Insider Trading in India – Regulator fines Ranbaxy,J P Associates Executives – Flash in the Pan or New Policy

9 Jan, 2012
Finance,IPO

Insider Trading in the Indian Stock Markets is quite rampant with promoters of business groups known to indulge in this white collar crime. However it continues to flourish as the market regulator SEBI has not done much about it. Note Insider Trading is very difficult to prove , though the recent conviction and jailing of hedge fund manager in the US Raja Rajratnam and some of his associates shows it can be done if the regulators and enforcers are proactive. India seriously lags behind in cracking down on Insider Trading though in the recent past SEBI has woken up from its stupor.

Note blatant pump and dump IPO’s have made the Indian market a heaven for stock market operators. Despite this going on for years,only recently SEBI has taken some steps against the manipulation of the primary market. Now SEBI has taken some steps in the Insider Trading case as well by fining executives of JP Associates and Ranbaxy both of which are constituents of the Indian main stock market index. However a mere fine will not do to deter insider traders. A big jail term for a insider trader will make white collar criminals think more in indulging in criminal activity rather than small fines .

SKS Microfinance Scandal

Indian Stock Markets are a very dangerous place to invest with circular trading,fleecing of retail investors by  management,pump and dump schemes in IPOs as common as a bid ask spread.The stock market regulator SEBI is mostly toothless failing to act against known stock manipulators known as “market operators” who act with impunity.The latest malfeasance has hit the stock of SKS Microfinance which was one of the most hyped IPOs last year with fabolous growth and profit figures and a high valuation.However the stock has seen its fortunes go down with the AndhraPradesh government launching a crackdown against the Microfinance Companies.This was done after the usurious interest rates and bad practises leading to suicides amongst borrowers.The stock has already touched new lows before it fell another 20% circuit down filter on April 6 2011.

Note the stock fell before it announced the results after the close of the markets which means that insider trading had take n place.The volumes at 10 times certainly seems to hint so as the JP Morgan downgrade of the stock could not have led to such a big fall in which there are a large number of foreign and domestic funds as investors.Besides its problems in AndhraPradesh are hardly new and Indian brokers hardly that good that their reports cause such big stock price movements.Like other SEBI probes expect this one to fail or result in a small penatly which will not deter more such white collar fraunds in the Indian Stock Market.Insider Trading in India is quite widespread with some of the biggest business groups having been fined by SEBI like ADAG etc.

Inflation,Interest Rates and Corruption Triple Whammy Kill Indian Stocks

India’s Stock Market has been amongst the worst performing market in the world in 2011 due to a number of converging issues.While Inflation and Interest Rate Increases are common themes hitting emerging market stocks,corporate governance problems are providing the icing on the cake for bears.Yesterday,stocks of the Anil Ambani Group (ADAG) fell by a bone chilling 15-20% on news that India’s accounting body ICAI has asked for accounts from 2 of the group companies Reliance Communication and Reliance Infrastructure.While no wrongdoing has been proved yet,it goes to show the low trust in company management.Note the promoters and directors of this Group had recently paid a massive amount in penalty to SEBI for insider trading charges.2 of the companies had also been barred from capital market operations.This had already had hurt the stocks and this proved to be the last straw.The Group Leadership is now blaming “Bear Cartel” for the woes which seems a bit laughable considering that they were charged with insider trading themselves.

Insider Trading has increased around the world with even stalwarts like the Swiss Central Bank Chairman and the ex-CEO of Mckinsey in the docket for insider trading charges.

SEBI wakes up reluctantly and decides to investigate a pump and dump IPO Vaswani and Book Manager Ashika

28 May, 2011
IPO

SEBI has been strangely and inexplicably absent from its role of supervising the primary market in India despite a stream of pump and dump IPO by small disreputable promoters and investment bankers.Most of these IPOs have no fundamentals to justify lofty valuations and without the role of market operators and investment bankers have no hope in hell of getting subscribed.Its a scary gambling scheme in which retail investors put money only with the hope of getting out on the first day with probably listing gains.There is no way that an investor can make money in these issues in the long term.However the shenanigans of the promoters and bankers have gone unpunished leading to more and more of these junk IPOs getting into the stock market everyday.This only brings a bad name to Indian stock markets where manipulation can happen so brazenly and openly and pushes away genuine investors away from equities.SEBI has been recently been trying to get more retail investors into the stock market however it seems mere words as it does not take action on open corruption.

