Tuesday the 31st of January was a great day in the Tuesday specials. The BSESENSEX gained a staggering 330.25 points while the NSENIFTY gained 111.95 points. The markets had lost considerable ground on Monday on global weakness and this kind of recovery the very next day seems a little unusual. However it upholds the theory of Terrific Tuesday. The SENSEX in 20 trading days had gained 1,779.06 points while on the four Tuesdays it had gained 1,292.54 points. Monday we saw a fall of 370 points and on Terrific Tuesday a rise of 330 points. Very clearly even God wanted to show that Tuesday is terrific. The net gain now on 5 Tuesdays is a staggering 1,622.79 points or 93.94% of the monthly gain of 1,738.63 points. The Nifty has gained 521.75 points or 90.75% of the monthly gain of 574.95 points.

What next would be the question on everyone’s mind? There are three more occasions in the current calendar year 2012 where there would be 5 Tuesdays in a month. These are May, July and October. The theory is that in any month where there are five trading Tuesdays, that month is extremely volatile and the Tuesdays contribute significantly to the events during the month.

January has been a great month and “TERRIFIC TUESDAY” has been significant as demonstrated. Let us hope 2012 is a great year going forward and Tuesdays an investor delight.

It appears of the five days of the week that markets trade on. Tuesday seems to be a really special day. The current month of January 2011 would have 5 Tuesdays of which four have been traded. The net result is an amazing finding where 72.65% of the monthly gains were recorded on the four Tuesday’s put together. The month has seen trading for twenty days. Yet another way of looking at these numbers is 25% of the days contributed to 72.65% or 75% of the days contributed to 27.35% of the gains.

The NSENIFTY also played out similarly with 70.6% of the monthly gains coming on the 4 Tuesdays.

The month of January 2012 has been really special as suddenly it appears all the problems of the country on fundamentals; economic and political have been resolved with the change of the year. India was the worst performing market in the year 2011 losing 24.64% on the SENSEX and 24.62% on thee NIFTY. With barely a month in the present year having been completed India is the best performing market of the world having gained 11.51% on the SENSEX and 12.55% on the NIFTY. If one were to look at it in another way the recovery in absolute numbers is 1779 points against a loss of 5054 points or 35.20% on the SENSEX, and 580 points of 1510 on the NIFTY or 38.43%.

The important thing to watch is whether Tuesday the 31st of January would be like a Super Tuesday or any other day. It sure would be interesting to watch how the remaining two days of the month play out.

Clearly it’s a great way to start the new year but whether the momentum is sustainable or not is a million dollar question.

AN ANALYSIS OF THE BEST AND THE WORST OF ALL IPO’S DURING THE YEAR

The year 2011 saw a total of 39 primary issues and two FPO issues. The current evaluation includes these 41 issues and six issues which consist of 5 primary issues and I FPO which listed in the last fortnight of December 2010. The year 2011 was a watershed year in the primary market. The quality of issues which hit the market deteriorated substantially and the end of the third quarter in September saw issues which were very poor in fundamentals and grossly overpriced, hitting the market. So bad was the situation that of the 9 issues that opened in the last week of September, as many as 8 issues had fundamental grades of 2 or less indicating below average and poor fundamentals. Two issues opened and failed to get subscribed during the year under review. We also had one unique IPO Vaswani Industries which after a prolonged delay was allowed to list but only after it did a buyback of 15% of the shares allotted and then issued bonus shares to the public shareholders. All in all a year in which things happened but investors lost money.

SEBI stepped in and investigated seven such issues and issued orders against these companies and in some cases also against the merchant bankers. The orders were detailed and investigated at length the wrong doings of the companies and its promoters. One more such order is expected in the next fortnight and it is believed that another 5 to seven companies would be covered. One other thing that has been debated is having price controls on IPO’s on listing day which has been considered by SEBI and now strict price controls have been introduced where issue size of Rs 250 crs and under would have a price band of 5% while issues having a size above 250 crs would have a price band of 20%. A further safeguard against the dumping of shares which has been the exit route for pre-sold issues would be the sub 250 crs issues being traded in the “Trade to Trade” segment for the first 10 trading sessions eliminating almost all chances of manipulation. In all cases there would be a price discovery session for the first hour as happens every morning in the first 15 minutes for shares which are part of the SENSEX and NIFTY. It would be this discovery price or the IPO price which would be the basis for circuit filters.

