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Should you continue to hold these 5 blockbuster IPOs?

We find out if they walked the talk and what’s in store for these stocks

Amber Enterprises (₹3499.6): Getting cold for comfort

The Amber Enterprises stock has been on a tear ever since its IPO in January 2018. At the upper end of the price band of ₹859, the offer was priced at a stiff 64 times its estimated earnings for FY18. Even then the issue was subscribed a whopping 165 times.

Fast forward to October 2021 — the stock has now moved up steeply to about ₹3,400 and trades at 97 times its trailing 12-month earnings and 69.5 times its estimated earnings for FY22.

Amber, a contract manufacturer of air conditioners (ACs) for several brands, is keeping cool company with consumer durable players whose stocks are also richly valued — peer contract manufacturer Dixon Technologies trades at 157 times its trailing earnings while Whirlpool (79 times) and Symphony (64 times) are not very cheap either.

Backward integration, import substitution

The company has had several tailwinds since the IPO, despite losing out peak season sales in summers of 2020 and 2021 due to Covid-induced lockdowns. Low penetration of room ACs and increasing preference for contract manufacturing by brands who wish to just concentrate on marketing, sales and service has always been a driving factor. Amber derives 55-65 per cent of its revenues from room ACs and counts Blue Star, Carrier, LG, Godrej, Daikin and Hitachi among its clients.

Apart from an offer for sale, the IPO was only intended for debt repayment, which was done. Since its market debut, though, the company has grown inorganically, achieving backward integration through the acquisition of IL JIN Electronics and well as Ever Electronics. These players manufacture printed circuit boards, especially for inverter ACs which are popular due to their energy efficiency over normal ACs. Amber already manufacturers other AC components such as motors through another acquisition prior to the IPO.

Besides, in 2020, Amber acquired Sidwal, a company manufacturing railway/metro ACs, giving Amber a foothold in a segment which typically has high entry barriers. Sidwal also supplies defence, buses and other commercial ACs. This is a highly profitable segment too, with operating margins at over 20 per cent. Order book for Sidwal today is at ₹425 crore.

With focus on Atmanirbhar Bharat, Amber has also benefited from its import substitution capabilities; 60-70 per cent of the motors and electronic components — segments in which Amber has a domestic presence — are being imported currently. Earlier in 2018, the Centre increased the import duty on ACs and certain components and in 2020, import of certain fully built room ACs was banned. Amber is also set to benefit from the PLI scheme for White Goods aimed at incentivising domestic production of certain AC components and is investing ₹400 crore in greenfield facilities under the scheme.

Margin expansion not yet

Despite being involved in value adding design and manufacturing of ACs rather than just production alone, backward integration and expansion into more profitable mobility ACs, overall operating margins of the company have been range bound at 8-9 per cent in the last four fiscals. In this period, revenues have grown at a CAGR of 12.5 per cent to ₹3,030 crore in FY21 and profits, at 9.4 per cent to ₹81.6 crore. While growth was strong from FY18-20, the pandemic has impacted FY21 which saw profits almost halving vs FY20.

Prospects remain good, but considering that the stock has moved up three times since the March 2020 lows as well as the high valuation, investors can book profits at least partially, in the stock.

Ujjivan Small Finance Bank (₹20.8): Small bank, big fall

The IPO of Ujjivan Small Finance Bank (SFB) was amongst the highest subscribed issues in 2019 – subscribed by 165 times. Following this euphoria, the stock posted a listing day gain of a little over 40 per cent.

But two years later the stock now trades 44 per cent below the IPO price. Covid-19 did highlight the risks in micro-lending leading to a fall in share price, but apart from weakness in asset quality, the SFB also suffered on the back of weak liability franchise. What aggravated the fall was the exodus of key personnel in the top and middle-level management of the bank during July-August 2021.

Then vs now

Though the IPO was predominantly done to meet regulatory norms, the bank raised ₹750 crore through the issue. Since then, its loan book has grown at a CAGR of 4 per cent (over September 2019 quarter to June 2021 quarter) to ₹14,037 crore and its capital to risk weighted assets ratio (CRAR) now stands at 25.9 per cent versus 18.8 per cent pre-IPO.

In December 2019, during the IPO, Ujjivan SFB positioned itself as having the lowest GNPA among peers (0.9 per cent in September 2019). Today, its GNPA stands at 9.8 per cent, which is the highest amongst peers (June 2021 quarter) — Bandhan Bank at 8.2 per cent, Equitas SFB at 4.8 per cent, Suryoday SFB (with a much smaller loan book of ₹4,004 crore) at 9.5 per cent.

