Just Dial Limited which had tapped the capital markets with its offer for sale of 174.97 lac shares was oversubscribed 11.63 times. The price band was Rs 470-543 with a fixed discount of Rs 47 to retail investors and also a safety net. The issue had opened on Monday the 20th of May and closed on Wednesday the 22nd of May. The company had earlier allocated 39.37 lac shares to anchor investors at Rs 530.

The issue received excellent response from all sections to whom it was offered. Though the retail portion which was oversubscribed 3.51 times looks lesser than the others the fact to bear in mind is that in retail unlike other categories the allotment is based on the minimum lot to all applicants before pro-rata. This means that the 1.6 lakhapplications which have come indicate that the average application size in this category is 37-38 shares or roughly 1.5 lots. As there are only 69,98,990 lots available, the allotment ratio would be roughly 2 out of 5 applicants getting 25 shares. Secondly it appears from the way the book has been made and keeping in mind the anchor allocation price, the allotment price for the offer for sale would be Rs 530.

The details of the subscription level in various categories are given below: -

The issue has received excellent response from all categories of investors. The cost of finance for the leveraged HNI assuming 9% for eight days works out to Rs 24-25 per share. This means for the successful retail applicant there is an upside of roughly Rs 77-80 (Rs 47 discount plus Rs 30 interest cost) per share or Rs 2000 for 25 shares that would be allotted. This return would be on an

Well the issue has garnered support in the subscription stage; let us see how it fares on listing where an issue with 75% reservation for QIB’s has been oversubscribed over 1o times by QIB’s and over 11.6 times overall.

Just Dial Limited which is tapping the capital markets with its offer for sale of 174.97 lacs in a price band of Rs 470-543 completed the allocation to anchor investors. The company on Friday allotted a total of 39,36,925 shares at a price of Rs 530 to raise Rs 208.65 crs from 20 QIB’s and 15 entities. The issue would open on Monday the 20th of May and close on Wednesday the 22nd of May. The offer for sale would raise Rs 822.38 crs at the lower end of the price band of Rs 470 to Rs 950.11 crs at the upper end of the price band of Rs 543. Retail investors have been offered a flat discount of Rs 47 which is 10% at the lower end and 8.65% at the upper end. In addition there is a safety net for retail investors.

This issue has 75% reserved for QIB, 15% for HNI’s and 10% for retail investors. The full list of anchor investors is appended below: -

Just Dial Limited is tapping the capital markets with its offer for sale of 174.97 lac shares in a price band of Rs 470-543. The issue opens on Monday the 20th of May and closes on Wednesday the 22nd of May. The company is offering a discount of Rs 47 to retail investors and also extending a safety net to them. The anchor allocation was made at a price of Rs 530. The issue would raise Rs 822 crs at the lower end of the band to Rs 950 crs at the upper end

Business

Just Dial believes that they are one of the leading local search engines in India. They provide users of “Just Dial” search service with information and user reviews from the database of local businesses, products and services across India. The search service is available to users through multiple platforms: Internet, mobile Internet, telephone (voice) and text (SMS). In fiscal 2012, Just Dial addressed over 254.3 million search requests across our platforms. As of December 31, 2012, they were conducting approximately 195,100 campaigns for our paid advertisers.

As one of the first companies to offer local search services in India, they believe that they have a first mover advantage among consumers seeking information on local businesses. They aim to provide fast, free, reliable and comprehensive information to our users, which we believe will create a network effect to attract more search queries. They also believe that we have established Just Dial as a well-known Indian brand on the Internet. In addition, through our easy to remember phone numbers and user friendly mobile phone interface, we believe that we have been able to attain significant mind-share with users for their local search needs.

Listing on our search service provides businesses with exposure to users at a time when the users are making apurchase decision. Businesses may choose to pay for a listing to be featured on a priority basis in our search results, which we call a ‘campaign’. We call businesses that pay for this service ‘paid advertisers’. Many of our paid advertisers conduct multiple campaigns at any given time. Paid advertisers have the flexibility to choose different levels of priority in the search results for different geographic areas and products and services. The number of campaigns increased from approximately 40,500 as of March 31, 2009 to approximately 195,100 as of December 31, 2012.

We have a large database of approximately 9.1 million listings as of March 31, 2013. We believe that by providing fast and free access to our database, we provide a compelling user experience that will create a network effect and attract a large number of users who search for information to Just Dial. This large number of users will, in turn, prompt more businesses to pay for listings and become paid advertisers in order to be featured in our search results on a priority basis.