A summary of these 47 issues shows that 10 of them closed the year with gains while 37 of them closed in the negative. The issues from the PSU stable also have not done well this year. There were 3 primary issues and 2 FPO from PSU’s in the period under review. The PSU issues have not done well either and have lost between 1/3rd and 2/3rd in value with the best of the lot being PFC which had come out with an FPO and the worst being SCI which also had an FPO. The details of all the issues are given below: -

The summary shows the sorry state of affairs of issues hitting the markets and the reason why investors are shying away from the markets. 10 issues or 21.2% of issues made money while 37 or 78.7% lost money. The worrying part is the amount of loss suffered by investors. 19 issues out of 37 or more than half the issues which were negative lost more than 50%. Yet another way of looking at the same is that 19 out of 47 or 40.4% of the issues lost more than 50%. With such losses when an investor says why one should apply there is no answer that one can offer to the investor. The entire community is responsible for the same and until and unless concerted effort is done in this direction this avenue of raising money would be closed for the community and entrepreneurs and promoters would look at different avenues to raise money.

The joke of the year is the fact that the top performer of the year is Onelife Capital Advisors Limited against whom SEBI has passed strictures in its order against 7 companies which had raised money in 2011. This company is a merchant banker and is currently a loss making entity as per results declared till March 2011. The order was also against the merchant banker of the company. The second Hero is AanjaneyaLifecare Limited which gained 111%. The stock has been extremely volatile and the performance of the company not quite known. In any case when the quality of issues have deteriorated this kind of doubt is bound to exist.

One very interesting thing that has happened during the last year is that wherever issues have been high profiled or highly talked about, the expectation of investors got raised and those companies just failed to rise to the occasion and did not deliver. Punjab and Sind Bank was very heavily subscribed and had a total oversubscription of 50.75 times. Net effect of the same was that the share made its peak on day one itself and is well below the issue price having lost 50% in value since listing on the 30th of December 2010. Let us now look at some Heroes and Zeroes of 2011.

A2Z Maintenance Services limited

This was one of the high profile issues of 2011 which listed on the 23rd of December 2010. Billionaire investor was the driving force for the company and its high profile marketing effort to raise Rs 675 crs through a fresh issue and an offer for sale of 45.56 lac shares. The issue was just about subscribed and after withdrawals the final allotment at the lower end of the price band of Rs 400 was 91.37% of the issue size. The company therefore reduced the offer for sale from the original 45.56 lac shares to 26.94 lac shares. The share lost ground on day one and was down 17.8%. This was despite the fact that the promoter of the company Mr Amit Mittal and the private equity investor RakeshJhunjhunwala bought 18.75 lac shares and 16.875 lac shares from the market respectively. The spirit of the buying of shares and the fact that with these shares being bought the public shareholding has slipped below the 25% level is self-defeating the very purpose of the offer for sale.Anyway all these events were not enough to support the share price and the same has been falling to hit a low of Rs 84.15. The share closed at Rs 87.85, a loss of Rs 312.15 or 78.04% for the year.

Acropetal Technologies Limited

The company launched its IPO in a price band of Rs 88-90 to raise Rs 170crs. The IPO was subscribed 1.28 times. The issue price was Rs 90 and the high of the share in the week of listing was Rs 150 and the close Rs 102.50. The delivery on day one of listing was 54.77% of the IPO size. After the first seven days of trading when the share made a new high of Rs 156, the downward journey began on expected lines. In the next two days it was below the IPO price of Rs 90 and the low of Rs 10.75 was touched during the course of the year. The share closed at Rs 10.92 for the year a loss of Rs 79.08 or 87.87%. This was one more issue where the investor was wiped out.

Brooks Laboratories Limited

This company had tapped the capital markets in August 2011 to raise Rs 63 crs in a price band of Rs 90-100. The issue was subscribed 1.6 times but did not receive a single subscription from QIB’s. The issue opened well on listing day and the high of the share against an issue price of Rs 100 was Rs 131.10. The share price fell sharply from there and closed at Rs 60.20. The first week of trading saw the share close at Rs 42.10. The low of the share for the year was Rs 12.50 and the close was Rs 12.80, a loss of Rs 87.20 or 87.20%. Incidentally SEBI has taken action against this company and its merchant bankers for misusing funds earmarked for the IPO. The company has paid the contractor for installing the machinery in its new plant to be set up in Gujarat even though the land is yet to be handed over to the company. This is yet another case of promoter and merchant banker ensuring that the investor is robbed of his hard earned money.