That apart, the SFB’s share in micro-finance is still the highest amongst peers (68 per cent of gross advances, compared to 58 per cent and 17.5 per cent, respectively in the case of Bandhan Bank and Equitas SFB), which demands extra caution, particularly on the asset quality front. While the bank has provided for 75 per cent of its bad loans, another 5.8 per cent of the advances are under restructuring. This, coupled with the bank’s portfolio at risk (> 0 days past due) –– at 30.8 per cent of advances –– indicates likely stress in upcoming quarters.

While yields continue to soar high, converting it into profits has been a tall task for the SFB (net profits were down 97.6 per cent in FY21 to ₹8 crore; also reported a net loss of ₹233.5 crore in June 2021 quarter). Besides rising credit costs, its slower (vs peers) ramp-up in liability franchise is another dampener. Low-cost CASA contributes only 20 per cent (vs 11.9 per cent in September 2019). Equitas and Bandhan have a CASA ratio of over 40 per cent.

Outlook

As per reports in the public domain, the bank seems to have also delayed recognition of NPAs in the micro finance segment.It is highly likely that the bank’s new management may now focus on front-running the provisions and cleaning its balance sheet, in the upcoming quarters, which can dent profits heavily in the near term.

The stock currently trades at 1.1 times its June 2021 book (vs IPO valuations of 2.2 times ). Any re-rating in future is contingent upon how the bank carries on this clean-up exercise. Upcoming stress in the MFI book and improvements in its weak liability franchise also need a watch.

Note that the plans for merger between Ujjivan Financial Services (holding company) and Ujjivan SFB is more significant for shareholders of the former due to elimination of holding company discount. It may not make much difference to the SFB shareholders for now.

IRCTC (₹4,875.4): Express speed

Starting with a stellar market debut (listing gains of 101 per cent) in October 2019 the IRCTC (Indian Railway Catering and Tourism Corp) stock has since zoomed.

The IPO was subscribed almost 112 times.

Its dominant position, as the only authorised entity to provide online railway tickets, catering services to railways and packaged drinking water at railway stations and trains in India, has worked in its favour. Its strong financials, healthy return ratios (ROE of 39 per cent in FY20) and debt-free status also put it in a strong position. IRCTC grew its revenue at 21 per cent,and net profit at 88 per cent ( y-o-y) in FY20, a normal year.

Now, the stock has multiplied 15 times from its issue price. From being very attractively priced at 18 times P/E (based on FY19 earnings) at the time of the IPO, to a trailing twelve-month P/E of 261 times now, the stock is anything but cheap. But with the economy opening up and people returning to travel, the prospects for IRCTC have brightened again.

What works

IRCTC derives its revenue from four segments — internet ticketing, catering, packaged drinking water and travel and tourism. With Covid restrictions on catering, online ticket bookings acquired the top slot (57 per cent of FY21 revenue). The introduction of a convenience fee of ₹15.00 (non-AC) and ₹30.00 (AC) for online ticket bookings from September 1, 2019, helped too.

Convenience fee accounted for 69 per cent of IRCTC’s June 2021 quarter ticketing revenue of ₹150 crore. This is expected to go up with increasing internet penetration and plans to replace with many sleeper coaches to be replaced with AC coaches.Online ticketing is a lucrative segment with operating profit margins (OPM) of 49 to 89 per cent during FY18- FY20 and 78 to 79 per cent, thereafter.

Leaving aside FY21 and the latest quarter, the OPMs from catering and packaged water too have been attractive at 11-17 per cent and 19-23 per cent, respectively.

IRCTC is applying for a payment aggregator licence from the RBI. This will enable the use of its payment gateway, i-Pay by other entities, bringing in additional revenue.

IRCTC is also strongly positioned to participate in government tenders for running private trains, though the operating metrics here will be different from its current businesses.

Being a PSU, key risks emerge from control over pricing by the government (convenience fee/catering) as well as from opening up of ticketing to the private sector.

Burger King (₹160.2): Big bite has paid off so far

Long queues at QSRs (quick service restaurants) are not common given their core objective. However, the IPO of one QSR company — Burger King — saw one of the longest queues when it was subscribed by 157 times in December last year. Investors who managed to get a bite have had their hunger for returns more than satiated so far. The stock has returned 167 per cent from its IPO price of ₹60 in a little less than a year, despite Covid second wave disruption to business.

So far so good

The ₹810-crore IPO included a primary issue of ₹450 crore, which the company intended to use for re/prepayment of outstanding borrowings and for capital expenditure to set up new restaurants. Post IPO, the company has repaid its borrowings and is now a net cash company (excluding lease liabilities) and better positioned to invest in growth.

