e-Nagar

Visa confirmed it would proceed with a public offering this spring. The company hopes to raise $18.8 billion, making it America’s biggest IPO. Visa takes fees from credit-card transactions;

Isn’t it odd that the in a time when the entire world is facing Credit Crisis, loan defaults are at an all time high, VISA (which makes all its money from Credit Cards) is confident that it can launch the biggest IPO in American history. Maybe it proves that the present crisis cannot scare off the companies with sound fundamentals.

PS: the default risk is borne entirely by the company issuing credit cards and not VISA. Hence the company could take this audacious step.

I loved T.R. Ramaswami’s article in LiveMint so much that I had to post it in ENagar.

Who is the greatest magician? David Copperfield? P.C. Sorcar? There is a new extremely talented magician. In specific, he can (to use a term favored by magicians) “vanish” the law and transform any amount of money as many times as necessary in four months. However, his little (or not-so-little) tricks are as susceptible to deconstruction as those of any other magician’s and can be broken down into sleight of hand (also called prestidigitation orléger de main), misdirection, deception, collusion with a member of the audience, apparatus with secret mechanisms, mirrors, and other tried and tested trickery. Subject to the caveat of a statutory warning (“This trick can be performed only by him or those who share the same surname and should not be attempted by others”). Here’s how to do it:
Step 1: Float a shell company (i.e., a company that exists on paper, is a legal entity but does not have any economic activity). Name the shell company XYZ Ltd. Paid-up capital Rs1 lakh only.
Step 2: Increase the share capital of the shell company from Rs1 lakh to Rs1,000 crore by passing a resolution.
Step 3: Another shell company of the magician, say ABC Ltd, and a listed associate, say PQR Ltd, each invest in the shell company XYZ Ltd. These are nothing but book entries, the financial equivalent of magic.
Step 4: Immediately apply to the court for the merger of XYZ with DEF. The reason for the merger as stated in the application “XYZ has put in considerable efforts in acquiring necessary technical and manpower skills, which are ancillary to the business of DEF which can take benefits of this specialized skill sets and technology available with XYZ to undertake mega power projects and implement them more efficiently and successfully.” This “expertise” has been acquired by the shell company within days of increasing the capital.
The real reason is to comply with regulatory guidelines supposedly designed to prevent fraudulent transactions, but which actually aid and abet them. This relates to recognizing the minimum capital brought in before a public issue as promoters’ contribution. The promoters’ contribution would have to be at many times the face value otherwise. A merger sanctioned by the court qualifies as promoter capital, which it would not have otherwise. The unsuspecting court allows the merger, since both the companies are private companies not knowing that there is no expertise involved except that of manipulating the market for a public offering of shares at a premium of 45 times within a period of four months. The merger is sanctioned.
Step 5: Millions of shares of PQR are allotted to the owners of the shell company, XYZ, and ABC called a Project. (The word ‘project’ could only refer to multiplying money many times in four months.)
Step 6: Engage top-notch intermediaries for a gigantic public issue. Select rumors and stock market manipulation push up the price of all shares in the same industry (there are not many) to dizzy heights to justify the premium and ensure subscription. Advertise aggressively and hijack the caller ring tone of captive telecom customers without their consent to play the advertisement.
Step 7: Engage a top-notch lawyer to obtain a blanket gag order from the highest court against various  petitions  in  various  courts.
Step 8: Get the issue subscribed and have it quoted at a further premium to the initial public offering (IPO) price in grey market operations.
Step 9: Say “Oops” and make pious statements of long-term returns when the market crashes.
And all this is within the “law”!!
Where are all the investor protector forums and champions?

A year ago Hutchison Essar was valued at $18.8 Billion by Vodafone. Bharti Airtel is today valued at $45Billion by Indian Stock Exchange. Reliance Communications (the company which made Cellphone a common man’s necessity) is valued at $38 USD.

Looking at this BSNL, the state owned Telecom Giant which has a huge fixed line, cellular, broadband and now IPTV business valuation at $100 Billion, looks cheep.
After all BSNL has the more infrastructure than any of them can even handle.
Also while all the other companies are creating SPV and hiving out tower business to keep depreciation cost to eat into their profitability, BSNL’s management inherited a nation wide infrastructure which is already depreciated to zero value.
Not only this, BSNL used to get as much as Rs 3,200 Cr INR p.a. from its competition as Access Deficit Charges to fund rural telephony and build infrastructure.