Just Dial has the First Mover advantage and a strong brand recognition which it uses to focus on the SME segment. Almost all the paid campaigns conducted by the company were for companies within the SME segment. The company offers the SME a cost effective platform, reaches out to the right target audience, and offers a personalised service to each advertiser.

Objects of the Offer

The objects of the offer are to achieve the benefits of listing of the equity shares on the Stock Exchange and to carry out the sale of the shares. Listing would provide a public market for the equity shares and allow a benchmark for the remaining shareholders of the company.

Financials

The total revenue of the company has more than doubled in the three year period from March 2010 to March 2012. Revenues have grown from Rs 1347 million in March 2010 to Rs 2752 million in March 2012. In the nine month period ended December 2012, they have further grown to Rs 2716 million. Net margins in the same period have grown from 14.34% to 18.32% in March 2012. In the nine month period ending December 2012 the net margin is marginally lower at 17.33%. The net profit for the year ended March 2010 was at Rs 193.25 million which grew to Rs 505.81 million in March 2012 and is at Rs 470.78 million in the nine month period ending December 2012.

Comparisons

There are no listed players in the line of activity that Just Dial is engaged in and hence there are no comparisons made with any other company. However if we are to increase the scope of comparison there is a listed entity in Info Edge which has a popular website “Naukri” and “Jeevansathi”. The company Info Edge reported revenues of Rs 4699.5 million for the year ended March 2013 and a net profit of Rs 915.94 million. The EPS of the company is Rs 8.39 and the PE 44.7 times based on March 2013 numbers. The revenues for Info Edge have grown by 20% over the previous year’s figure of Rs 3903.04 million. The company has made a provision for diminution in value of investments to the extent of Rs 236.92 million which has had an impact on the net profits.The net profits have fallen from Rs 1033.29 million in the previous year to Rs 915.94 million and without this exceptional item would have actually risen by about 10%.

I believe this company is a fair comparison with Just Dial and on the face of it looks steeply priced.

Concerns and Drivers

The key drivers would be the large middle class population; the opportunity would be the low internet penetration and the biggest threat would be the competition from the large global players like Yahoo and Google. The entry barrier for companies is virtually non-existent with the introduction of the internet and the World Wide Web as it is known as and realising the potential that India offers, global companies have stepped up their efforts to woo the Indian customer. Google advertises and offers to make a website for a business and also advises on how to promote the same. The geographical advantage of being in India is negated with the advent of technology.

Track Record of Merchant Bankers

There are two merchant bankers to the offer for sale from Just Dial. They are Citibank and Morgan Stanley.

Citigroup Global Markets India Private Limited

They have handled 2 issues each in 2010-11 and 2011-12 and this is the first issue in the year 2013-14. Of the four issues handled all four were at a premium on listing day, three were at a premium on the 30th calendar day after listing and 2 are trading at a premium as of the closing price on Friday the 17th of May. Their biggest disaster has been the over hyped issue of SKS Microfinance which after being issued at a price of Rs 985 rose to Rs 1490.70 and then fell to a low of Rs 54.40 before recovering to trade at Rs 119.45.

Morgan Stanley India Company Private Limited

The merchant banker has handled 4 issues in 2010-11 and 1 issue in 2011-12. Of the 5 issues handled, 4 were trading at a premium on listing day and also on the 30th calendar day from listing. Currently just 1 of the 5 issues is trading at a premium.

Incentives to Retail Investors

The company is offering a discount of Rs 47 or 10% to the floor price and 8.65% to the ceiling price as a discount to retail investors. There is also a safety net for retail investors which would kick in sixty trading days preceding the relevant date which is 180 days from the commencement of trading on the stock exchanges. The safety net is being provided by the promoters of the company and the amount required for the fulfilment of the safety net would be deposited in an escrow account and converted into interest bearing term deposits.

The safety net would be triggered if the volume weighted average traded price on the exchange in the last sixty traded days (roughly three calendar months as there are on an average 20-21 trading days a month) falls below the net price at which retail investors have been allotted shares. Assuming shares are allotted at the same price as anchor investors at Rs 530, the net price to retail investors would be Rs 483 and if the volume weighted average price was below Rs 483, the promoters would buy back the shares at Rs 483.