Lovable Lingerie Limited

This company listed on the 24th of March 2011. The company had tapped the capital markets in a price band of Rs 195-205 and raised Rs 93.27 crs at the top end of the price band. The issue was subscribed over 35.21 times. The issue was very well subscribed and was compared as a cheaper valuation to Page Industries, the Indian franchisee of Jockey Industries. This fact helped Lovable touch a high of Rs 636.50, a gain of Rs 431.50 or 210.48%. The share was trading at slightly more than 3 times its issue price and was in no way cheaper than the valuations of Page Industries, a company who had a turnover of over 4 times that of Lovable. The share has corrected substantially from those levels and became half in value in about three months’ time and is currently trading at Rs 310.90, which is a decent gain of Rs 105.90 or 51.66%. Compared to the stocks which have lost ground atleast to the credit of this stock is the fact that there are fundamentals to support the stock.

MB Switchgear Limited

This was a unique IPO where a company involved in manufacturing and trading of transformers tapped the capital markets with an IPO where the object was to set up a project for solar power plant, an area where they had no expertise. The company raised Rs 93 crs by offering 50 lac shares at a price of Rs 180-186. The issue was subscribed 1.57 times. The market cap of the company on a fully diluted basis was Rs 372 crs and the PE of the company a staggering 480 times. The project of 6 MW of solar power would cost Rs 100 crs for which the company had term loans of Rs 22.5 crs and was raising Rs 93 crs from the public. The market cap pre-IPO for the promoter holding of 75% was to be a staggering Rs 279 crs for a company which had a turnover of Rs 34 crs and a net profit of a mere Rs 77.48 lacs. This market cap increased to a peak level of Rs 780 crs where the valuation per MW of solar power would be Rs 130 crs when it costs a mere Rs 16 crs per MW to set up and the Government of India encourages the setting up of such plants. Anyway after the customary high of the listing week at Rs 390, the share closed at Rs 319.80. Thereafter the share began its downward journey having trapped investors and making them lose their shirt. The share made a low of Rs 60.40 and closed the year at Rs 62.30, a loss of Rs 123.70 or 66.51%. This scrip had recorded a turnover which was higher than the market leader Reliance on listing day. Not only that the stock price rose from a low of Rs 118.65 to Rs 356 in a mere 150 minutes. The price movement, the fundamentals and the subsequent fall all indicate that this was a pre-sold issue and was part of the rampant manipulation which happens in primary issues. It is widely expected that SEBI is investigating this issue and some action would be taken against this company when the next order on IPO’s does come.

Moil Limited

This was a PSU offering and the company had sold shares at a price of Rs 375. Retail investors were given the customary discount of 5%. The issue received excellent response and was oversubscribed 56.43 times. It is important to note that the issue did so well that the HNI portion was subscribed a staggering 143.30 times making the HNI cost of leveraged application between Rs 175-190 which meant that he had to sell at a price of Rs 550-565 to recover his costs and be neutral leave aside making money. The high of the share was Rs 591 but the share barely traded at that price. The share closed on day one at Rs 537 a gain of 40%, but by the end of the week was at Rs 460. The low of the year was Rs 217.35 and the close at Rs 227.75, a net loss of Rs 147.25 or 39.27%. This was a great issue, it got hyped because of excellent response from all categories particularly HNI’s and even in the retail category where after a very long time people who had subscribed for the maximum permissible limit were allotted the minimum shares and that also by lottery.

Punjab & Sind Bank Limited

This was yet another PSU offering and this was a hyped issue as the last PSU bank to go public. After this bank issue there would be no other PSU bank which had not yet become public. This issue received huge subscription response and was oversubscribed 50.75 times. The HNI category was oversubscribed 85 times and the cost for the leveraged application was Rs 34 per share. This meant that the HNI was losing money first thing in the morning and as the day progressed, the fact that the share would not be able to recover from the selling pressure caused by the leveraged HNI saw the share slipping. By the end of the day the share closed with gains of under 6% at just about Rs 127. The retail subscriber to the issue received allotment of the minimum lot of 50 shares but on lottery basis and thus the returns to the investor were quite poor.

The share price fell through the year and made a low of Rs 56.05 and closed at Rs 60.20 for the year, a loss of Rs 59.80 or 49.83%. This was yet another example of a good PSU offering getting hyped and as a result of the hype and subsequent oversubscription failing to deliver the results. Investors have lost half their money in this issue as well.

