The total traded volume in Jindal Cotex on both the exchanges combined was 5.36 cr shares. The traded volume on day one saw the issued capital change hands 4.76 times. The shares marked for delivery were 2877857 and 2784389 shares on the BSE and NSE respectively making a total of 5662246 shares or 50.33% of the total shares which were offered in the IPO.

This very high delivery certainly indicates people wanting to exit on day one as they are making money after a long time in a small sized issue. What is important that with half the shares sold or delivered they have been accumulated by stronger hands? In the next few days we will know who has bought these shares and what’s in store for the investors of this company.

Project

The project being constructed envisages the building of India’s largest dry dock and amongst the largest in the world. The dimensions of the same are 662 mts long and 65 mts wide. This dry dock can accommodate a VLCC (very large crude carrier) as well. The company has installed/is installing two large Goliath cranes each having a lifting capacity of 600 tons, including fit out berths. Alongside the dry dock, the company has a wet dock which could be used for ship repairing as well. The location of the shipyard is strategically located in Gujrat and ideally situated between Dubai and Singapore.

Ship building at PSL is done by building blocks, then mega blocks and then giga blocks. These blocks are very much similar to playing ‘lego’ when we were kids. Steel is cut, fabricated and then assembled. These blocks are then mounted and fabricated to form a mega block and then a giga block is made. On my visit to the shipyard we were explained that a Panamax vessel which has a 75000 ton DWT, weighs roughly 12000 tons. This ship is constructed in 12 giga blocks of roughly 1000-1200 tons each.

The building facility is effectively a modern state of the art assembling, manufacturing engineering unit having various capabilities. It is this capability that the co-promoter Punj Lloyd would like to exploit going forward. The company has the capability of making off-shore vessels which are used in oil exploration as well as defence related ships for the Indian Navy and coast guard. The company is in the process of completing its assessment of facilities for clearance of pre-requisites before it can bid for such enquiries. 

The shipyard site is an EOU (export oriented unit). The fabrication and block assembly facilities are set up in the company’s SEZ unit which is owned by its subsidiary E Complex with whom the company has a long term lease agreement. The entire shipyard other than the offshore yard would be ready in the next couple of months and the first vessel is to be delivered in April 2009. 

Order Book

The company has a healthy order book of roughly Rs 4500 crs which consists of 22 Panamax vessels from two overseas shipping companies valued at roughly Rs 3900 crs and a notification of award of contract from ONGC of 12 OSV’s for about Rs 550 crs.  Of the order for 22 Panamax vessels, the company is in discussion for 8 of such vessels and is engaged in arbitration for 4 such vessels which means that there is a firm order for 12 vessels and there is discussion/arbitration for 10 vessels. The ONGC order is a fixed price contract which does not allow for any escalation of contract price on any ground whatsoever. It is important to mention that the 22 Panamax vessels were all contracted before 14th August 2007 and are therefore eligible for a 30% subsidy from the government of India.

Ship building is a cyclical industry and is subject to wild fluctuations based on the economic cycle and the oil exploration industry based on the oil prices. There is widespread concern and almost every country wants to secure its energy security and has therefore increased the oil exploration efforts. In India also the success in finding oil in deep exploration blocks in the Krishna Godavari basin and in the Barmer oil fields in Rajasthan has increased the activity in these fields and also the need for more equipment.

The company having the potential and the capability to manufacture would be able to leverage on the expertise of its promoter and co-promoter in obtaining the necessary orders. The company has a technological tie up with M/s SembCorp Marine of Singapore.  

Valuation

The company has commenced commercial production from 1st April 2009 and as such there is no past performance to talk about. Revenue recognition is on completion method basis and there would be some revenue in the current year ending March 2010. With the first ship due for delivery only in April 2010, any meaningful revenue would only accrue in the financial year ending March 2011. With no revenue to talk about, EPS and therefore PE become redundant to talk about when one looks at valuation. The sheer size of the project makes any comparison with listed entities like ABG Shipyard and Bharti Shipyard unrealistic and improper. The government shipyards are un listed and therefore are again not comparable.

A correct and meaningful comparison can only be made once substantial revenue numbers are available and once clarity on a) the under negotiation orders and b) defence orders visibility becomes available. In the absence of any such clarity or visibility, there would always be risks associated with the revenue and also with the execution of the project.   

Promoters and their holding

The promoters of the company are the Gandhi brothers with a stake of 23.1% who have in the past promoted and sold Pipavav Port and the Mumbai SEZ project to the Mukesh Ambani group. Even in the case of PSL the promoters have sold to private equity investors and financial institutions a little over 54% of the pre-ipo equity. They inducted a co-promoter in the form of the Punj Lloyd group who has 22.3% shareholding. Post IPO this holding would get further diluted with the Gandhi brothers having 20.1% and Punj Lloyd having 19.4%.

The company has marquee investors in the form of Trinity Capital, 2iCapital, New York Life, Blackstone Asia Advisors amongst the FII’s and Indian investors in the form of IL&FS, UTI, IDBI and Exim bank amongst others.