The incentive is attractive but the question is why the safety net. It is believed that the regulator was not happy with the asking price and therefore insisted on the safety net being provided by the promoter even though he is not raising fresh capital. The issue is an offer for sale and even then he would be depositing the money upfront to provide the safety net.

Valuations

The offer for sale in a price band of Rs 470-543 is steeply valued and offers little scope for making money in the medium or long term. The EPS for the year ended March 2012 is Rs 7.24 while on an annualised basis it is Rs 8.98 based on nine months ended December 2012. The PE at the lower band is 52.32 while at the upper end of the price band it is 60.44, certainly steep.

Retail Opportunity

The retail bucket is 10% of the issue size or 17,49,745 equity shares. At the minimum lot of 25 shares it means that there would be 69,990 successful applicants assuming that the retail portion is fully subscribed. The QIB is likely to be well received considering the anchor book where there are 15 entities who have been allotted shares. It may make sense for retail investors to punt the issue by investing the minimum amount of Rs 12,400 for 25 shares on the last day of the offer provided the QIB book is oversubscribed 2 times or more. There is every possibility that in that case the issue when listed would allow returns for investors in the short run.

Conclusion

The issue is steeply priced considering the valuations and business. There is impending threat from competitors and things could get tough in the near term. There is a trading opportunity for retail investors provided the QIB book is oversubscribed as explained above. Until and unless you want to take this limited risk where you would book profits in the marketplace or surrender by offering shares in the safety net, the issue may be avoided.

SEBI Disclaimer :- I intend to subscribe in the retail category provided the QIB portion is well received.

The benchmark indices have gained 10% in the last four weeks and are now at levels last seen at Diwali or October-November 2010. This was the euphoria around the listing of Coal India. There is complete lack of participation in the market place and retail and HNI investors are just not interested in the market.

FII’s have been aggressive buyers and invested a little over 800 million dollars in the last week. Domestic institutions have continued to be sellers. The open interest in the futures as of last week was at Rs 48,404 crs with stock futures at Rs 30,828 crs and Index futures at Rs 17,576 crs.

The economy is showing some early signs of bottoming out but is surely in a bad state. IIP numbers for the year ended March 2013 was at 1%, the lowest level in the last 20 years. The positive side is the fact that crude prices are softening and that should be a relief for the country. The worrying sign is that with FII’s strong flows, weakening crude prices, why should the rupee fall? The rupee fell quite sharply on Friday and recorded its largest single day fall in over three months. The weekly loss was Rs 0.87 or 1.61%.

The greatest concern in India currently is the sad state of the political environment. We seem to be going from bad to worse and it appears that politicians are just not accountable to anyone. The only objective of getting elected is to make money and then make more money. The resignation of the railway minister and the law minister is not going to solve any problems but the next target would be the demand for the resignation of the Prime Minister. This would be because he was the coal minister in the period when these coal blocks were allocated and the need to alter the CBI report was to safeguard this as alleged by the opposition.

The Supreme Court has come down very heavily on the government and CBI and has stated that CBI is “like a caged parrot having many masters”. This is a scathing attack and it has asked the government to make CBI an autonomous body and present their plan when they appear again on the 10th of July. If this does happen this would be a great achievement of Indian Democracy and would help in removing the one tool that is used to garner support by arm twisting enemies and turning them into outside supporters.

Coming to the markets, global markets have been on a roll on the back of liquidity and currently India is no exception. The old adage “Sell in May and go away” is simply not working so far and markets in May are up 3% so far. The week ahead could see the left out feeling being panned out and retail and HNI who have not participated so far entering the markets. Their participation could make the markets vulnerable and extremely volatile. One would be well advised to ride the rally but be nimble footed to exit when the selling pressure steps in.

Scotts Garments Limited which had tapped the capital markets with its IPO in a price band of Rs 130-132 and then reduced due to poor subscription to Rs 118-120, was finally withdrawn due to poor subscription. The company had initially opened its issue on the 25th of April and the same was to close on 29th of April. The issue was extended to then close on the 3rd of May. The issue garnered subscription of a total of 28.17 lac shares against an offer size of 105.07 lac shares, resulting in subscription of 27%.

The issue received support from QIB’s to the extent of 36%, HNI’s 39%, retail investors 6% and employees 23%. The level of subscription did not change significantly from the time that the issue was extended. The earlier subscription was overall 25% which increased to 27%. QIB’s remained unchanged while HNI’s moved from 36 to 39. Retail actually reduced from 12 to 6 while employees increased significantly to 23 from 12.