India’s Stock Market remains a heaven for Pump and Dump Operators of IPOs.Despite some high quality IPOs in recent times like Coal India,the majority of the IPOs being done are by fly by night operators and promoters.Their is little justification for the valuation and the subscription numbers.But it is a lucrative trade for shady operators who easily manage to manipulate small cap IPOs leaving huge losses for retail investors.The stock market regulator SEBI strangely remains asleep at the wheel despite some blatant pump and dump issues.More than 50% of the IPOs in the Indian stock market over the past year are  below their issue prices.But there has been no investigation and prosecution over these white collar crimes just seem gentle scolding.Like the totally infamous and ineffectual SEC of the US Stock Market,SEBI looks more and more like a toothless tiger.Despite some laudable reforms in favor of retail investors,it needs to act more quickly and reform much more.

Ashika involved in many of the Pump and Dump,Stock Scams,However no Stopping it

Note Ashika Capital has been involved in a the mid cap scam revealed by IB recently in which stock market operator Dangi and others were involved.This had led to massive losses in some of the popular mid cap stocks.Ashika was not involved in that scam but has been the lead banker in other dubious IPOs and FPOs. Tirupati Inks another junk offering where the issue price had no relation to the fundamental value of the company was book run by Ashika Capital.However despite continuous involvement in scams,Ashika keeps turning in new ones without SEBI doing anything much.

Vaswani Scam taken to another Low Level

Vaswani Industries is another one of those IPOs which happened in the market getting subscribed by 4 times.But the manipulation by the promoter and the banker Ashika Capital was taken to another low level.A large number of subscriptions were cancelled such that investors who had applied seeing 4 times would get many more shares than these had initially calculated.Note many retail investors put money into IPOs seeing the oversubscription numbers and by evidently manipulating this they had duped the retail investors.SEBI has decided to investigate this.Expect nothing much to come out of this except a small fine which would be laughably small and would lead to more such scams in the future.

SEBI to probe alleged irregularities in Vaswani IPO

Market regulator SEBI today said it will probe alleged irregularities in subscription of shares of sponge iron producer Vaswani Industries and investigation will be completed within 30 days.

The company, its promoters, directors and intermediaries have been asked by the Securities and Exchange Board of India (SEBI) to cooperate in the investigations.

SEBI, on May 13, had withheld the listing of the company’s IPO following complaints by about 100 investors alleging large scale withdrawal and rejections in the issue.

“A detailed investigations shall be initiated into the matter…The investigation shall be expeditiously completed within a period of 30 days, so that a decision on the listing application by the stock exchanges can be taken within the statuary time limit provided under the Companies Act,” SEBI said in an order.

Future Ventures IPO Review and Analysis – Unique Indian Consumption Private Equity/Venture Capital Company with Cheap Valuation is a Good Buy

22 Apr, 2011
Finance,IPO

Future Ventures is a VC/Private Equity Company that has invested in a number of small Indian companies and startups mainly focused on the consumption industry in India.With India growing at around 8-9% in the last few years and expectations of strong future growth driven by consumption,Future Ventures seems a good investment considering the portfolio of companies that it owns (analyzed below).Future Ventures is a part  of the Future Group run by Kishore Biyani who started India’s most famous retail company Pantaloons.The Company has set a price band of 10-11 rupees a share with a target of raising around Rs. 750crore though the IPO.This would represent around 40% of the equity which would give it a post IPO market capitalization of around $375 million.Note the company had tried to come with an IPO 2 years ago but it was deemed to expensive at that time.