Taksheel Solutions Limited

This was an issue from Hyderabad and was for 55 lac shares in a price band of Rs 130-150. The issue received poor response from QIB’s but was very well supported by HNI’s and retail investors who subscribed the issue 4.7 times and 6.18 times respectively and helping the issue be subscribed just about 3 times. The share made a high of Rs 185 for the day but closed at Rs 55.85, a loss of 63%. This share closed at the end of the first week of listing at Rs 29.05. The low of the year was Rs 12.30 and the close was Rs 13.40. The share has lost Rs 136.60 or 91.07% and wins the “ZERO OF THE YEAR 2011 award”.This company was lead managed by a PSU bank merchant banking division and the company and the merchant banker have both been hauled up SEBI in their order in December 2011.

Summary observations

The key takeaways from primary issues are as follows: -

One hopes that with a new set of listing day conditions and virtually no possibility of earlier pre-sold issues happening in the new regime, primary markets would improve in the immediate future. The market needs a few bold companies to make interesting and profitable offerings to attract investors back to the market and change the sentiment. Let us all put our best foot forward to help revive the markets.

Wishing all a happy 63rd Republic day.

SEBI has announced new norms for listing day for IPO’s. These norms would certainly hit the manipulation and first day disaster in IPO’s which had become a norm these days. Very clearly post the order on seven companies in December 2011, which had tapped the capital markets these guidelines were keenly awaited.

The broad guidelines divide the companies into two categories with the cut-off point being the size of issue at Rs 250 crs. All companies would on listing day have a call auction which is similar to what happens these days between 9 am and 9.15 am for the companies which are part of the SENSEX and NIFTY. This call auction or price discovery would happen for 1 hour from 9 am to 10 am and then trading would begin as normal with the discovered price or the equilibrium price being the base for the day. First day circuit filters would be 5% for issues below Rs 250 crs and 20% for issues above Rs 250 crs. In case no equilibrium price is discovered than the IPO price would be the base. From day two the normal circuit filters would apply. In addition the really important condition that has been introduced for issues below Rs 250 crs is the fact that such issues would trade on “Trade for Trade” basis which means that every transaction would result in delivery. This would reduce the volume considerably. Readers would recall that the norm for first day trading volume would be anything between 10-20 times the IPO size on day one.

The above norms would also apply for issues which are re-listed.

The above is a brilliant step taken by SEBI and they need to be complemented for the same. The present modus operandi of people behind issues was only possible because lack of circuit filters on day one gave a free hand to people behind the price manipulation to trap investors and exit on day one. Either of two things happened on day one of listing of an IPO where either the share price rose 60-70% 0r even beyond 100% on day one or prices crashed a minimum of 65%. This has happened consistently and in either case the person/entity behind the stock was able to exit. With a price band of 5% in sub 250 crs and a trade for trade restriction for the first ten trading days this is completely blocked. Gone are the days when non-descript companies would record turnovers of multiple times Reliance turnover on day one.

I believe these steps will ensure the revival of the primary market and I would urge merchant bankers and promoters of companies to bring issues which are fairly priced and offer appreciation opportunities to risk takers. I primary issues are brought with this objective, the market would certainly see a revival and improvement in the quality of issues.

The Primary markets have been in a bad shape. There have been no issues now since the September bunch of issues which hit the market and knocked the steam out of the markets completely. Even the issues whether IPO or FPO from the Government seem to be stuck and for some reason or the other have not been hitting the market. The quality of issues had become so bad that it forced SEBI to take action and act against seven companies, promoters and its merchant bankers. Action against this group of people clearly reflects on the quality of issues, and the extent of deterioration that has happened in the issues hitting the market.

Goodwill Hospital and Research Centre Limited launched its issue on the 30th of December and the issue was open for a record seven working days creating a record for itself. The issue was scheduled to close on Monday the 9th of January. There is no doubt that market conditions were certainly not conducive to an IPO opening and the fact that the SEBI order on IPO’s came a day earlier than the issue was to open certainly did not help matters. The only reason one can attribute to the issue being opened at the time it did was to avoid submitting fresh audited accounts which need to be no more than six months old when any issue opens. In the case of Goodwill audited accounts upto 30th June formed part of the RHP and therefore the issue had to compulsorily open by the 30th of December.