What went wrong? The pricing was wrong and the fact that this was a mere manufacturer and not a retailer made the issue expensive. Secondly there is no interest in the textile sector currently and existing companies from the sector are not sought after. Thirdly there is general apathy in the IPO market and investors are simply not interested in the primary market.

What needs to be done to revive the market? There needs to be a block buster issue where looking at the attractiveness of the same, the issue just sails through and all investors make money. A couple of issues like the above is certainly going to make the primary markets more attractive than what it is today.

The IPO of Scotts Garments Limited which had opened on Thursday the 25th of April and was scheduled to close on Monday the 29th of April has been extended due to poor subscription. The company received bids for 26.40 lac shares against an offer for 105.07 lac shares resulting in a subscription of 25% of the offer size. The price band was Rs 130-132.

Readers would recall that the company had recently done a pre-IPO placement with Canara Bank’s venture capital fund at a price of Rs 115. This by itself was a price discovery and the need to have another price discovery through the book built price band of Rs 130-132 was unnecessary. The price band made the issue expensive and the result is for all to see. It appears that the fund insisted that the IPO issue price should be at a premium to the price at which Canbank Venture Fund invested, so that from day one of listing they would be sitting with profits. The move unfortunately backfired very badly.

The issue failed to garner adequate subscription and even though the issue had a reservation 0f 25% for QIB’s, 40% for HNI’s and 35% for retail, saw subscriptions of 36%, 36% and 12% respectively. The employee quota received subscription for 12%.

The issue has been extended by three working days to close on Friday the 3rd of May 2013 and the price band would be Rs 118-120. Effectively the price has been lowered by Rs 12 or roughly 9% compared to the earlier price band of Rs 130-132. The PE ratio on an annualised basis based on the 7 months ended October 2012 results on a fully diluted basis would now be in the band of 13.15-13.38 against the earlier 14.49-14.72.

The lot size remains the same at 100 shares. The subscription amount to be paid for investors applying in the 2 lac category would now be 1.600 shares for Rs 1,92,000. The issue looks that much better but one needs to know a little more about what went wrong. My advice to investors would be to wait for the next two days till the end of day of Thursday the 2nd of May before taking any decision. This website would update subscription levels and what action investors should take.

Scotts Garments Limited (SGL) is tapping the capital markets with its IPO for 105.07 lac shares in a price band of Rs 130-132. The issue has opened on Thursday the 25th of April and closes on Monday the 29th of April. The issue has received bids for a total of 43,500 shares so far. No inference should be drawn from the level of subscription as the bids are normally made on the last day of the issue closing.

Business

SGL is a manufacturer of hi-fashion readymade garments having state of the art facilities. The company has domain expertise in providing sampling and design, and also provides facilities for embroidery, printing, dyeing and washing. SGL primarily caters to exports and more than 90% of its turnover comes from exports. During the year ending March 2013, the company has exported garments to more than 69 customers in 41 countries. The manufacturing capacity of the company is 217.08 lac pieces per annum. The company is operating at its capacity and it would be fair to state that if any further growth in revenues is to happen that will come from capacity expansion. The company employs over 12,500 people as of 30th September 2012.

SGL uses its sampling and design team capabilities for furthering its business prospects by providing samples made from the in-house design team. International buyers approve from the collection offered and once the sample is approved, the same goes into production cutting the delivery time substantially as the sampling is not required. The approval of designs from SGL’s creation also demonstrates their ability at forecasting fashion and creating designs to suit the needs of the customer.

Currently SGL owns 5,196 sewing machines, 15 computerised embroidery machines, and other finishing equipment for woven garmenting facilities. It also owns 2,682 sewing machines, 17 computerised embroidery machines and other finishing equipment for knitted garmenting facilities. The company has its units in Bengaluru, Tumkur and Kolar in Karnataka and Tirupur in Tamil Nadu.

The company has already partially commissioned its unit at Doddaballapur in Karnataka and would be expanding its base to Kolhapur in Maharashtra as part of the expansion from the IPO proceeds.