Future Group

Pantaloon Retail is the leading company of the Future Group and has been used to start a number of different businesses in India related  to the comsumption goods and retail like

1) Retail Companies – Future Bazaar, Central, Big Bazaar, Food Bazaar, Home Town and E-zone

2) Consumption and Finance Companies- Future Capital Holdings, Future General Insurance, Future Supply Chain, Future Agrovet, Future Media, Future Brands,

Future Ventures History

Future Ventures was started in 1996, as Subhikshith Finance & Investments. The company was acquired in  2007 by Future Value Retail a subsidiary of Pantaloon . Futures Ventures  is regulated by the RBI as a systemically important NBFC.The company invests in businesses which are strategically important to the group’s retail business.

Future Ventures Investee Companies List and Details

Future Ventures has invested in 14 companies mostly related to India’s Consumption Industry with Textiles/Fashion/Apparels Industry being the biggest investment sector.Makes sense also as Pantaloon is the biggest fashion retailer in India.

Textiles/Fashion Investments

  1. Indus-League Clothing ( Neutral investment,85% Stake) Indus-League Clothing  again has top of the line brand names in the textile retail sector and enjoys very good brand recall with “Urbana”, “Urban Yoga”, “Indigo Nation”, “John Miller”, “Scullers”.The company is growing at slower growth rates though it is the largest textile name in Future Venture portfolio with around $40 million in sales,however net margin is extremely low at 2%.
  2. Celio Future Fashion (Good Investment,~43% Stake) Celio is a JV  between Celio and Indus-League in the men’s apparel .Has expanded rapidly to  20 exclusive brand outlets and 70 multi-brand outlets with sales growth above 200% in 2010 ($6.5 million) with net margin of 18%.
  3. Lee Cooper (India) (Good Investment,84% Stake) Lee Cooper is the biggest brand in India’s Jeans and Shirts Category.This company  has a 15 year exclusive license ending 2021 to manufacture and market “Lee Cooper” products in India for 3% royalty.The company has shown an impressive growth of over 40% CAGR though net margin is low at 6%
  4. AND Designs (Good investment,23% Equity Stake ) AND Designs is present in  women’s apparel market, with focus on western wear.It has  44 brand outlets and 158 multi-brand outlets.The company has got a premium brand name in the Indian market and has presence in the major malls in Indian cities.A good brand to own.The company also has solid financials showing growth of more than 50% CAGR in revenues and with around Rs 58 crores in profit with more than 12% Net Margin.
  5. Biba Apparels (Good investment,13% Stake ) Biba Apparels is also involved in the women’s apparel segment. It has around  68 brand outlets and 133 multi-brand outlets.The company has slower growth rates of around 25% CAGR and a lower net margin of around 8%.However the  company also enjoys a significant brand name in the urban Indian consumer’s mind
  6. Turtle ( Neutral investment,~23% Stake) Turtle is a Kolkata seller of men’s apparel and is also like other companies has well known brand name.The company’s growth though has declined in 2010 and net margin remains low at around 4%.
  7. Holii Accessories (Too small to Tell) Holii is ja JV between the Company and Hidesign India which sells fashion accessories leather products under the brand name “Holii”. The company is still quite small with revs of  less than $1 million and has operating losses.

Future Group Companies

Food Industry

  1. Capital Foods Exports ( Neutral investment,41% Stake ) It is a food processing company selling brands like “Ching’s Secret”, “Smith & Jones”, “Raji”, “Mama Marie” .It also exports these product though sales are still quite small at around $3 million with net margin of breakven.The company is looking to expand rapidly by building Food Parks.
  2. Future Consumer Enterprises (Bad Investment)- It produces and sells brands in the Food Space like  “Tasty Treat”, “Clean Mate”, “Care Mate”, “Premium Harvest” and “Fresh and Pure”.Again not much profit in the competitive sector
  3. Future Consumer Products(Bad Investment) -Very small company owing and selling the “Sach” brand with almost negligible revenues and profits.

The last 2 investments don’t make much sense,they should be combined with Capital Foods Exports as having 3 companeis doing pretty much the same thing leads to unnecessary costs .