Well the issue opened and at the end of six trading days the total subscription received was a mere 22,015 shares against the issue size of 35,42,857 shares. The subscription was less than 1% and stood at 0.62%. In the last two decades that I have been associated with the stock market, I do not remember any company which has fared so poorly. Even issues which have not been subscribed have done significantly better than what we saw with this issue.

Looking at it in hindsight one wonders whether the decision to go ahead was correct or not. Clearly it backfired and made no sense. The company and the promoters are big losers post this debacle. The group had an ambition post this issue to tap the markets for its Aviation and NBFC company issues. Very clearly post this performance this would be extremely difficult. Secondly the stigma of having done so badly would always be at the back of the mind of any investor whenever the issue makes a comeback. Thirdly the document would have to be refilled which means that the company would have a waiting period of a minimum six months before it can tap the primary market again. This is because a fresh document would have to be prepared and submitted and would have audited accounts for a later date.

In terms of expenditure there has been a colossal wastage with all the stationery, advertising expenses just going down the drain. The failure of the issue would also be a big setback for the merchant banker as this issue would be added to his track record.

In a bad primary market which has not seen any issues for over three months, the opening and the complete disaster of such an issue is a major setback for the markets. It may take quite some time to recover from this.

SEBI Chief U.K.Sinha has said over the weekend that investigation in IPO’s is continuing and another order should be coming in due course of time. One hopes that the first order and the one to follow act as a strong deterrent for market intermediaries and promoters and the present crop and modus operandi of these people in IPO’s just stops. Until and unless this system is stopped, the present state of the primary market is unlikely to improve.

Leaving aside the negatives let us now look at the brighter side of things. With equity issues having simply dried up people are now looking at debt issues. We have had very successful Tax free bond issues from NHAI which issued bonds for a cumulative value of Rs 10,000 crs and the issue received excellent response. The final figures would be known in a day or two but it is believed that the issue raised somewhere in the vicinity of Rs 30,000 crs with the QIB portion subscribed about six times. The retail portion was under subscribed with the segment having reservation for 3,000 crs.

The second tax free bond issue was from PFC (Power Finance Corporation) which was for a size of a little over Rs 4,000 crs. Here again the issue for QIB’s and HNI’s was oversubscribed on day one and the retail portion also subscribed by the time the issue closed. These bonds are likely to list at a premium as the interest rates seem to be softening marginally and certainly seem to have peaked out currently.

The tax free bond issues are not over as yet and two more companies are likely to open their issues in the coming fortnight but before the end of January. IRFC (Indian Railway Finance Corporation) will launch its issue for Rs 6,300 crs while HUDCO would do so for a shade under Rs 5,000 crs.

There are other bond issues presently open which have a tax break under section 80CCF. A number of infrastructure companies are offering these bonds. Some of the issues currently open include names like SREI, L&T Finance, IDFC and REC. These bonds offer a tax rebate on a maximum of Rs 20,000 and have a minimum lock-in of 5 years. Safety of bond holders or subscribers is ensured with a buyback option after five or seven years.

An announcement on the NSE website says:-Book Running Lead Manager to the issue has informed the Exchange that the Book Building issue of Goodwill Hospital and Research Centre Limited has been withdrawn.

Market too volatile for comfort – AVOID

Goodwill Hospital and Research Centre Limited (Goodwill Hospital) is tapping the capital markets with its IPO which has opened on Friday the 30th of December and closes on Monday the 9th of December 2012. The issue is priced in a band of Rs 175-185 and would raise Rs 62 crs.

It may be mentioned that after remaining open for six days so far the issue has garnered less than 1% subscription. History says that no issue has been subscribed to such an extent on the last day. It would make sense to see what happens during the day.

Business
Goodwill Hospital is engaged in running a multi-speciality hospital at Noida called Ojjus Medicare with a super speciality focus on core areas such as Neurology and Neuro Surgery, Cardiology and cardiac Surgery and Orthopaedics with emphasis on joint replacements and sports injuries. The company also provides healthcare services in area of minimally invasive surgeries, mother and child care, paediatrics, diagnostic, critical care medicine, oncology, gynaecology and obstetrics, nephrology, dermatology, gastroenterology, dental and eye care etc.

The company has an USP in “Perfexion” Gamma Knife Machine for non-invasive treatment of brain tumors, vascular malformations and functional diseases like Parkinson’s disease, trigeminal neuralgia and psychiatric disorders using highly précised focused gamma rays. Goodwill Hospital is amongst few private centres in South and South East Asia to install Perfexion Gamma Knife. This is a 5th generation machine which uses robotic technology to deliver precise radiation to intracranial and cervical spine lesions and to treat functional disorders.

