Monte Carlo Fashions Limited which had tapped the capital markets with its offer for sale of 54.33 lac shares in a price band of Rs 630-645 was oversubscribed 7.83 times but the hyped issue which was expected to do very well with HNI’s failed to entice them. Why? What went wrong? We all know that issues which are hyped get added flavour when the HNI who borrows funds and applies participates. To the issue price, the cost of funding becomes the base price for the issue to list and retail investors take this as a launching pad.

Two recent examples come to mind where the issues of Snowman Logistics and Sharda Cropchem were oversubscribed 60 times a piece and HNI portion received excellent response with Snowman being subscribed 221 times and Sharda Cropchem 251 times. Why then was Monte Carlo at just 1.71 times? The brand is strong and the issue size not too big. Just about 351 crs at the top end of the price band. Two things went wrong for the company. The pricing was horribly wrong and the valuation based on current earnings was 25 times at issue price which with the expected premium on listing would become an expensive 35 times. At this valuation one can easily go and buy the market leader KevalKiran which enjoys a margin which is substantially higher than Monte Carlo. Second the track record of the promoter group as far as minority shareholders are concerned is very poor. The Oswal family is still living in the 20th century where they believe that dividend should be maintained in absolute terms and the term “DIVIDEND PAYOUT” has no relevance. Their flagship company Nahar Spinning earned an EPS of Rs 21.59 for the year ended March 2013 and the dividend paid was Rs 1 or the dividend payout ratio was 4.63%. The following year the company fared much better and the EPS rose a staggering 86.61% to Rs 40.29. The company declared an unchanged dividend of Rs 1 and thus slashed the payout ratio to 2.48%.

Government companies or PSU Company’s payout between 20% to 33% of their profits as dividends and are considered to be good paymasters. The payout of a measly 2.48% speaks volumes of the management’s attitude towards minority shareholders.

The details of the subscription are as follows: –

One hopes that management and merchant bankers take a learning from this issue that mere roadshow response is not enough and issues which concern shareholders post listing should be looked into. Gone are the days when what management gave shareholders was taken as God’s gift and no questions asked. Shareholders are voicing their concern and raising issues. Further the institutions too have been forced to take a stand on important issues and no longer can just remain neutral on important issues. They have to make public on their websites the way they voted and also the rational for their voting.

The new BJP led government is a mere 7 months old and they have 53 more months to go. Many more issues whether IPO’s or FPO’s or OFS will come in that period. Let promoters and merchant bankers take the example of Monte Carlo Fashions Limited as a test case of what can happen.