It’s raining IPOs, 7 things you need to know before you subscribe

The year so far has not been going well for the equity market yet India has seen a flurry of IPOs getting launched. Between January to June 2018, India has recorded as many as 90 IPO launches, the highest globally so far. The latest to join the band wagon was HDFC AMC and coming up next is Lodha.

Does it make sense to invest in the IPOs? And if yes how do you pick one? Read to find out more.

What is an IPO?

For a company to grow and expand it requires huge amounts of capital; an IPO helps them raise much more money than what they can raise through borrowing or private equity investors. An IPO stands for Initial Public Offering; it is the very first time a company offers its stocks to the public. Prior to an IPO the company is considered private with a relatively small number of shareholders. With the IPO the company becomes public and thereafter, it’s shares can be traded through an Exchange.

Why is there a frenzy around IPOs?

Every investor is looking for a diamond in the rough. Through an IPO the investors tries to purchase the shares at an IPO price which may be significantly lower than it’s future market price when it eventually starts trading on an exchange. This is where huge capital gains can be made.

As per data, the HDFC AMC offer was over subscribed 83 times by the end of the 1^st day. What this means is that there was a demand of over 83 times for the shares offered by the company. The investors saw huge growth potential in the company and every one wanted to get a piece of it. Unfortunately, getting an allotment of a hot IPO can be very difficult, if not impossible.

Understanding the IPO process

A company that wishes to launch an IPO has to first register itself with Securities and Exchange Board of INDIA (SEBI) and submit its prospectus for approval. Once the SEBI gives a go ahead, the company fixes the price and the number of shares it plans to issue through the IPO.

 There are two types of IPO issues: fixed price and book building. In the former, the price of the share is decided in advance. In the latter the company offers a prices range and the investor needs to bid for the share within that range. The upper limit is known as the cap price while the lower is called floor price.

While applying for shares the investor needs to bid as per the lot size mentioned in the prospectus. Lot size is the minimum number of shares you have to apply for during an IPO.

For eg: If the you wished to buy 50 shares of XYZ company and the lot size is 10 shares/lot then you would have to bid for 5 lots. As per the SEBI rules, one can’t bid in decimals.

It is important to note that even if you have successfully subscribed to an IPO there is no guarantee that you will receive your lot. If the issue is popular and gets oversubscribed then it becomes difficult to issue even 1 lot to each successful applicant. In such cases the lots are allotted based on a computerized lucky draw.

Things you should consider before applying for an IPO

• Read the Red Herring prospectus. It can be difficult to analyze the performance of a private company since there is no historical data to draw on. So the red herring becomes an important document to gauge the business prospect and operations of the company.
• Look closely at the management team; they should be capable of steering the company towards growth after it goes public. Look for how they plan to utilize the funds received from the IPO.
• Compare it’s bid price to that of the competitors in the market. That will give you a fair idea as to if the IPO is over priced or a value purchase.
• You will need to have a Demat account since the shares can not be received in the physical mode.
• Some investors like to subscribe to an IPO because some lucky people had bought shares in the IPOs of companies that went on to pay huge dividends or soar in value. But just because investing in IPOs has worked for some in the past doesn’t mean you’ll get the same returns.
• The target investor for an IPO are the institutional investors and a big part of the shares are reserved for them. This leaves a small percentage of shares available to the retail investor. Your best chance to get an allotment would be to check the “cut-off price” option in your application form. This way if the IPO is oversubscribed, then you have a better chance of getting a subscription.
• Since you will need to block the money required while bidding, you can use an ASBA (Application Sorted by Blocked Amount)account while applying for shares. The blocked amount stays in the ASBA account and earns interest till the allotment can happen. And only an amount equivalent to the allotment is deducted.

Going back to the main question, should you invest in an IPO? The answer depends on your investment outlook. IPOs are definitely a good investment option if you are looking for value investing or under the radar deals but then so is everyone else.

If the company has been in the business for long, has good performance history and management team then it definitely is worth the shot but then again there is no guarantee that you would be able to get your hands on a lot or two.

If you’re not sure whether investing in an IPO will be a good move for your portfolio, consider talking to a financial advisor. A financial advisor can evaluate your investment decisions in the context of your overall financial situation and goals.

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Is the D’mart IPO worth it ?

