If you love the primary market and an Initial Public Offering (IPO) is something that gets your pulse racing, get ready for a lot of excitement. A slew of companies is lining up to raise as much as Rs 3,700 crore from D-Street this week. And you could be in the thick of the action.
The companies launching their IPOs this week are Kalyan Jewellers India, Craftsman Automation, Laxmi Organics, Suryoday Small Finance Bank and Nazara Technologies, the mobile gaming company backed by ace investor Rakesh Jhunjhunwala.
Each of these companies is unique and could list with healthy gains. But strong listing gains do not mean that a company is necessarily a good long-term pick, so it’s a tricky call.
We asked the experts which companies could turn out to be wealth creators in the long term. Their take: Anupam Rasayan (ongoing IPO that closes today), Craftsman Automation, Laxmi Organics and Nazara could be good bets for listing gains while Suryoday Small Finance Bank could be a long-term pick.
If you had to put money in some of them, which ones would you pick?
It’s all bull
To be sure, the ongoing enthusiasm in primary markets through IPOs, FPOs and OFSes is in harmony with the current bull market rally.
So far in calendar year 2021, as many as 13 companies have raised about Rs 16,000 crore through their IPOs. During the whole of 2020, around Rs 31,000 crore was raised via 15 IPOs.
The average listing gains for IPOs that hit D-Street in FY21 are at over 70 percent, the highest in at least 3 years, suggest experts.
“Retail investors are the most excited lot, subscribing to these IPOs for listing gains, and nearly 78 percent of total stock listings in FY21 have witnessed first-day gains, the highest in at least three years,” Nirali Shah, Head of Equity Research, Samco Securities, told Moneycontrol.
“Investors must be cautious as during such times even poor-quality issues tend to see mind-boggling subscriptions. It is safer to judge on the basis of one’s own risk appetite and liquidity requirements before holding on to these companies for the long term,” she said.
Here’s a closer look at the IPOs this week.
Craftsman Automation: High debt level a concern
Craftsman Automation opened its initial public offering (IPO) for bidding on March 15, with a price band of Rs 1,488-1,490 per share. The issue closes on March 17.
Most brokerages are in favour of subscribing to the issue for listing gains, but the high level of debt on the company’s books is a concern. Craftsman Automation is raising money to pare its huge debt burden.
The company is a diversified engineering company with vertically integrated manufacturing capabilities. It operates in three business segments, namely Automotive – Powertrain and Others; Automotive – Aluminium Products; and Industrial and Engineering.
“It has strong and well-established relationships with several marquee domestic and global OEMs. Its balance sheet is burdened with debt and it trades at an expensive valuation of 73x P/E vs an industry PE of 61 times,” Samco Securities’ Shah told Moneycontrol.
“Further, considering the capital-intensive nature of the business, along with stiff competition among auto ancillary players, it would be advisable to look for other resilient listed players operating in the auto ancillary space and not subscribe to this IPO for the long term,” she said.
Prashanth Tapse, AVP – Research, at Mehta Equities, told Moneycontrol that risky investors can “subscribe with caution” while conservative ones can give the offer a miss.
“We are concerned over the high debt on the books with low profit margins, and high competition in domestic as well as global markets, which can keep margins in lower single digits. Exposure to the criticality of the automobile business with changing BS norms and the rise in focus towards EVs (are also factors to consider),” he said.
Lakshmi Organic: Subscribe for listing gains
Laxmi Organic Industries, a specialty chemicals company, is planning to raise Rs 600 crore through a public issue. The IPO opened on March 15 and comprises of a fresh issue of Rs 300 crore and an offer for sale of Rs 300 crore by promoter Yellow Stone Trust.
Laxmi Organic Industries is going to utilise the net proceeds from the fresh issue for repayment and to fund its capital expenditure for a fluorospecialty chemical manufacturing facility.
The IPO gives investors a unique investment opportunity in the knowledge-intensive specialty chemicals manufacturer and leading exporter.
The IPO is priced slightly on the higher side compared to its peers, but the company has failed to capitalise on growth opportunities, which only makes it a good bet for listing gains, say the experts.
“The company operates in a high-growth segment with significant market share, it has not been able to capitalise on this growth and has in fact seen a declining bottomline over the last three years,” says Shah of Samco Securities.
“Not only this; the IPO is expensively valued at a PE of 45.5x vs the industry average of PE 35.5x. Hence, it is advisable for investors to seek other listed peers for better returns over the long-term and avoid this IPO too,” she said.
