IPO MARKET STILL FROTHY
Monday, 11th February, 2008
The recent fall may have skimmed a lot of froth off the secondary market but the primary market remains as frothy as ever. That’s the next correction waiting to happen. The three initial public offers open this week, only highlight this.
Take IRE Infrastructure, priced in the 185-220 bands. Engaged in BOT road projects, this company will probably clock Rs 1,000 crore in revenues and Rs 110 crore of profit in 2009. At 220, it is asking for a market value of Rs 7,300 crore, a price-earning (PE) multiple of 70 times. IVRCL and Nagarjuna constructions, 5 times the size of IRE, have market values of around Rs 6000 crore. It beats me why anyone would want to buy a much smaller company at three times the valuation of existing listed peers. But then, one looks at Wockhardt Hospitals and almost spots a trend there. Of course, the 10 management has quickly lowered it’s price band by Rs 50 to Rs 225-260 after the market sell off. I guess we should infer that the management’s assessment of the value of Wockhardt hospitals is directly connected to the value of the sensex. Is this a scalping game by investment bankers or serious promoters trying to bring in a new set of investors, you often wonder?
Yet, even after the market induced price cut, the stock appears expensive. If all goes well, Wockhardt may generate EPS of Rs 3 in 2009-10. It wants a 90 PE multiple today for that from primary market investors. It wants a market value of Rs 2,700 crore when you can buy Apollo hospitals, a much larger peer for Rs 2,500 crore. And I always thought lPOs need to offer a discount to secondary market valuations to attract investors. Tut tut. Finally, there is Emaar MGF around which there is considerable excitement. Here too, a futuristic leap is required. You have to believe a land bank and “NAV” story as cash flows, even till 2009-10, won’t remotely justify a price of Rs 690.You could buy DLF and Uriitech, which churn out thousands of crores of cash every year at PE multiples of 15-20 times 2008-09 earnings, while for Emaar the PE, even for 2010, is closer to 100.
Yes, Emaar has big plans but those will all fructify over “years” with attendant risks of oversupply and pricing pressure in it’s key markets by then. Maybe the “bird in hand” principle works against this lPO. The more I see these lPOs, the more I marvel at how effortlessly investors pay up these valuation even as they ignore much cheaper, well established, larger stocks from their peer sets. I marvel at the imprudence of managements and the audacity of investment bankers who collude to rip investors off. Many of the lPOs of 2007 are well under their issue prices today and I suspect some of the big ones of 2008 will follow suit. Nothing like hard losses to cure a market of it’s euphoria.
Last fiscal year,India’s economy grew faster than thought, according to revised government estimates released Thursday. Encouraged by the new numbers, Finance Minister P Chidambaram said the government would do everything to keep the economy’s growth average close to 9 per cent a year.Data from the Central Statistical Organization showed India’s gross domestic product rose 9.6 per cent in 2006-07, up from an earlier estimate of 9.4 per cent. This is strongest expansion that the economy has seen in 18 years and the pace brings’ it close to China’s sizzling double-digit growth.
Chidambaram said the latest estimates left the GDP growth averaging 8.8 percent, in the first three years of the UPA government. “My goal is to continue to maintain the same level of growth but at the same time,” he said. The “government reserves the right to make rapid adjustments depending upon evolving global economic situation.” New Delhi-based research body National Council for Applied Economic Research has projected India’s GDP to grow 9.1 per cent through this fiscal year ending in March.Chidambaram said he was confident that India would be able to tide over the ongoing turmoil in the global financial markets, which has been precipitated by a housing loan crisis in theUS. “We are confident that if we keep firm hands on the wheel, the economy will sail through turbulent waters,” he said. We are maintaining a balance between growth and inflation.”