Issue Detail:
Issue Open: Mar 8, 2017 – Mar 10, 2017
Issue Type: Book Built Issue IPO
Issue Size: 62,393,631 Equity Shares of Rs 10 aggregating up to Rs 1,865.57 Cr
Face Value: Rs 10 Per Equity Share
Issue Price: Rs. 295 – Rs. 299 Per Equity Share
Market Lot: 50 Shares
Minimum Order Quantity: 50 Shares
Listing At: BSE, NSE

D’mart (Avenues Supermarket), which is in the retail business with 118 stores, selling products such as food and groceries (55 per cent of revenues), home and personal care products (20 per cent of revenues) and general merchandise, such as crockery, furniture, garments, footwear, and home appliances (25 per cent of revenues), has clearly come at a time where the global view on equities has turned positive, and volatility in equities is at record lows. IPOs like Snapchat in the US have created significant short term gains for investors, and Indian investors are seeking a repeat.  The fact that D’mart is associated with Radhakrishan Damani, believed to be one of the sharpest long term investors in India, has only added to the frenzy. The penetration and development of retail businesses in India have been a much discussed opportunity over the last decade, and the shift from unorganised to organised, and from offline to online, continue to be much talked about.

Whilst there is no doubt that this shift has begun and is only likely to increase significantly going forward,  as individuals and families gain more and more comfort with these formats and decide which one works best for themselves, one needs to keep in mind that margins in most retail businesses tend to be very slim, and thus investors will need to be very patient with these businesses, as they scale and maintain/try to grow margins simultaneously, in spite of significant competition. Customer loyalty across these formats will also be tested , as consumers do tend to be very price sensitive in most retail segments.

Whilst revenue and earnings growth for the business have been very decent at 35 – 40% CAGR  over the last few years, and the profit margins and other numbers are better than competition, with further scope to possibly expand through the use of private labels, one will need to remember that businesses of this type will create wealth for investors if they are truly thinking very long term. At a P/E of 36 times, even though cheaper than other players in the retail space, and with a model that is very efficient with use of capital, real estate and its supply chain, this IPO is  not cheap.

With expectations of significant listing gains pushing investors to try to get a share of the pie, and the issue size being only about Rs 1870 crores, most investors in the retail segment are not likely to get any shares at all, or even if they do, the net impact on their portfolio is likely to be minimal due to the small holding that they will get. For high net worth investors taking leveraged positions, a very high over subscription rate could essentially mean that their interest costs are also likely to be very significant.

With an uncertain global environment on the back of a possible US rate hike coming up, this issue is appropriate only for investors with a high risk appetite, or investors taking a very long term view of their portfolio in our view.

Just like Retail is all about detail, stock investing is all about earnings so keep your eyes focussed there and see how retail businesses continue to grow their earnings going forward, and deal with significant competition pressures.

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IPO under the lens – PNB Housing Finance

PNB  Housing Finance is the 5^th largest Housing Finance Company by loan portfolio as of 30 Sep 2016. They offer loans for purchase, construction, extension or improvement of residential properties or plots, Non housing loans in the form of Loan Against Property (LAP), loan for construction of Non Residential premises and general purpose loans to developers for on-going projects.

Data Source: JM Financial

Post issue the share of PNB will reduce to 39% from 51% at present. In case of Destimoney, which took 49% stake in 2009, the stake will reduce to 38%.

Strengths

1. Strong distribution network:

Their business is spread across Southern, Western and Northern regions of India. As on31 st March, 2016, 40% of their loan portfolio originated from the Northern region and ~30% each from western and Southern regions.

2. Stable operating model and centralised operational structure:

Their processing hub is designed to support additional branches which will enable them to deepen penetration. Their branches, processing hubs provide centralised and standardised back end and administrative activities, payments and processing of their business. This enables timely collection of funds, better fund management and proactive alerts to their collection department in the event of an overdue.

3. Diversified and cost effective funding source:

As on 31 Mar, 2016 their lenders include 22 public and private sector banks, 17 mutual funds, 16 insurance companies, 553 Provident funds and 122 pension funds. This has resulted in an overall low cost of borrowing and allowed them to maintain sufficient interest margins.