Objects of the Issue

Financials
The hospital was started in the year 2002 and was taken over by the present management in the year 2007. The present hospital has 220 beds as on date and they were added in phases and reached the present capacity in the last quarter of 2011. The revenues on a consolidated basis were Rs 2291 lacs for the year ended March 2010. These improved significantly to Rs 5358.30 lacs in the year ended March 2011. For the first quarter ended June 2011, there is further improvement to Rs 1608.39 crs. The company has a high operating margin but after providing depreciation and financial charges this reduces significantly. The net margins have improved from 12% in FY10 to 29.33% in FY11, but have dropped in the first quarter ended June 2011 to 26.92%.

The EPS on the pre-IPO capital of 90 lac shares was Rs 3.05 for FY10 which has improved significantly to Rs 17.46 for the year ended March 2011. In the first quarter ended June 2011, the EPS on an annualised basis has improved to Rs 19.24. On a fully diluted basis the EPS would reduce to Rs 13.80 at the lower end of the price band and Rs 14.02 at the upper end of the price band. The PE ratio for the company would be 13.97 times at the lower end and 14.54 times at the upper end based on full year diluted earnings for FY 11. Based on the first quarter June 2011 annualised results the PE ratio would drop marginally to 12.68 times at the lower end of the price band and 13.19 times at the upper end of the price band.

Comparisons
The company has chosen to compare itself with Fortis Malar Hospitals, Kovai Medical Centre and Regency Hospital. Fortis Malar is part of a large hospital chain namely the Fortis group and has revenues of Rs 83.27 crs for the year ended March 2011. The share trades at a PE ratio of 9.51 based on March 11 earnings. Kovai Medical is three times the size of Goodwill with revenues of Rs 174.64 crs for the year ended March 2011 and trades at a PE of 9.23. Regency Hospital is of a similar size of Goodwill with revenues of Rs 52.21 crs and trades at a PE of 16.86. Looking at the current valuations it becomes clear that any valuation which is not in single digit is expensive and Goodwill is asking for much more than that.

Concerns
The group is promoted by Mr Chawla who is by profession a Corporate Lawyer having diverse interests in Hospitality, Medical care and Hospitals, Aviation and NBFC. It appears that the group is into unrelated activities and is spreading itself too thin. There seems to be a concern about the bandwith at the top and this could affect the group going forward. Secondly investment in Aviation is an area of key concern looking at the current market dynamics.

The third area of concern is the fact that there could be execution risks with the company increasing its bed capacity from the present 220 bed to 920 beds in a phased manner. The fourth concern is that the expansion is on debt and the company is already highly leveraged with debt of over Rs 100 crs as of 30th June 2011. The new project would have a debt component of Rs 150 crs and there would be unsecured loans as well.

The fifth concern is the timing of the issue at a time when there is apathy to the markets in general and IPO in particular. There have been no issues in the last three months and one is quite sceptical about issues post the SEBI order on seven recent IPO’s last month.

The sixth and very significant concern is on account of the track recordof the merchant banker SPA Merchant Bankers Limited. The last issue by this entity was SRS Limited where he was one of three merchant bankers and the issue which listed in September 2011 is now trading at Rs 34-35 against an issue price of Rs 58. The greater concern is for the issue where SPA was the sole book running manager in Cantabil Retail which was sold at RS 135 and listed in October 2010. The share crashed on day one itself and is now trading at Rs 17.54, a loss of 87%. The merchant banker in a public meeting when asked about the track record of issues brought by him made a categorical statement that post listing was not there concern. This sure is a dangerous comment and should put prospective investors on high alert.

Convertible Warrant
The issue comes with a free detachable warrant with every share which would be separately listed and traded. The warrant would be converted at the option of the holder into an equity share after 13 months at the then average traded price for the month, less 20%, making the instrument attractive.

Conclusion
The company is in a business which has huge potential and is likely to grow. The concerns are amny and the market conditions not conducive to investment. In such a scenario it makes imminent sense to skip the issue at the current time and look at the issue post listing.

SEBI Disclaimer: - Looking at current market conditions I do not intend to subscribe to the above issue

SEBI has issued ad-interim ex-parte orders under 7 companies which had tapped the capital markets in the current year. In very detailed orders on each of these companies, SEBI has been able to detect the money trail and has ordered that the money be deposited in an escrow account within the next seven days. This is a great effort done by SEBI and they should be complemented for the findings and the meticulous detailing of the execution of the frauds that were done by these companies on investors.