The company’s ship building yard which is also a manufacturing, fabricating and assembling unit for various types of plant and machinery, is a state of the art facility and can be used for various end uses. No doubt the plant would be consistently operating and would be able to weather any cyclical downturns which would occur over time. However at the current moment of time the issue looks very expensive based on present conditions and the fact that the first full year of operation would be 2010-2011 and probably it would be only in 2011-2012 that the full potential of the plant/facility is realised

Risks

Expertise in ship-building is limited of the promoters. The company is yet to start delivery of the ships and the first one is expected only in April 2010. Of the total 22 Panamax vessels as many as 12 are under negotiation/arbitration and there could be delay in execution of the same orders. The limited experience in execution and cyclicality of the business could lead to delays. There is every possibility that there would be further issue of equity thus diluting the stake of those entering the company currently as shareholders. 

Conclusion

Considering all the above it appears that the book built price of band of Rs 55-60 is tilted against the investor, and even though there maybe some listing gains considering the small size of the issue of just about Rs 500 crs, I believe it makes sense to avoid the issue. It may make sense to buy the company post listing or when revenues and order book become more visible. Currently markets have also run up quite a bit with the benchmark indices having more than doubled over the last six months.

If however any investment is to be made with a minimum of three years horizon, the same may be done with a clear understanding that if markets correct 15 to 20% in the future this share could be available cheaper than the current price band

This week the high profile NHPC listed and is included in the list. This is also the last week for Excel Infoways and having completed one month of being listed, we would cease covering this stock next week onwards.

The hydrocarbon industry in India is highly regulated and we have regulations, price controls, subsidies etc. The biggest burden on the industry is the unrealistic price at which kerosene and LPG is sold to the consumer. The resultant loss or under-recoveries is split three-way in a formula which has basically been ad-hoc and revised from time to time by the central government. This burden of subsidy which falls on the PSU units in this sector have affected not only the fortunes of the companies but also to some extent made them weak financially and affected the performance of these companies.

Whenever there is a disinvestment from any such company, the issue of subsidy is always in the forefront and top of the mind of analysts. This time was no exception, but the government was prepared for the same and answered accordingly. The Union Budget for 2009-10 clearly states that no under-recoveries on account of kerosene or LPG will have to be shared by upstream or downstream companies. This will form part of the central budget. This I believe is a certain positive for the exploration industry and will help them expedite the process of energy security for the country. 

Whenever one talks of OIL, ONGC comes to mind. Very clearly ONGC is the big brother of OIL and from the table below it can be seen that by and large ONGC is ten times the size of OIL. Broadly speaking on parameters of efficiency, earnings and performance the similarities are more than striking and one could say that they are identical. In terms of size there is a clear cut difference and ONGC is about ten times in size.

NHPC has just listed a few days back and very clearly the listing of the same was a disaster considering the overwhelming response the issue garnered. HNI’s had invested Rs 35000 crs in an issue where shares worth Rs 580 crs were to be offered to them. There cost of funds was in a range of Rs 6.75 – Rs 7.25 per share and each one of them has either booked a loss or is holding on to a huge loss, hoping that the price improves. In this scenario the question that comes to mind is should one invest in OIL by applying for the issue and if yes at what price?

The price band is Rs 950 -1050. ONGC shares closed at Rs 1157 on the BSE on 2nd September, a premium of roughly 10.19% over the upper price band of OIL. Broadly speaking a large number of people believe that because of size that ONGC has there should be a 9-11% premium that ONGC should enjoy currently over OIL. If that be the case, then pricing of OIL at the upper price band leaves nothing for the investor on the table after listing. The assumption that price of OIL and ONGC will rise post listing is fine but let us understand that ultimately both will move in tandem unless one finds large reserves of oil and or gas and the other makes no progress.  Market players also feel that with the NHPC saga, the government should lower the price and allow investors to make some money. 

This is a catch 22 situation and needs careful attention of all concerned. Reduction or change in price band is not a possibility. Pricing at the lower band is tantamount to accepting the pricing as inappropriate. The only solution or option in my view is something in between. Thomas Bata is very well known and introduced a concept known as “BATA Pricing”. Products in his shop were sold at 99.95 and 199.95 and so on. The lead managers may take a leaf out of BATA and recommend a price which is ‘three digit’ and on listing becomes ‘four digit’ so that investors may make money and some sort of compensation or relief may be offered for NHPC. Secondly there is no loss of face for anybody be it the promoter of the company (in this case the government) or the merchant bankers and finally with a positive gain on listing day for investors, the dampened sentiment revives – something which is very important with the huge pipeline in store.

I believe retail investors should apply at the magical figure of Rs 999, the last three digit price and not at cut-off. My rational is that suppose the issue is substantially oversubscribed and the price fixed is at Rs 1050, the possibility of listing gains seem remote at current market price of ONGC. The loss of interest for a retail investor is Rs 2.85 per share assuming an investment of Rs 999 bearing interest of a fixed deposit of 8% per annum for 13 days. The worst case scenario is that the issue is priced at the highest price and the investor is not allotted anything. In such a case by losing on the interest alone the investor is out and with virtually no listing gains possibility he is saved from a bigger potential loss.