So essentially in a capital intensive operations like tele communications, BSNL is several years ahead of other players. Had it been under private control and had half the work-force, I won’t even bat an eye lid if their operations were evaluated at even $200 Billion.

But the question remains is India prepared for BSNL IPO?
SEBI laws force the company to offer a minimum of 10% of the shares for the public offering. Out of this 10%, atleast 30% has to be reserved for the Retail Investors. And going by the history of all IPO of the Public Companies, another 3-5% would be reserved for babus and government employees. So essentially BSNL has to raise some 3.5 Billion Dollars from the retail investors. (or 460 Billion INR).
Not a large sum, considering that India is a Trillion Dollar Economy and household saving rate is close to 30%. But the problem is that Government has put a cap of 100k INR for investments by small investors. So BSNL needs to entice about 4.6 Million investors to invest in the company.

Getting a million people to pay for a 50p candy is a big Marketing task. So consider how big a task is convincing 4.6million people to invest 0.1Million INR each… and that too within 5 days.
Companies like DLF, ICICI, and Relaince Power have tried all tricks. (5% cash discount, option of payment in installments (3 in case of ICICI FPO)) and yet their mega issues are barely subscribed. Sahara Group (one of the India’s largest conglomerate) is forced to carve its business to lots of smaller entities and break the Big IPO into several smaller ones (Its infrastructure IPO is expected to hit soon) SBI was forced for an rights issue because there was no way it could raise the kind of money it needed without dumping the shares at a throw away price. The problem is that Indians have money (reliance is raising billions of dollars every minute), but the laws are preventing them being channelized efficiently. The Corporate India badly needs funds to fuel the growth and boom which we are facing. With the curb in the External Commercial Borrowing (USD loans) and because of the high handedness of Indian banks, they do not have too many options.

I do not know whether India need a maverick who can expand the market and make India ready for the Mega Issues or should we keep our fingers crossed and pray for the day when SEBI would increase the limit on investments we make? But I do know that India may run out of steam if the Companies cannot raise funds fast enough.

This is another bit in my series of stock market basics (advanced readers please skip the post)

India is a booming economy and as the companies expand their operations, they need more and more of capital to fund it. Sometimes the company is able to raise these funds by issuing bonds, taking loans from Banks, internal cash flow etc. but often when the company is expanding exponentially its advisable to issue a fresh set of equity and raise funds by selling it. This could be done via Rights or via FPO.

FPO: Further public offering:
Its much like an IPO, but its an IPO of an already listing company.

Concerns of FPO:
Usually people accuse the promoters/management of a company raising money through FPO of diluting the equity and not rewarding the shareholders adequately.
But if the management is good, then the reality is just the opposite.
an FPO usually happens when the stock price is at all time high. So in reality the FPO induces a stickiness in the price. (People rarely like to book losses, esp in a good company.)
Secondly the funds raised only enables the company to continue its exponential growth and hence benefiting the stake holders (both post and pre-fpo)
Thirdly the very fact an outsider is ready to pay the price for the share is a display of the company’s strong fundamentals.
So an FPO is actually a good thing for the minority stock holders.

Rights Issue:
Its is almost like a FPO i.e.:
1. Fresh equity of an already listing company is raised.
2. The fresh equity is always at a discount from the prevailing market rate (except a rare case where the promoter issues rights share instead of warrants to raise his holding)

However the only difference is that:
1. in the rights issue, only the existing share holders are allowed to subscribe. So the shareholding pattern does not get significantly altered.
2. The allotment would be in proportion to the existing shareholding pattern on the record date. So one does not have to worry about over subscription and hence no/low allotment.
3. The FPO is usually at the prevailing rates (or at a 5% discount) so that the existing shareholder’s interests do not get hurt. But the rights issue is usually a significant discount from the prevailing market rate to encourage subscription and also enable the existing share holders to save taxes by booking paper losses.
4. This discount in prices leads to a significant fall in the share price of the company (post record date)… (but now since the investors have more shares, their wealth does not alter) And this fall gives room for booking of paper losses and getting tax shields.
5. But this introduces a downside. If a company issues a rights issue (at a significant discount) then the existing share holders have to invest in the company, else they will suffer a significant dilution of stakes and capital losses.