Rural Retail

Aadhaar Retailing (Too Early to Tell) – Aadhar is present in the  rural and semi-urban retail sector. The company has been growing impressevely though it has incurred a major loss of Rs 19 crore last year which means a Net Margin of -40%.However it is growing its business and time will tell whether it will become big or not.

Footwear Retail

SSIPL Retail (Neutral Investment,6.5% Stake).SSIPL sells footwear from Nikie and has more than 100 exclusive stores.The biggest company in terms of revs with Rs 334 crore however Net Margin is quite pathetic at only 1.5%

Green and SRI Retail

Indus Tree Crafts (Neutral Investment,52% Stake) Indus Tree is in the  social entrepreneurship sector sellling Green and SRI products under the brand “Mother Earth” .It has a low number of outlets at only 5 exclusive and running at a loss.The company sells premium products which is out of the afforability reach which may restrict its growth despite its “Green” tag. crore.

Education

Amar Chitra Katha (Good Investment)- The company sells the most well known brand in the Indian comic space and has a large loyal following with again top brand recall amongst Indian consumer however sales are still quite low at less than $3 million and is running at a loss.The business has huge potential if executed upon.

Future Ventures will continue to own a  significant stake in portfolio firms so to have managment control and may look to divest portfolio companies through M&A or IPOs to exit its investments at an appropriate time

Advantages of Future Ventures

1) Valuation – The company is not expensive at around 1.1x post IPO book value.Note while the company has not made profits in 3 of the last 4 years it was due to the fact its companies are mostly in the startup phase when they are scaling up with losses.However a number of the companies are earning profits which is a good sign in the last year.The growth trajectory of most of the companies are also above 20%.The company has not earned a profit in the last year so the Future Ventures P/E ratio is not of much use.Normal valuations metrics and measures is not easily applied to a holdings/asset management company especially which is involved in Venture Capital.Book value gives a decent idea about the valuation

2) Good Portfolio – In the portfolio analyzed below you can see 5 good investments with only 2 bad ones in my opinion while others are neutral or too early to tell.I would be willing to buy 5 of these companies which makes Future Ventures a good stock buy

3) Management – Kishore Biyani is a 1st generation entrepreneur who is known as one of the best minds in the retail space in India and Future Ventures has a good management team with both operation and financial expertise.

4) Industry – Future Ventures is a unique Private Equity/Venture Capital story which is not easily available to investors focused on the rapidly growing Indian consumption industry.

Disadvantages of Future Ventures

  • Conflict of Interest – Not a major disadvantage as all Indian companies have that on a much bigger scale.Some of the companies owned operate in the same industry and are competitors.However the parent Future Ventures manages this conflict of interest would be interesting to see
  • No Investment Exit Till Now- Till now Future Ventures has not managed a single exist despite good stock market conditions in the last year.Successful investment of a couple of companies will show the true mettle of the management.
  • No Access to  Galaxy Entertainment Corporation Limited Prospectus which is strange -  “We had undertaken an initial public offer of their equity shares. Galaxy Entertainment Corporation Limited was acquired by our Promoters from the erstwhile promoters of Galaxy subsequent to its initial public offering of equity shares. We do not have access to the offer documents and other records of Galaxy”
  • Loyalty Payments for use of “Future” trademark - They have to pay Rs 1 crore as loyalty which increases a whopping 144% to Rs 2.44 crore in 2015.I think they could have done without the name as “Future” does not have a huge brand name in India ( Pantaloon does though).

