Alagappan Arunachalam

Buoyed by the bull phase and an unrelenting appreciation in stock prices in the preceding two years, the IPO (initial public offering) market has been quite active in 2005-06, with several big names raising funds through this route. Not only did this list include some high-profile companies such as Jet Airways, Shopper's Stop, Suzlon Energy and Reliance Petroleum, it also featured stock market debuts by some unconventional companies in new businesses such as multiplexes, aviation and broadcasting, hitherto unrepresented on the stock market.

Business Line

made recommendations on 100 of these IPOs between January 2005 and June 2006. We revisit some of these companies for a report on where investors in these IPOs now stand and evaluate whether these new entrants still merit investment.

Investors would be sitting pretty had they invested in our `invest' recommendations, which generated an average return of about 80 per cent. Celebrity Fashions and Jet Airways, however, have not performed as well as expected.

Heightened business risks due to events that played out after the IPO appear to have contributed to the poor performance of these stocks. The number of IPOs rated `Avoid' was 44. These stocks, on an average, generated an unimpressive 2 per cent return till date.

A significant number of IPOs rated `Invest' quote at about twice their offer price. Our `Avoid' list has also panned out well, with a few stocks quoting at a 40 per cent discount to the offer price. Here, we attempt to follow up our initial recommendations in some of these stocks, with an emphasis on scrips that have registered the most and least gains from their IPO price.

Bombay Rayon

: Phase-out of the quota system in global trade along with the government-sponsored TUFS loans has driven capacity expansion in the textile industry.

Buoyed by a bull phase in the secondary market, a significant number of companies in this sector tapped the primary market. Bombay Rayon, which made its debut in December 2005, was among our top picks in the textiles space. Within the space of a year the stock trades at Rs 210 against Rs 70 (the invest price). The sharp deprecation has not altered our view that investors would be better off exiting this stock, as valuations appear stretched. It trades at a premium to similar-sized peers in the textile industry. The company is on an expansion binge, though revenue from these plans is likely to flow in only in the medium term given the order backlog in the textile machinery industry. An equity dilution, which appears to be on the cards, is a dampener.

SPL Industries

: Buoyed by the response in the primary market to Gokaldas Exports and opportunities in the global markets, SPL Industries, in July 2005, offered 90 lakh shares at Rs 70 apiece. Despite the stock trading at a significant discount to its offer price, we continue to be bearish. At Rs 40, the stock trades at about nine times its trailing twelve-month earnings. Though valuations appear moderate, earnings prospects remain uncertain. While its export potential remains intact, SPL Industries faces competition from larger peers. SPL's margins, which are thin, have come under further pressure in recent quarters. Larger integrated players are our preferred picks in the textile sector.

Uttam Sugar

: Rated `Avoid', this is a stock in which IPO investors have lost significant value. Offered at Rs 340 per share in March 2006, it now trades at about Rs 140. The sharp decline in the stock, however, has not materially altered our overall view on it.

Uttam Sugar, an integrated player in the sugar business, tapped the market to fund its greenfield expansion plans. The lifting of the export ban on sugar and commencement of production at its 4,500 tcd facility at Khaikheri augur well for revenue growth. However, the earnings growth for sugar companies may slow from the scorching pace of the past, given the weak trends in domestic and international sugar prices.

Intense competition for cane procurement in Western UP is an added risk. Under the circumstances, it may be better to restrict stock exposures in the sugar sector to one or two frontline players.

Sadbhav Engineering

: An infrastructure player focussed on road projects, Sadbhav Engineering has registered a two-fold rise on its offer price. With the company riding on a comfortable order-book position in the road construction business, we continue to retain a positive view. Sadbhav, however, faces intense competition in the road segment from larger peers.

A ramp-up in its capital base, which is about Rs 130 crore, would be required for Sadbhav to leap into larger projects. However, with Gammon holding a sizeable minority stake in Sadbhav, order-flows from this larger peer are likely to fast-track revenue growth. Mining operations and irrigation projects are also among the company's focus areas. Diversi- fication is key for the company to break away from the low-margin highway business.

Sasken

: The fundamentals of Sasken, a hybrid telecom products-cum-services play, rest on a strong footing. Our positive outlook on the stock stems from the strong demand for offshore R&D services going by the R&D spend by telecom equipment majors, its blue-chip clientele the broad range of service offerings and recent acquisition of Finland-based Botnia. The upside in the stock is likely to come from the ramp-up in product revenues, which is not fully factored into its current valuation. We reiterate an `invest' on the stock recommended in April at Rs 352 and suggest investors stay invested at current price levels.

3i Infotech

: A strong third-quarter performance, with robust growth in revenues and swelling order-book, sustained acquisition spree of small sized companies and evenly-spread revenues from different geographies, continue to inspire confidence in the 3i Infotech stock.

The downside risks stem from slowdown in discretionary spends in the banking domain and heightened competition affecting growth prospects and putting pressure on margins. In the latest quarter, the company also revised its earlier policy of capitalising its software development costs by charging software product development costs as incurred through the profit and loss account. We have an outstanding `buy' recommendation on this stock made in August at Rs 169 and now recommend a `hold'.

(This article was published in the Business Line print edition dated January 21, 2007)
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