The week is again full of action on the primary markets front. We have as many as four issues opening during the week. The biggest of them is from HDB Financial Services Limited, which consists of a fresh issue of Rs 12,500 crores. The issue would open from Wednesday the 25th of June and close on Friday the 27th of June. Currently, HDFC Bank owns 94.32% of the company’s shares while 5.44% are owned by the public which has come through stock options. The remaining 0.24% are held by employee Trusts. The price band is Rs 700-740.
Interestingly, until a week ago, shares of HDB Financial were traded in the unlisted markets at a price of Rs 1,200 a share. The share issue band has come as a surprise to this segment of people and is a body blow to the unlisted markets, as people took it for granted that the traded price would be the issue price. Kudos to the company, its management and merchant bankers who are as many as twelve in number to stick to basics and fundamentals. The restated diluted EPS of the company for the year ended March 25 is Rs 27.3. Based on this EPS, the PE multiple is in the band of 25.6-27.1. The price to book for the company is at 3.72 which is marginally higher than the average of 3.6 times of the peer set but lower than the highest at 5.9 times.
The biggest risk factor that the company has is that going forward there could be a sharp dilution in the promoter’s shareholding if draft RBI circular issued in October 24 is implemented. The short of this circular states that the company cannot offer similar services and products as those offered by the bank. In this case as much as 92.54% of the revenue comes from services which are similar to what HDFC Bank offers. If the draft circular becomes law, the company going public would have to ensure that the shareholding of the promoter is reduced to less than 20% or as stipulated and the time frame would be 2 years, if it wants to continue the business of doing what it does.
Besides the above the performance of the bank has seen a decline with profits declining, quality of assets seeing stress and leading to some deterioration in key KPI’s. In the year of going public, the company has also reduced the provision coverage ratio. The AUM of the NBFC, going public is Rs 1.06 lakh crores. The companies who are peer set competitors include names like Bajaj Finance Limited, Sundaram Finance Limited, Shriram Finance Limited, Cholamandalam Investment and Finance Limited, Mahindra & Mahindra Financial Services Limited and L&T Finance Limited. A small point here would be in order to highlight the big risk mentioned, that none of the competitors have a bank which is part of the group or therefore the promoter of the NBFC.
The second issue is from real estate player Kalpataru Limited, which is tapping the markets with a fresh issue of Rs 1,590 crores. The issue opens on Tuesday June 22nd and closes on Thursday the 24th of June. The price band is Rs 387-414. The company is a real estate developer and has till date completed projects in residential and commercial in four states and within Maharashtra in Mumbai, Thane, Panvel and Pune. The company has delivered 120 completed projects and 25.87 million square feet of developable area till 31st December 24.
The company suffered losses for the financial years FY22, FY23 and FY24. However, in the nine months ended December 24, the company has made a small net profit of Rs 7.92 crores. One hopes that this turnaround continues in the foreseeable future. The accounting for the company is on project completion method which leads to lumpiness in expenses and revenue recognition. While it could be debated why the company changed the system from percentage completion to project completion, the fact remains that losses accrued for three consecutive years.
In terms of future, the company has 25 ongoing projects with 24.8 million square feet of developable area and 6 forthcoming projects for 16.3 million square feet. While the ongoing projects would complete in a phased manner starting from FY26 and FY27, the forthcoming projects would take another couple of years thereafter. Suffice to say that the pipeline is strong and would therefore ensure a steady flow of revenue from completed projects. The company has debt on the books which is being considered as negative. The debt is for the projects and has been utilized for buying land and construction costs particularly pre-operative from buying TDR and cost of permissions before starting a project. It’s important to note that these expenses are akin to buying land and are incurred upfront before RERA approval is granted. This effectively means that the builder has to incur and invest in them before any pre-sale can be done.
The demand for housing seems insatiable and the opportunity that is available is just unimaginable. Considering that the company has land bank available beyond the ongoing and upcoming projects, the challenge is two-fold. Sell the projects and ensure that they are completed timely. As on date of RHP, the company has unsold inventory of Rs 8,248 crores. This is at the end of December 24 and would be from projects which are in the ongoing projects, nearing completion. The sale of these along with revenue recognition of completed projects would ensure the turnaround that people would like to see from this company.
Investment in a real estate player would only be for medium to long term as gestation time for any stand-alone project is anywhere between 3-5 years depending upon the size. Invest if you have a medium term horizon at the bare minimum.
The third IPO is from Ellenbarrie Industrial Gases Limited which is tapping the capital markets with its fresh issue of Rs 400 crores and an offer for sale of 113,13,130 equity shares in a price band of Rs 380 to 400 Rs. The issue opens on Tuesday June 22nd and closes on Thursday the 24th of June. The company is in the business of manufacturing and supplying industrial gases in an industry which is dominated by multinational players. The company manufactures and supplies oxygen, carbon dioxide, acetylene, nitrogen, helium, hydrogen, argon and nitrous oxide as well as dry ice, synthetic air, firefighting gases, medical oxygen, welding mixture, and specialty gases catering to a wide range of end use industries. The company has its manufacturing base in West Bengal and Andhra Pradesh and Telangana.
The company reported revenues of Rs 348.43 crores for the year ended March 25 and a PAT of Rs 83.46 crores. The EPS for the year was Rs 6.36. The PE multiple for the company is 59.75 – 62.89. The PE appears to be on the higher side when looked at on a standalone basis. However when looked at from a peer set basis the impression changes because the competitor which is Linde India is quoting at a PE multiple of 140.74.
The objects of the issue include setting up of a new plant of 220 TPD per day to supplement the 110 TPD plant in Uluberia, West Bengal. This will help the company grow its business substantially as the company’s existing plant at the same place is fully utilized. While the place is same, the plant is in a different location or plot.
Investment in the company can be looked at from a switching perspective if one is invested in the competitor as the valuation is half. If not invested look at it from investing in an Indian company competing with MNC at half the valuation. The new plant would be ready in the third quarter of the current financial year leading to higher revenues. The business enjoys higher margins as the principal raw material is electricity while air as such is free.
The fourth and final issue is from Sambhv Steel Tubes Limited which is an integrated manufacturer of ERW steel pipes and structural tubes based in Chhattisgarh. The company is tapping the capital markets with its fresh issue of Rs 440 crores and an offer for sale of Rs 100 crores in a price band of Rs 77 – 82. The issue would open from Wednesday the 25th of June and close on Friday the 27th of June.
The company reported revenues of Rs 1,289.3 crores for the year ended March 25 and a profit after tax of Rs 82.56 crores. For the nine months ended December 24, company reported revenues of Rs 1,018.80 crores and a profit after tax of Rs 40.10 crores. New capacities have gone on stream in the third quarter and have not fully stabilized. The impact of these capacities would be felt in the fourth quarter and subsequently in FY26 when the full impact would be felt. The PE multiple for the company is at 20.32 – 21.64 based on the EPS for the year ended March 24 of Rs 3.79.
For the nine months the EPS has fallen taking into account new capacities that have come up, the higher depreciation on them and plants yet to be fully utilized.
Investment may be considered considering the demand for pipes, the fact that the company is a backward and forward integrated player making steel and pipes from the steel produced which have a great demand. While nine month numbers are disappointing, for reasons explained, it makes sense to invest only if you have an investment horizon for the medium term. These were the four IPOs slated for the week and many more to follow.