In conclusion I believe the best an investor can do is apply at the recommended price of Rs 999 and expect the promoters to be reasonable in the price discovery  and be considerate to investors looking at the sentiment of the market. 

SEBI disclaimer: I intend to subscribe at the recommended price.  

Markets had fallen sharply on Monday, but on Tuesday they opened very strongly in Asia as well. Indian markets also opened strong. It was the ideal situation anybody could have hoped for a listing. NHPC had the perfect setting for listing, after huge interest was generated during the road show and the issue garnered oversubscription of over 23 times. Even retail participation was excellent and more than thirteen lac applications were garnered.

The listing ceremony was held at the Convention Centre of the Mumbai Stock Exchange and the share opened at Rs 39 a gain of Rs 3 or 9 % against the issue price of Rs 36. On the NSE the listing was even more spectacular with the stock listing at Rs 42, a gain of Rs 6 or 18 %. Alas! This was too good to be true. On the BSE the stock made a high of Rs 39.75 while on the NSE the open was the high itself. Thereafter even though the BSESENSEX was up as much as 257 points and the NIFTY 73 points, it made no difference to the price of NHPC – the stock just kept on slipping and slipping.

The table appended above shows the volume which took place and I believe this is the highest traded volume in any share ever on the bourses. A total of 70.24 cr shares were traded on the exchanges and the value of these trades were about Rs 2625 crs. The shares which were sold for delivery were extremely high at 35.255 crs or 50.19 %. In the case of Adani Power the percentage delivery of trade on day one was a mere 33 % and one must also bear in mind that the total traded volume was substantially lower at 26.07 cr shares against 70.24 cr shares in the case of NHPC. The issue of NHPC was for 167.74 cr shares and of this issue the delivery percentage is 21%. This is a high number and clearly shows that investors irrespective of category have a tendency to sell on listing day.

The fact that the stock closed almost at its low indicates that the selling is not over and the stock is likely to continue to be under pressure even today. US markets were substantially down last night and the Dow Jones lost 185 points or 1.95%. If Asian markets continue to be weak taking US cues, NHPC could be in trouble holding on to the issue price of Rs 36.

OIL India issue opens on Monday the 7th of September. The performance on day one of NHPC certainly does not add comfort of any sort to the OIL India issue. The euphoria of NHPC has disappeared and seeing the debacle on listing day, people are now discussing the pricing of NHPC. At the time of the issue nobody was concerned about valuations or the fact that the company had an EPS of just over one rupee and therefore the PE of the company was over 34 times. It may also be mentioned that grey market premiums had touched a staggering Rs 12 or a 33% premium to the issue price of Rs 36. Once again the old adage that grey market premiums disappear as listing day nears held true.  

NHPC was the second mega issue and with both being from the power sector, there were high expectations. Power has huge growth potential and the opportunities seem unlimited currently. Both issues have failed to live up to their hype and euphoria created or generated during the road show period. There would be a definite bearing of this on the remaining IPO pipeline which has more than 125 issues lined up. A greater impact would be on the issues from the power sector companies and the PSU divestment companies.

Let us hope promoters and merchant bankers learn from this issue and ensure that there is enough left on the table for the risk taker. One final thought and prayer for the health of the primary market is that NHPC manages to hold on to the issue price and that the promoter of the company lends support to the issue.

NHPC shares were issued at Rs 36 and in the grey market the premium had touched levels of Rs 12 or 33% higher than the issue price. Over the last few days the premium has dropped significantly and is currently about Rs 4-5 and very few trades are actually happening. There are two important repercussions to the issue performance of NHPC post listing namely: – the success of NHPC will determine the success of the issue of Oil India which opens on 7th September 2009 and secondly HNI’s cost of application was around Rs 7.50 per share. If they do not make money there could be some selling pressure on NHPC and secondly bring about a dampener to the subsequent issues. 

The HNI category with the employee under subscription added was oversubscribed 54.75 times. Taking the highest retail allotment of 713 shares, the similar allotment in the HNI category was for an applicant who applied for 39025 shares. The oversubscription in this category was 54.75 times. The cost of application for an investor who took a loan in the HNI category at 10% with a margin of 5% for a period of 13 days is Rs 6.67 per share. This interest cost has reduced as the allocation increased on some cancellations or withdrawals and also because of addition of shares to the category on account of employee under subscription. 

The issue is to be listed on Monday or Tuesday and would be finalised in a day or two. 

The share opened at Rs 15.05, made a high of Rs 133.70, a low of Rs 115.60 and closed at Rs 119.30, marginally below the issue price. The volume traded was 1,73,91,025 shares and a high 15.46% of traded volume or 26,89,365 shares were marked for delivery.