Summary

Future Ventures seems a good buy to me given the inexpensive valuation,leverage to Indian’s Consumer Durables and Fast Moving Consumer Goods (FMCG) sectors,decent portfolio and reasonably decent management ( tough to find in the Indian stock markets).Given the junk and crap IPOs that keep hitting the Indian market which is a pump and dump IPO heaven for market operators,this issue looks pretty good.Not consumption focused companies in India have given good returns in recent times which have good brand names like Lovable Lingerie

PTC India Financial Services (PFS) Review and Analysis – Too Expensive to Buy the Financial cum Energy IPO despite Quality and Growth

16 Mar, 2011
Energy,Finance,IPO,PSU

PTC India Financial Services (PFS) a subsidiary of India’s state owned state-run power trader Power Trading Corporation (PTC) is coming out with an IPO to raise around Rs 438 Crores in the price band of Rs 26-28 with an issue size of almost 15.7 crore shares.This ~$100 million issue will also see the exit Macquarie India Holdings which will sell around Rs 81 crores.The company appears to be a bit on the expensive side asking for almost 30 times its annualized profits of around Rs 50 crores.The valuation seems appropriate for a high growth technology company rather than for a financial service intermediary.Though India’s Energy Sector is expected to see sharp growth in the coming decade,it does not imply that everything related to Energy gets a high multiple.

PTC India Financial Services (PFS) is diluting  27.88% stake in the public issue, which will lead to a total market captitalization Rs 1,567 crore or $350 million.PTC will haves its equity stake diluted to 57% post the issue while the other promoters  Goldman Sachs’ stake go down to 8% and Macquarie to 3%.

PFS Introduction

PFS was promoted by PTC  as a special purpose investment vehicle (SPV) to provide total financial services to the  energy value chain, which is mainly  investing in equity and debt to power projects in generation, transmission, distribution of electricity.

Anchor Investors

PTC India Financial Services Ltd. has raised nearly 658 million rupees ($14.5 million) by issuing 23.5 million shares to three cornerstone investors -HSBC Bank Mauritius , Capital International Emerging Markets Fund and Emerging Markets Growth Fund.Set up in 1999, PTC India is a state owned JV between National Thermal Power Corporation (NTPC), Power Grid Corporation of India Ltd (Power Grid), Power Finance Corporation Ltd (PFC) and NHPC Ltd (NHPC).

Investment Bankers

The IPO is being managed by SBI Capital Markets , JM Financial and ICICI Securities  , Almondz Global  and Avendus Capital

Pros and Cons of PTC India Financial Services

Advantages

1) Management – The company has experienced management drawn from top energy companies in the country.This is a substantial big moat for the company.Corporate governance standards are also quite high for the company.

2) Financials and Business Model - The Financials of the company are in the pink of health seeing 100% growth in the last year.The Net Margin at 47% for the last 2 years is also quite good.The Interest Spread on its Loan/Deposit at above 6% is also very comfortable and gives a big cushion.The NPAs are zero which makes the business model terrific for the company.The Capital Adequacy is quite high at 61%.

3) Growth - The company has been growing at a rapid pace since inceptino in 2006.The company has managed to grow its equity and debt investments substantially.Its current loan book is around  Rs 605 crore across 12 companies with  7,500 MW capacity.It has equity investments in 8 companies totalling around Rs 418 crores with another Rs 484 in the queue.The company has seen a CAGR of 371% in its asset books.

4) Power Industry Attractiveness - India is going to add around 82 GW in the next 5 years with a total investment of around $200 Billion with $120 Billion in Generation of Power alone.The massive investments needed in the Power Sector provides huge opportunities for growth

5) Infrastructure Finance Company (IFC) Status by RBI – The company got this privilege in 2010 which allows it to substanitally lower the cost of its funds.Advantages of being an IFC.

a) It is entitled to lend up to 25% of its owned funds to a single borrower in the infrastructure sector, compared to 20%
of owned funds by other NBFCs that have not been granted IFC status.

b) It is also eligible to raise ECBs up to 50% of owned funds without prior RBI approval.

c) It can raise capital through issuance of infrastructure bonds at comparatively lower yields, as holders of such bonds are entitled to tax benefits

Disadvantages

1) Valuation - Despite its strong growth,the pre-IPO valuation of PFS is quite high at 30x P/E,15x P/B and 15x P/S.The company has much higher valuation compared to its listed peer REC and PTC.

2) Small Size and Limited Operating History- PFS has a limited operating history of only 4 years and a small size.Other competitors in the power sector lending space are almost 20-30 times bigger than PFS.

