1)Internal risks
SEBI takes a very serious view of
newbie companies hiding any looming risks to their business from the
public. Therefore, IPO firms try their best to cover every possible
thing that can go wrong with their business in the ‘risk factors’
section. While ‘external’ risk factors are usually generic, ‘internal
risk factors’ are specific to the company. Do go over them with a fine
tooth comb, as these can sometimes flag risks to the very existence of a
business.
Varun Beverages, the bottler for PepsiCo
India, which made a ₹1,100-crore offer recently, discloses that its
franchisee arrangement with PepsiCo India for 17 States and two Union
Territories is valid for ten years up to 2022. But the franchisee
arrangement is non-exclusive. Pepsico has the right to ‘unilaterally
terminate’ this arrangement with a 12-month notice. It can also
terminate the arrangement if Varun’s debt-equity ratio exceeds two
times.
This apart, pay special attention to the
lawsuits against the company. A fairly long list of commercial disputes
is usual. But you need to be wary if there’s litigation hanging over a
critical business asset, like the brand or main facility.
2)Promoter stake build-up
Is the IPO over-priced? The best way to gauge this is to check out the valuation multiple for the offer at the price band.
But
the prices at which large shareholders have bought into the company in
recent years can give you excellent cues too. Past share purchases are
available in the section ‘capital structure’ under the ‘build-up of
promoter holdings.’ In the ICICI Pru Life IPO, for instance, the
prospectus reveals that the company allotted shares to an Azim Premji
outfit and an arm of Singapore’s Temasek Holdings at an average price of
₹226.3 per share in December 2015 and March 2016. That’s a good 33 per
cent below its final offer price of ₹334 just six months later.
3)Basis of issue price
Most
IPO investors lose money not because the business is shaky, but because
they have bought into it at fanciful prices. Every IPO firm is supposed
to justify its offer price to its investors in its prospectus. Some
companies present an elaborate justification of their offer pricing.
Others get by with skimpy disclosures.
But even if
you don’t go by the company’s reasoning, the ‘basis of issue price’
section helps you check the company’s latest EPS (earnings per share)
and book value as per restated financials.
Then,
there’s the comparison of valuation multiples for the IPO firm with its
industry peers. The recent PNB Housing IPO offered a good comparison
with as many as six of its real rivals. It revealed that the most
expensively valued housing finance stock — Gruh Finance — traded at a
steep 14 times book value, while the cheapest — Dewan Housing — traded
at 1.6 times. PNB Housing was offered at 2.4 times post-issue book
value.
4)Industry and company overview
Industry
information is not a problem for companies operating in highly visible
sectors like banking. But when a company operates in a niche sector
about which little is known, the ‘industry overview’ section can come to
your rescue. The prospectus of Green Signal Biopharma which is making
its IPO this week has a detailed overview of the Indian vaccine market.
This tells us that the BCG vaccine requirement for the Indian
immunisation programme is now sourced from just two private companies —
Serum Institute and GreenSignal Biopharma.
The ‘our
business’ section is where the company offers details of its business
and makes a pitch for why it is better than its rivals. Green Signal Bio
Pharma claims in this section that it is one of just four companies
worldwide pre-qualified to supply BCG vaccine to WHO
5)Record of merchant banker
There
used to be a time when one could gauge the quality of an IPO merely by
looking at its merchant bankers. But even top-notch bankers sometimes
bring duds to the market. Now, a new section in the prospectus mandated
by SEBI, helps us gauge the merchant bankers’ track record. You will
find this section at the fag end of the prospectus tucked away in “other
regulatory disclosures” (some provide links). It reveals the stock
price performance of the IPOs handled by the same banker for the last
year, for various time frames. There’s also a useful summary of the
proportion of IPOs handled by them languishing below offer price six
months after the issue. PNB Housing’s prospectus shows that Kotak
Mahindra Capital handled 16 IPOs in the past year, of which half were at
a discount a month after the issue.
No comments:
Post a Comment