While the company reported sequential growth of 20 per cent in revenues to ₹196 crore in Q3FY21 (its first full quarter after IPO), restrictions due to second wave resulted in a 24 per cent sequential decline in revenue to ₹149 crore in Q1FY22. However,Burger King managed the second wave better by optimising on delivery business. Its same store sales growth during these two quarters was lower than that of bigger peers like Jubilant Foodworks, may be due to a marked number of its stores being in malls (55 per cent). With malls opening, this may improve. From 270 operational stores, it plans to have 320 by FY22 end, 470 by FY24. It aims to end FY22 with flattish same store sales growth (SSSG) over FY20 (flat in FY20 also) and reach 5-7 per cent SSSG from FY23. The company is progressing as planned in expanding services with launch of BK Café in Q4FY22.

Valuation

Based on consensus estimates, Burger King trades at EV/revenue (one year forward, Bloomberg consensus) of 5.3 times versus Westlife Development (McDonald’s) at 5.5 times and Jubilant Foodworks at 11 times. Its discount versus Jubilant appears justified given longer track record of Jubilant and its better profitability - FY22 EBITDA margin of Jubilant expected at 25 per cent versus 14.5 per cent for Burger King. The company is expected to reach profitability at the net (EPS) level in FY23.

That said, do note that Burger King is at early stages of its foray. Its revenue numbers, year-on-year growth, EBITDA margins and EV/revenue multiple for FY23 look very similar to Jubilant of FY13. In the eight years from then till FY21, Jubilant stock has given CAGR returns of 26 per cent, revenue grew at CAGR of 11 per cent.

For now its valuation looks reasonable. Further stock performance will depend on its execution and whether domestic markets continue to assign higher multiples for QSR business. Restaurant Brands International (parent company of Burger King International) trades at one year forward EV/revenue of around 6.5 times. While its expected CY22 revenue growth at 8 per cent is lower than Jubilant’s 20 per cent (FY23), EBITDA margins at 40 per cent are far superior to Jubilant’s 26 per cent.

Chemcon Sp. Chemicals (₹448.3): Mixed brew

The Chemcon Specialty Chemicals (Chemcon) IPO was oversubscribed by 149 times and the stock debuted with listing day gains of 116 per cent in October 2020. While it has given up much of the gains, it still trades at 33 per cent premium to IPO price.

At the time of IPO, we had recommended to wait and watch for a stable operational track record before investing. The issues flagged revolved around volatility in prices and stretched working capital besides ability to add and commercialise capacities. Today, margins are stronger but given high volatility in prices, sustainability of high margin is a concern. Capacity expansion, product line extension and backward integration are yet to reflect in the earnings.

We hence reiterate the call we gave at the time of the IPO.

Chemcon has three main product lines, pharmaceutical intermediaries Hexamethyldisilazane (HMDS - 50 per cent of FY21 revenues) and Chloromethyl Isopropyl Carbonate (CMIC-35 per cent) and oil well cleaning-related bromides (13 per cent). HMDS’ raw material prices continue to be volatile. It contracted further by 10-12 per cent in FY21 after nearly halving in FY20 from record highs in FY19. Raw material prices of CMIC have been stable in the last three years. Chemcon is in the process of backward integrating into raw materials for HMDS, which should help improve margins over the medium term.

Progress report

Of the IPO proceeds intended for capital expansion (₹40 crore), close to ₹25 crore has been utilised by Q1FY22. The company plans two additional multi-purpose plants in FY22 and two more in the next two years at Manjusar, Gujarat. Other pharma intermediaries 4-CBC, and 2,5-DHT have started revenue generation but are yet to scale up while higher grade HMDS for semi-conductor and other applications remains to be validated by customers.

Chemcon has improved its debt-equity ratio from 0.3x at the time of IPO to practically zero as of FY21 end. But working capital cycle remains stretched. Revenue declined by 7 per cent year-on-year in FY21. Better product mix and price pass-through allowed for EBITDA margin expansion to 33 per cent in FY21 (26 per cent in FY20), but Chemcon is a price taker from global markets, which have been choppy in the last three years.

The promoters have a few unresolved matters with SEBI and CBI. Now Gujarat Pollution Board has issued an order to close the Manjusar plant. The company is unsure of operational losses till the order is revoked. The stock is priced at 28x FY21 earnings, which is not expensive, but not cheap as well, considering issues such as material price volatility, stretched working capital and the promoter issues.

Published on October 09, 2021

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