for your stock.

5. There should be a history regarding the ability to identify the right offer price and size.

6. Finally, but rarely understood by many companies, there must be significant

aftermarket support in terms of maintaining and supporting trading in the stock,

providing subsequent research reports on the company, and continuing institutional

exposure to the company.

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REFERENCES

BOOKS

1. Khan M. Y .and Jain. P.K (2005). Financial management. Pearson publications

WEBSITES

• www.moneycontrol.com

• www.capitalline.com

• www.nseindia.com

• www.sebi.gov.in

• www.capitalmarket.com

• www.wikipedia.com

• www.intimesepctrum.com

• www.thehindubusinessline.com

• www.financialexpress.com

• www.myiris.com

• www. icra ratings.com

NEWSPAPERS

1. Economic Times

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http://www.icraratings.com/

http://www.myiris.com/

http://www.financialexpress.com/

http://www.thehindubusinessline.com/

http://www.intimesepctrum.com/

http://www.wikipedia.com/

http://www.sebi.gov.in/

http://www.nseindia.com/

http://www.capitalline.com/

http://www.moneycontrol.com/

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