Kalyan Jewellers: Subscribe with Caution
Bidding for Kalyan Jewellers’ IPO will begin on March 16 and end on March 18. The price band for the public issue has been fixed at Rs 86-87 per equity share.
The company plans to utilise the proceeds from the fresh issue for its working capital requirements and general corporate purposes.
Experts recommend that conservative investors give the IPO a miss though it could see good listing gains. The jewellery business has remained risky and volatile, with gold prices also adding to the headwinds the company faces.
“We recommend risky investors can “subscribe with caution”. We see high competition from both organised and unorganised players in the Indian jewellery industry as the majority of the jewellery industry consists of unorganised players, who have historically dominated the market, although their share has been falling and is expected to continue declining,” says Tapse of Mehta Equities.
Conservative minded investors can give this IPO a miss because it is priced higher than the industry average, according to Tapse. The jewellery business remains quite risky and gold prices are volatile, he said.
Gold prices have been in a downtrend with emerging signs of economic recovery. MCX Gold has declined from a high of Rs 56,191 (made in August 2020) to a low of Rs 44,150 (made in the first week of March 2021) - a fall of 21 percent. At present, the yellow metal is trading around the Rs 45,000-mark.
Prabhudas Lilladher has assigned an avoid rating to the IPO of Kalyan Jewellers, one of the largest Jewellery companies in India. The stock trades at ~30xFY23E EPS, which might look cheaper than Titan, but a weak balance sheet, poor capital allocation, and a poor track record of jewellery listings in the past suggest caution.
Nazara Technologies: For risky investors
The Rakesh Jhunjhunwala-backed Nazara Technologies will open its maiden public offer for subscription on March 17, within a price band of Rs 1,100-1,101 a share. Nazara is set to become the first gaming company to list on the exchanges.
Nazara Technologies is a leading India-based diversified gaming and sports media platform, with a presence in India and markets such as Africa and North America.
The company may trade at an even higher multiple vis-à-vis expectations, as 1) it is a pure-play digital company offering a potential of 30 percent CAGR and 2) scarcity premium with almost no traditional company showing capability to grow at this pace in the medium term, Elara Capital said in a report.
“With investor enthusiasm in the primary market and high liquidity for primary issues, we are not comfortable on the objective of the IPO, which is entirely an offer for sale by existing funds or shareholders,” says Tapse of Mehta Equities.
“We also assume understanding the gaming business is quite difficult and an extremely risky business at this point as there is no defined concept to value and price any game’s intrinsic value. It will cost millions of dollars for development and marketing and we never know which game will become the next PUBG or fail due to some regulations,” he said.
Mehta added that Nazara’s first-mover advantage in the niche gaming segment might see good grey demand, but the ask price is very expensive. Hence, only risk-taking investors should “subscribe with caution”.
Suryoday Small Finance Bank: A good long-term play?
Suryoday Small Finance Bank will open its initial public offering of 1,90,93,070 equity shares on March 17 with a price band of Rs 303-305 per share. The issue will close on March 19.
Expert recommendations are mixed but if the economy picks up momentum, Suryoday Small Finance Bank (SSFB) may very well be lifted by the rising tide. The company has a diversified asset portfolio but still remains MFI dominant. Valuation comfort and growth will keep the company on buyers’ radar, suggest experts.
The bank’s Gross Loan Portfolio has grown at a CAGR of 46.98 percent from Rs 17.18 billion as on March 31, 2018 to Rs 37.11 billion as on March 31, 2020 to Rs 39.08 billion as on December 31, 2020.
“At a higher price band (305), the stock is valued at 2.28(x) P/BVPS with a current book value per share of 133.5. Factoring the good return ratios, FY20 ROA/ROE of 11.3%/2.5%, we believe that Suryoday Small Finance Bank Limited is worth subscribing. Thus we recommend subscribe,” LKP Securities said in a note.
Tapse of Mehta Equities told Moneycontrol that the Suryoday Small Finance Bank IPO gives investors an opportunity to invest in a leading SFB. “We see huge business growth from unbanked and underbanked segments in India, with SSFB well placed to tap the growth,” he said.
Mehta added that the IPO seems to be reasonably priced, and is well below the industry average compared to its listed peers. We advise investors to “subscribe” with a long-term perspective as well as to generate decent listing gains.
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