3) Higher Interest Rate Spread and Margins will come down – PFS has much higher interest spreads of over 6% compared to around  3% for REC and PTC.Going forward this spread is going to come down alongwith its high Net Margin of above 47%.The company’s higher interest rate is also going to come down as it lends in larger amounts to more credit worthy customers.

Summary

PTC India Financial Services has substantial advantages of growth,a good business model in India’s booming Energy Sector.However the valuation of the company has been kept too high for essentially what is a financial intermediary.The growth of the company has been compensated by the high valuation making it not such a good buy especially in the context of the current stock market and economic conditions.It might be better to look at cheaper alternatives in the Indian Infra Sector.

List of Top Ten Banks in India – Each a Good Investment for Different Reasons

8 Mar, 2011
Finance,IPO,PSU

India’s GDP has been growing at a rapid clip over the past decade and is set to grow  at even a faster pace in the coming decade.Financial services penetration of the Indian economy is quite low compared to even other developing economies.With majority of the Indian population mired in poverty,access to banks and financial companies is quite hard as people lack knowledge and education.India’s banks have grown at a rapid pace over the past 2 decades after the financial liberalization.However this growth has still lacked in meeting the massive demand in the need of financial intermediation.This has led to the growth on  non-banking financing companies (NBFCs) and microfinance companies.With the opening of the insurance sector,financial companies in India are set to enter a new growth phase.Major banks in India are either state owned or previous government owned  institutions which have been fully privatized like ICICI and HDFC Bank.Both  the state owned banks and the private banks have managed to grow without throwing the whole system in a crisis like what has happened in the recent past in Europe and USA and in China in the 1990s.Here is a list of the 10 Major Banks in India

1) State Bank of India (SBI) - SBI is India’s Largest Bank which is majority owned by the Government.The Company has a number of Subsidiaries and has been a market outperformer in recent times.Revenues of $22 Billion.The SBI has 7 subsidiaries of which 2 have been merged and  5 are remaining .

  • State Bank Bikaner Jaipur
  • State Bank of Hyderabad
  • State Bank of Mysore
  • State Bank of Patiala
  • State Bank of Travancore

2) ICICI Bank – This is the largest Indian Private Bank with operations in all Financial Services Sectors.The Company has faced a bad time during the Lehman downturn but has recovered well.Revs of $12.5 Billion.ICICI Bank is also strong in almost all sectors of the financial industry and has one of the strongest management teams in the country.Like HDFC Bank majority of the shareholding is held by foreign investors.The company which overextended itself in the 2007-2008 boom has now reduced the size of its risky segments and is again back on the growth trajectory.

3) HDFC Bank – HDFC Bank like Axis Bank has shown remarkable growth in the last few years.The Bank which was founded by India’s largest housing finance company HDFC has assets of around $22 billion.One of the best rated banks in terms of service quality and growth.

4) Punjab National Bank – Punjab National Bank (PNB , is the second largest PSU bank  with about 5000 branches across 764 cities.The Bank like BOB and SBI has shown good growth while at the same time managed to control bad debt.

5) Axis Bank - Axis Bank has been the best performing private bank alongwith HDFC Bank showing excellent growth in topline and bottomline.The Bank has been expanding into insurance and investment banking (acquired Enam).Axis Bank was formerly UTI Bank that  begun operations in 1994.The Bank was promoted jointly by UTI,LIC and other state owned general insurers.One of the best Indian bank stock picks.

6) Bank of Baroda – Bank of Baroda(BoB) is the third largest bank in India and is government owned like SBI and PNB. BOB as it is popularly known has shown excellent growth over the last few years and has managed to control its Non-Performing Asset (NPA).The Bank has good management and manages to earn nice interest spreads.

7) Bank of India -Bank of India (BoI)is Indias 4th largest bank, with  3374 branches, including 27 branches outside India. It was the first bank in India promoted by Indian interests to serve all the communities of India.The stock of the company has not performed as well as it peers post the Lehman crisis.It has seen its market cap decrease relative to its larger PSU Bank peers

8) IDBI Bank - Industrial Development Bank of India Limited(IDBI) is a leading public sector banks . RBI categorised IDBI as an “other public sector bank”. The commercial banking arm, IDBI BANK, was merged into IDBI.This PSU Bank has supposed have great potential and could be the next ICICI in the making.