Of the above seven issues 4 of the issues namely Onelife, RDB Rasayan, Taksheel and Tijaria were part of the bunch of issues which came in the end of September 2011. Readers of this site would remember that these issues were highlighted as having extremely poor fundamentals and their issues being overpriced. Things are now falling in place.

The modus operandi used by promoters in these issues is almost similar and SEBI has got to the bottom of it. One hopes that with such a big operation having been done successfully, the menace of poor IPO’s and the fact that the primary market has virtually dried up or kileed by such issues is likely to improve.

The present modus operandi of pre-sold issues is unlikely to happen in the near future in the same manner as was prevalent.

During the fag end of the quarter there was a rush of IPO’s from companies who wanted to open their issues and they did so in the last three days of the month. The compelling reason was nothing to do with astrology or the market conditions; it was a regulation of SEBI, which allows IPO’s to open their issues with audited financial results which are not yet six months old. Therefore a company opening its issue on the 30th of September is allowed to do so provided the results forming part of the Red Herring Prospectus have results for the March 2011 period at the bare minimum.

This year we had as many as nine issues coming in the month with eight of them getting subscribed and one issue being unsuccessful. The issue which failed to get through was Swajas Air Charters Limited which had tapped the capital markets with its issue to raise Rs 37.5 crs in a price band of Rs 90-100. The issue having failed to garner support saw the issue being extended, and the price band was therefore reduced to Rs 84-90. The issue got subscribed but it failed to receive the mandatory 50% subscription from QIB’s and had to withdraw the issue.

An issue which was launched in April-May 2011 and got embroiled in all sorts of controversies and sawhistory in the making with the regulator and Securities Appellate Tribunal (SAT) asking it to issue bonus shares to the public shareholders etc., Vaswani Industries listed on the 24th of October.

This bunch of nine issues if analysed as a group have many similarities and make interesting observation. Almost all the issues except one had grades of 1 and 2 indicating poor fundamentals. The second common thing is that all but one issue was ridiculously priced and had valuations which are unheard of in the industry in the relevant sector or the markets as a whole. The third common factor is that 5 out of the 9 issues crashed on day one losing more than 60% of their price on the listing day itself. The fourth factor is that the trading volumes in these shares would put the large cap stocks like Reliance and even an ICICI bank to shame. Some of these issues continue to trade at ridiculous levels and unsustainable valuations as the “friendly” intermediary is unable to exit the stock and this now becomes the long term investment in the stock until and unless he gets someone to agree to bail him out.

There is therefore a very important question which comes up whether retail investors actually benefit by applying for shares where the fundamentals are extremely poor and the issue is subscribed only with the help of buyback and “friendly” intermediaries. I believe the answer would be available in the table which is available for these nine issues a little later in the article.

Let us analyse a case in point where extremely poor fundamentals existed. The case is of M&B Switchgear which issued shares at a price of Rs 186 and the PE ratio at that price was an audacious 480 times. The price rose further and at the high of Rs 390, the PE ratio was actually in four digits at 1006. Even if one were to look at the business which is proposed, the setting up of a solar power plant of 6 MW which would cost the company Rs 100 crs, the valuation at this price of market capitalisation was a staggering Rs 130 crs per MW or 8.13 times the project cost. One has to believe that there is something which the promoters and merchant bankers knew which common investors did not. It’s a separate issue that post this high of Rs 390, the share has more than halved and closed for trading at Rs 178.85 which is a small discount of 3.84% to the issue price. The price per MW even at this price is Rs 59.6 crs per MW.

In the example of turnover the case of Indo-Thai Securities would be a classic case where on the day of listing the company had a combined turnover of 867.60 lac shares which was 21.69 times the IPO size of 40 lac shares. The turnover was a staggering Rs 517.67 crs on the two exchanges combined and constituted 4.58% of the total turnover of the exchange of Rs 11,300 crs.

From the above table the issues can be broadly categorised into two where one has poor fundamentals and are extremely expensive and those that were reasonably priced and had good fundamentals. It may seem strange but the only issue which had a grade 3 was the most reasonably priced issue. Of the two broad categories where the first had eight issues and the second category a single issue, five issues crashed on day one. The failure ratio was a staggering 62.5%. The extent of fall was anywhere between 65 and 80%. Of the remaining three, two are trading above par and are currently up 80% and 108%. It sure is baffling that with markets being where they are and the condition of the broking industry whether it is the primary market or the secondary market is in such a bad shape why would somebody want to invest in a company like One Life Capital Advisors which has a market capitalisation of Rs 278 crs as of the 4th of November on revenues of 40 lacs for the year ended March 2011 and a net loss of Rs 60 lacs for the period. The PE multiple is infinite and prospects for the industry are a little gloomy currently.