4. Prudent credit underwriting, monitoring and collection process

This has helped them maintain growth in the loan portfolio without compromising on credit quality. They have a credit appraisal team of experienced professionals who perform credit checks to minimise losses. They also have subject matter experts in several areas of underwriting, legal, technical valuation and collections.

Risk factors

1. If they are unable to manage the growth of their loan portfolio effectively it will impact their business
2. Interest rate volatility may impact their business performance
3. They face risk of default and non-payment by customers, in particular self-employed customers, who constitute 23.76% of their total loan portfolio as on 31 Mar 2016 due to factors like change in interest rates, regulations or other factors impacting macroeconomic or global environment.
4. Due to increased competition and deregulation of interest rates, housing loans are becoming standardised and lower processing fees and monthly reset options are becoming increasingly popular decreasing spreads.

Valuation

Peer Comparison

The Price to Book ratios look reasonable compared to peers.

Data Source: DRHP

There have been stable Net Interest Margins, reducing cost to income ratios and decreasing gross NPAs to total loan portfolio which is positive.

Our opinion: Subscribe for the long term

Its reasonable valuations, strong loan growth and strong distribution network are key factors. However, already existing competition could be a challenge. Investors with long investment horizon can subscribe to this issue as projects like ‘smart cities’ and ‘Housing for all by 2020’ may positively contribute to growth of PNB hosing Finance.

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IPO Under the lens – ICICI Prudential Life Insurance Company Limited

ICICI Prudential Life Insurance Company Limited is the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016. It’s a joint venture between ICICI Bank Limited, India’s largest private sector bank in terms of total assets and Prudential Corporation Holdings Limited, a part of the Prudential Group, an international financial services group. It offers a range of Life insurance, health insurance and pension products and services.

Source: Kotak Securities

Quick facts

1. They were the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016.
2. In fiscal 2016, their market share on a retail weighted received premium basis was 11.3% compared to a market share of 9.7% of its nearest competitor among all private and public insurance companies.
3. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches.
4. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies
5. As of March 31, 2016 their solvency ratio was 320% compared to IRDA prescribed level of 150%

Strengths

1. Consistent and robust fund performance

Funds representing 92.9% of their market linked assets performed better than their respective benchmarks since inception.

2. Quality service experience

In fiscal 2016 their grievance ratio was 153 per 10,000 new policies issued compared to private sector average of 345 per 10,000 new policies issued.

In fiscal 2016 their claim settlement ratio for retail death claims was 96.2% compared to private sector average of 89.4%.

3. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies

4. Diversified multi-channel distribution network

They have a growing bancassurance network. ICICI Bank and Standard chartered             Bank currently exclusively distribute their life insurance products. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches. According to CRISIL Research, Life Insurance Industry Report, July 2016, they have one of the largest channels among private sector life insurance companies in India in terms of premium as on 31 March, 2016.

5. Digitisation and transformation of sales, customer onboarding and internal processes:

They have created a device agnostic technology platform that provides their customers, employees and distributors with seamless experience from sales to claim settlement. In fiscal 2016, 92.3% of their new business applications were initiated on their digital platform either by distributors or customers. This has also helped them improve employee productivity. Their retail weighted premium received per employee grew at a CAGR of 29.1% from fiscal 2014 to fiscal 2016. They have an architecture which can integrate their systems with partners quickly which facilitates faster issuance of policies.

6. Robust risk management and control processes

Risk is an integral part of an insurance business. They have risk management and control processes with a detailed cost benefit analysis for risk mitigation and a strong focus on credit quality of their portfolios.

7. Experienced Senior Management Team

Their CEO, Mr. Sandeep Bakhshi has been with their company for over 5 years. He joined ICICI group in 1986 in project financing group of ICICI ltd. He has over 32 years of experience in the banking, financial services and insurance sector. 28 of top 36 members of their management team have been with ICICI group for over 10 years. Senior managerial persons in the actuary, investment, underwriting and claims department have average functional experience of 16 years.

8. It has fairly good persistency ratio compared to peers

Data Source: kotak Institutional Equities

Risk factors

1. Adverse effect on equity market in India could have an impact on their business as it will have an impact on their market linked products.
2. Change in market interest rates could have impact on their investments and business profitability.
3. Their inability to attract or retain distributors, key sales employees could have a material impact on their finances.
4. Any shift in consumer attitude towards financial savings could have an impact on their business.
5. Catastrophic events, including natural disasters could increase their liabilities for claims and have an impact on their finances.
6. Most of their new business premiums come from few products. Any constraints in selling these products due to regulatory changes could impact their business.

