India Inc. raised U.S.$1.2 billion in the first quarter (Q1) of 2010 through initial public offerings (IPO), according to a report published by global consultants, Ernst & Young. The report goes on to add that with 20 IPOs in Q1, India stands behind only the U.S. and China in the global tally. Infrastructure, real estate and construction, information technology and retail were amongst the leading sectors in India. These statistics affirm the thought that the Indian economy is well on its way to revival post the global economic downturn. Companies, big and small, across industrial classifications, have trusted the public to invest in them thereby creating a financial environment where they can thrive. “There is a clear trend that has emerged with these IPOs, the government has stepped up as a major player along with the private sector,” says Ajay Parmar, head of research, institutional equities, Emkay Global. However, he maintains that the returns to investors on the IPOs that hit the market have not been much. “Investors still seem skeptical as some returns have even hit the negative,” he adds.
Despite the initial apprehension to the proceedings, there are companies whose valuation seem attractive. They hold the clear advantage of being a monopoly player or operating in a niche space. Here is a glimpse of some hot and not-so-hot companies that tapped the capital market recently, based on inputs from Parmar.
Favourite pick
Jubilant FoodWorks Ltd.
Industry: Food Services
Price band: Rs. 135-145/Share
Issue proceeds to be used to repay bank debt and to allow their private equity partners, India Private Equity Fund (Mauritius) and Indocean Pizza Holding Ltd. to exit the venture.
Jubliant Foodworks (Jubilant) holds the master franchisee rights for Domino’s Pizza in India, Nepal, Sri Lanka and Bangladesh. Parmar lists Jubilant Foodworks as his personal pick and states that it likely to display strong medium-to-long term gains. He states that Jubilant’s delivery model is impressive, especially its cash generating ability. “They could see a growth of 30 to 40 per cent in their topline in the future,” adds Parmar. Jubilant is unlikely to face a like-to-like comparison as there are no listed peers in the same space. Comparing Jubilant to its listed peers that function internationally is a folly as the operating parameters are different. The verdict on Jubilant is that its valuation is attractive, lending itself to lucrative listing gains.
Niche player
Persistent Systems Ltd.
Industry: Information Technology Services
Price band: Rs. 290-310/Share
Issue proceeds to be used to fund two new development facilities, procure hardware and to capitalise the company’s subsidiaries.
Persistent Systems (Persistent) is a leading Outsourced Product Development (OPD) company and its client list includes 37 companies with revenues of over U.S.$ 1 billion. Its greatest advantage is the fact that it operates in a niche space and has no direct comparison in the OPD space. Parmar feels that the company offers a wide spectrum of services enhancing their growth prospects when compared to peers. The right mix between offshore and onshore projects and a strong client list add to the list of positives. As negatives, Persistent depends heavily on revenues generated by companies based in the U.S. apart from a threat of dilution to earnings if the government decides not to extend tax benefits granted to export of IT services. In conclusion, Parmar feels Persistent will see a strong response post listing simply because of its strong growth prospects.
Fit for the future
Talwalkars Better Value Fitness Ltd.
Industry: Wellness and Fitness
Price band: Rs. 123-128/Share
Issue proceeds to be used to open 27 new fitness clubs across India
Talwalkars Better Value Fitness (Talwalkars) is amongst India’s largest fitness chains operating 58 health clubs across 28 cities. Talwalkars enjoys great brand equity and is the first choice for many fitness enthusiasts in the country. “At present, Talwalkars looks on the expensive side. It is tough to judge if the valuation is accurate as it will take a minimum of three years to judge its performance. Right now, nobody can say for sure as the lack of a direct comparison to a listed peer makes it difficult to read,” says Parmar. He still maintains that Talwalkars growth prospects look very encouraging as the level of penetration in the industry remains low. A major concern could be the lack of exclusive access to the brand name, with other fitness clubs looking to leverage an association with the name ‘Talkwalkars’.
Shaky foundation
Nitesh Estates Ltd.
Industry: Real estate and Construction
Price band: Rs. 54-56/Share
Nitesh Estates (Nitesh) is a real estate company based out of Bengaluru. In the recent times, Nitesh has moved from a sole focus on residential projects to include hospitality, corporate projects and malls in its real estate portfolio. “I would definitely say Nitesh looks expensive,” says Parmar. He adds that poor financials and limited track record of project delivery is bound to hamper the company’s future. The recent economic slowdown has impacted this industry and delayed delivery dates for most projects. Of note, Nitesh is yet to complete a project outside of Bengaluru, although it has taken on projects in Chennai, Kochi and Goa. On the positive side, Nitesh has managed to form strategic partnerships with global entities from which the company can benefit immensely. The joint-development model that Nitesh follows also allows it to reduce upfront land acquisition and project costs. Overall, Parmar feels Nitesh will find it hard to justify its valuation.