The other company is PrakashConstrowel where the price has been on an upward curve since the day of listing. This is a very small road construction company from Nasik, and the current valuations are not only expensive but raise doubts about the motive behind such a huge price.

The third issue in the first category is M&B Switchgear which is currently trading below the issue price after doubling.

In the second category, there is only one company namely Flexituff International. The company had a grade of 3/5 and was the highest fundamental grade in the nine issues. The stock price has been steadily moving up and is currently trading at a premium of 41% to its issue price. This was the only issue out of the lot of nine issues that this writer had recommended and it is vindication of the kind of analysis that goes into the issue before a recommendation is made.

Let us hope that after these observations and performance, readers and investors would be able to take a call on poor fundamental issues in future and sae themselves from losses and heartburn.

The long delayed, controversy ridden and unique IPO from Vaswani Industries finally listed on “Dhanteras” day on the BSE and NSE. The company had issued 1 crore shares in a price band of Rs 45-49 which was subscribed with the help of friendly intermediaries. The QIB portion was undersubscribed with a mere 16% of the allocation being subscribed to while the HNI portion was subscribed 11.29 times and the retail portion 6.82 times. The overall issue was subscribed 4.16 times.

The stock listed at the BSE at Rs 33.45 on the BSE and at Rs 33.70 on the NSE. The high of the day was Rs 35.40 on the BSE and Rs 33.70 on the NSE. The low was Rs 13 on the BSE and Rs 14 on the NSE. The share closed at Rs 17.75 on the BSE and Rs 17.80 on the NSE.

The issue was open between the 29th of April and the 3rd of May. The issue was dogged with controversies of various kinds which began with withdrawal of applications by HNI’s and retail investors getting allotted higher number of shares. There was rampant grey market activity in this share and large number of application forms was procured by the company. Post this withdrawal of applications there was a complaint made to SEBI by a group of investors in Ahmedabad and the protest culminated in ransacking of the office of SEBI in Ahmedabad. The issue allotment was completed but the issue was not allowed to list. SEBI then issued some orders about the same which was challenged or contested in SAT by the company and then a very funny, unheard of, unparalleled and only of its kind ever solution was hammered out. The gist of the same was that the company would through an open offer by back 15% of shares from the original shareholders who had applied and received shares in the IPO at the issue price and the company was at liberty to reallot these shares. Post this exercise the company would issue bonus shares in the ratio of 1 share for every 4 shares held to the new shareholders who had become so through the IPO. This meant that the cost of the shares post the bonus became Rs 39.20 instead of the original Rs 49. The shares were allotted, process completed and listing done but trading not permitted. Finally after a period of almost 5 and a half months against the normal 15 days trading began in the shares of the Vaswani Industries, and it turned out to be yet another disaster.

The total traded volume was 592.35 lac shares which was 4.74 times the IPO size of 1.25 cr shares. Readers would recall that the original issue of 1 crore shares was increased post bonus to 1.25 crore shares. The delivery volume was 47.80 lac shares which was 38.24% of the IPO size. The weighted average of the day’s trade was Rs 20.64 on the BSE and Rs 20.56 on the NSE. The net loss was Rs 21.45 on the BSE or 54.72% while it was Rs 21.40 on the NSE or 54.59%.

From the price chart of the share one can see that the high and the low of the day were made within a few minutes of the open of the day’s trading itself. The share then steadied down at the upper end of the price and started drifting downward. By 12.30 pm when the stock hit Rs 17 it rallied for the the next 90 minutes to make a high of Rs 22 and then again began to fall. By the end of the day slightly more than half the IPO amount was wiped out and the point that if fundamentals are poor or non-existent, a share post listing has to sooner or later move or converge to its fair fundamental value.

Vaswani Industries Limited is one more example of an issue going wrong where the asking price was not justifiable with the fundamentals. It also created a dubious record with all that happened in SEBI and SAT and the settlement which at best could be said to be face saving. One hopes and prays that after one more debacle on listing day, retial investors learn their lesson the hard way.