Objects of the Issue

The objects of the issue are to raise resources to finance: -

• Setting up of unit for trouser manufacturing at Doddaballapur, Karnataka and knitting and fabric processing unit at Kagal-Kolhapur, Maharashtra.
• Margin money for working capital of new units
• General corporate purpose
• Issue Expenses

The company has been sanctioned a term loan of Rs 150 crs for the expansion project by Canara Bank. The balance money would come from the net proceeds of the IPO and internal accruals.The total cost of expansion would entail a total expenditure of Rs 320 crs. The trouser facility would have a capacity of 90 lac pieceswhile the knitted fabric and processing facility would be 14,000 tons per annum.

Financials

The revenues of the company have grown from Rs 430 crs in the year ended March 2010 to Rs 495 crs in March 2011 and to Rs 500 crs in March 2012. In the seven months ended October 2012, they have grown to Rs 329 crs. If these numbers are annualised, the revenue in the current year ended March 2013 would be Rs 564 crs. The net profit in the same period has improved from Rs 27.84 crs in March 2010, to Rs 34.93 crs in March 2011 and to Rs 84.04 crs in March 2012. In March 2012 there were onetime capital gains on sale of investments of roughly Rs 59 crs and if one were to remove the same from the net profit, the same would be Rs 25.04 crs.The net profit in the current seven months ended October 2012 is Rs 20.41 crs which if annualised would become roughly Rs 35 crs.

The margins have been under pressure and it is with this in mind that the company is doing expansion and backward integration at the same time. The setting up of the knitting fabric and fabric processing plant in Kolhapur, Maharashtra will help in reducing costs as currently the company buys grey fabric and processes the same. The manufacturing plant for fabric and entire processing of the same would make a significant reduction in costs and help in improving margins and also reducing delivery time for customers. There would also be an improvement in quality control as it would be under direct supervision and under one roof. Finally there are incentives for setting up the unit in Maharashtra from the Central government which include 10% capital subsidy and a 5% interest subsidy. The state of Maharashtra gives a further subsidy on interest so that the effective rate of interest would be no more than 2%.

Valuations

Theshares are being offered in a price band of Rs 130-132. Based on the old equity minus the one time capital gains which is not a regular business of the company the net profit for the year ended March 2012 is Rs 35 crs and the EPS Rs 12.30. Based on this EPS the PE ratio is 10.57 at the lower band and 10.73 at the upper band. The expected profit for the year ended March 2013,based on seven months ending October 2012 if annualised, also comes to roughly the same Rs 35 crs. Assuming the fully diluted equity of 389.84 lac shares, the EPS on an annualised basis would come to Rs 8.97 making the PE at the lower end of the band as 14.49 and at the upper end of the price band at 14.72.

Concerns and Drivers

The key concerns in the business of readymade garments export are the dependence on a few buyers which is a concern as well as an advantage. The second concern is the huge outstanding and debtor days and the falling margins. The margins would improve going forward once backward integration kicks in and the competitive environment from our neighbours like China and Bangladesh would help. China is becoming expensive and Bangladesh is having too many issues with deliveries, human rights violations and some incidents of factory collapse and fire in manufacturing units. These incidents may seem isolated but are being viewed as serious by buyers of garments as they cannot afford delay in shipments at any cost. Secondly when retailing does enjoy high margins, a situation where the shop is stocked out is simply not affordable.

The capability of SGL in meeting short cycle delivery and a complete in-house manufacturing programme would help in garnering orders where just in time fashion is the need of the hour. This would help in improving margins. The new capacity being added is some time away and would not have any impact in the financials for the year ended March 2013. The first impact would be felt in the June quarter 2013-14 when the trouser unit in Karnataka has begun operations and would move to capacity utilisation in the second half of the current year 2013-14.

Conclusion

SGL is in a competitive business which is capital and people intensive. The company already employs over 12,500 people and this figure would rise to over 15,000 once the new capacities are partly in place and to 18,000 people when all capacities are fully in place. Margins have been under pressure and there is not much of pricing power available in the industry looking at its nature and competitiveness.

The expansion and new trouser plant would help in sales and profit going forward but the asking price currently leaves virtually no scope for appreciation as far as the valuations are concerned. The company has done a pre-IPO placement of 17.39 lac shares at a price of Rs 115 to a fund of Canara Bank. What has changed since then that the price being asked for is now higher at Rs 130-132?

One should not expect immediate gains from this company as on the valuation front there is little upside possible currently as the issue has been compared with retailers. The markets are in turbulent times and not much has happened to investors in the primary market in terms of gains. India rerating could be the game changer in the medium term.

SEBI Disclaimer: I do not intend to subscribe to the above issue.