9) Kotak Mahindra Bank - This is the first NBFC to convert into a bank.The bank has its origins as an investment bank and is still very strong in the capital markets.The Bank and its sister concerns are present in most of the financial segments of the market like Private Equity,Wealth Management,Broking,Investment Banking etc.

10) Yes Bank – Yes Bankwas founded by Ashok Kapur and Rana Kapoor.This bank though still small compared to its larger peers,has come into the top 10 due to its path breaking performance over the last few years in terms of growth.It has managed to set new standards and has broken out from the league of smaller private banks.

Summary

India’s  stock market has a large share of financial companies and this is set to possibly grow as India’s bank grow at around 15-20% as the Indian economy expands by  8-9% every year.The valuations of some banks are not high and make a great investment.Many of these banks have excellent management something which other companies in India sorely lack.Banking scams and instability is much lower in India compared to other countries.One of the best investment sectors in the Indian market

Other Articles by GreenworldInvestor that may interest you

  1. India’s Oligopolistic Banking Sector High Lending-Deposit Spread (NIM) due to Lack of Competition
  2. India’s Central Bank proposal to Deregulate the Savings Deposit rate a Positive move
  3. India not to impose Capital Controls like other Asian countries as Economy’s absorbing capacity increases
  4. Indian IPO Market – Seven Reasons Why Investing in Standard Chartered IDR seems a Stupid Idea
  5. Punjab & Sind Bank IPO – Very Attractive Valuation makes it a Buy
  6. Soaring Demand Pull Inflation forces India’s Central Bank RBI to hike Interest Rates by 25 bps to 5.5%
  7. Why do people invest in Indian real estate companies

Acropetal Technologies IPO – Not Junk but Not Compelling Either

16 Feb, 2011
IPO,Technology Sector

Acropetal Technologies is a bit different from the run of the mill junk IPOs coming out in Feb 2011.After a deluge of crap IPOs in 2010,2011 has not seen many of them as the markets have corrected by around 15%.However a recent rally has bought out the junk companies in association with their associated shady bankers and market operators.Omkar,Sudar,FCL are some of the totally crap IPOs  which have happened or in the process of happening.Acropetal Technologies is an IT/ITES company plans to raise Rs 170-crore through its IPO on February 21. The company has fixed the price-band of its IPO at between Rs 88 and Rs 90 per equity share.The company will use Rs 55 crore for acquisitions and Rs 26 crores for a software office.The company seems better quality than the junk and may merit a look from investors though there are much better companies on offer at better prices in the secondary markets.Here are the positives and negatives of the IPO

Negatives

1) Customer Concentration – “top 5 customers contributed approximately 85.68% of our income from operations for the 9 months period ended December 31, 2009. Further, our top ten customers contributed approximately 94.91% of our income from operations for the same period”

2) High Debt – The company has a surprisingly large amount of debt with a D/E ratio of 1:1 which is quite for an ITES company.The company has reasonably good net margins of 20% and has shown decent growth rate as well.

3) Bad Sector - Small and Medium sized IT/ITES companies in India are facing strong headwinds in terms of high wage costs,lower growth compared to the large IT companies etc.Even large medium IT companies have shown falling stock prices.Tough to see how a small company Acropetal is a good bet in this scenario when companies like HCL,Tech Mahindra are available for 10 P/E.

4) Management – Except the Managing Director,there is no management depth plus the MD himself does not seem to have to distinguished a career or academic education.

Positives

Good Growth – The Company has managed to grow by about 50% for the last 2-3 years with a margin of 20% which is quite decent.

Summary

While the company is not the total junk that is dished out in the Indian primary market,there is nothing compelling about Acropetal to buy it.There are tons of other small and tiny IT/ITES companies in the public markets with better valuation and prospects.

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