Usually the Rights issue is marginally under subscribed because some of the minority share holders are not able to submit their applications in time. There it is advised that who ever subscribes to the rights issue, should apply for slightly more than the guaranteed amounts and benefit from it.

PS: I have deliberately omitted all equations and charts. Please refer to investopedia for details.

Price Band: 405-450 (QIB) and 385-430 (Retail Investors)
Dates: 15th – 18 Jan
No of Shares: 28 million equity shares

Pros
1) Reliance has always proved to be a goldmine for the investors and in the long run, always delivered superior returns. Hence its definitely a buy.
2) Retail Investors will get shares alloted at a 20/- Discount (4.6%) as compared to QIB.
3) Retail investors have an option to pay only 115/- (about 1/4) of the application money upfront.
4) Gray market premium for every such application is 7800/- (per Lakh)
5) The company has 13 ongoing projects that the company is developing have a combined planned installed capacity of 28,200MW. (largest in the country)

So it would be advisable for retail investors to apply for 225 shares, which has a bid value of Rs.96,750 (and an upfront payment of 25875)

Concerns:
Livemint has analyzed the prospectus and raised some valid points.
The company has no trackrecord, no revenue generation operations as of now. Even if everything goes as per target, the first plant would be operational by December 2009, and the last of the proposed plant would be commissioned in 2016. So all the hype is based on the future performance and how efficiently Anil can implement the project. However the present track record does not seem very encouraging.
1) The 300MW Butibori project is already behind schedule and the government, while giving an earlier extension, had said it wouldn’t allow any further extensions.
2) The memorandum of understanding (MoU) for the 1,200MW Shahapur project expired last April.
3) The company has requested for an extension of the deadline for the submission of the project implementation schedule for the 3,960MW coal-fired Madhya Pradesh power project.

Contrarian Approach:
Fundamentals does not seem to be the only factor around this issue. Also, because of the sheer size of the issue and prevailing volatility, there is a slight chance that the issue might get less than 160,000 retail applications. In that event, Reliance Power will be oversubscribed less than 4 times and will have to issue partially paid shares. And for the first 30 days you will be amongst those fortunate few who will actually be holding tradable shares.
So watch out for this trend. If this seems to happen, then I would recommend you to pay not the min 115/- per share, but the full 430/-.
This strategy would really pay off if you have multiple accounts (through spouse/family). So you could apply for few partially paid shares and few fully paid shares and get the best of both the worlds.

No of shares: 20.8 million
Issue Date: 28th Nov – 3rd Dec
Price Band 12/-

This is a classic issue which tells us exactly what are the tell tale signs of a bad IPO.
1) The factory has been operational since 1991, and still its growth and performance has been below average. No wonder a share of face value 10/- is going for ipo at 12/- Last year was the first time the company made a profit >1cr.
2) The objective of the IPO is to raise about Rs 26.2 crore to part finance the proposed Rs 500 crore greenfield one million tonne integrated cement plant in Jharkhand. Can someone tell me from where is the rest 474 crore coming?
3) Promoters are offloading 49% stake in the company. They might as well sell it the entire company off, after all Cement industry is on boom and Ambuja Cement (sensex stock) and L & T cement (another blue chip) actually did that recently.

4) The company boasts that it has made a profit of 1.14 Crore (on a proposed market capitalization of 53cr resulting in an EPS of < Rs 1.) but you have to read its balance sheet to realize that this profit was partly because of a trading profit of over 4 crore. (Now this confuses me, should i categorize this company as a trading firm or as a manufacturing firm?)

5) One should not forget that the profitability of the company is partly due to the scarcity of cement and high prices.. so consistency is not guaranteed, infact that company has a track record of making losses and has a meager revenue of 26 Crore.

6) The company has over 90 crore in debt (a sum equal to almost 4 years of revenue)…. i wonder if even the banks can give them one extra penny.

7) The company says the IPO is to enable its backward integration into clinker… but tell me why would you make 100s of cr of fresh investment in a raw material plant to save 1-2 pennies on your annual revenue of 20cr. This defies all logic and commercial prudence!

In short this issue is the fastest way to penury. BTW the reason for this post is that MoneyControl and several other yellow journalists have assigned 3 star rating to this issue and even ICICI has recommended people to apply.