Valuations

The embedded value (EV) represents present value of future profits from assets after adjusting for risk. The price to embedded value multiple is approx. 3.4 times FY16 EV. Compared to multiple of HDFC and max life which is 4.2 times FY16 EV, valuations are attractive.

 

Data Source: Mint, 14 September 2016

Our opinion: Subscribe, but only if you are doing so for the long term

Whilst it is the first of its kind IPO in its space and has a large distribution network, strong brand franchise, strong solvency ratio, good settlement ratios, an attractive price to embedded value ratio relative to Max/HDFC and an experienced management, the fair value of the stock in our opinion is lower than the current offer price for the IPO. Thus, you should look to subscribe to this issue only with a long term investment horizon, as the offer price currently does not provide significant upside in the short term in our opinion.

 

 

 

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IPO under the lens – Larsen & Toubro Infotech Ltd.

L&T Infotech is a large global IT services and solutions company, NASSCOM (National Association of Software and Services Companies) ranked them the 6^th largest India IT Services Company in terms of export revenues in 2014.

 

L&T Infotech has come up with an IPO of Rs. 1228 Cr. The details are as under

Data Source: JM Financial

Purpose of the issue

The purpose is to provide liquidity to the existing shareholders.

Quick facts

• They offer IT services in diverse industries such as Banking & Financial services, insurance, energy and processes, consumer packaged goods, retail and pharma, media and entertainment, hi-tech and consumer electronics and automotive and aerospace.
• Their range of services includes application development, maintenance and out sourcing, enterprise solutions, infrastructure management services, testing, digital solutions and platform based solutions.
• Larsen & Toubro Ltd. was incorporated in 1996. The L&T group provides them with access to professionals with deep industry knowledge and its corporate and business culture

Besides India, they have global presence

• Their revenues from continuing operations increased from Rs. 34278million in FY 13 to Rs. 49680 million in FY 15.

Strengths

• Their business to IT connect model

They are one of the very few IT service providers who are part of such a diversified business conglomerate. The experience and institutional knowledge of the L&T group helps them to capitalise on strategic opportunities at a faster pace.

• The strong brand support

L&T provides them with a competitive advantage and helps them in attracting talent, clients, capital, benefit of parent’s global network, best corporate governance practices, etc. They can continue to capitalise on the ability to engage with strategic global clients, vendors and partners of the L&T group.

• Established long term client relationships

Their client base includes world’s largest and well known organisations including 41 out of fortune 500 companies. They have a history of high client retention and derive significant amount o revenue from repeat business.

They carry out regular surveys which helps them ensure high level of client satisfaction. They provide customised client solutions flexible to their client needs through their “Thought Partnership program “ which is designed such that they work with business leaders from their clients on business specific needs like reducing run costs, realigning IT with business changes and helping tem envision their future technological needs.

 

• Track record of established process

 

They have expanded their onshore, offshore and near shore presence thus developing their global delivery model. They have a reputation for delivering high quality IT solutions and timely completion of projects. They have a track record of executing a number of large, end to end critical projects in diverse business areas.

Risk Factors

• Their business will suffer if they fail to innovate, anticipate and develop new services and enhance existing services to keep pace with change in technology.
• Due to their global presence their revenues and profitability will be impacted by exchange rate fluctuations.
• They derive a significant portion of their revenue from a limited number of corporate clients and their revenues could decline if they lose a major client.
• They may be liable to client’s loss caused due to system failure, disclosure of confidential information or data security breaches.

Valuations

Extracts from P&L

It has experienced earnings growth in all periods except 2013-14.

Earnings per Share

PE Ratio based on 31 March 2015 EPS

Comparison with peers

PRE based on 31 March 2016 EPS

Data source: JM Financial services, DRHP

Our opinion

You can consider subscribing to this IPO and exiting post listing.It has a reasonable valuation compared to peers at this stage, but it does not have a very differentiated business model.

Data Source: DRHP

Image credit: economydecoded.com

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IPO under the lens – Mahanagar Gas Ltd.

Mahanagar Gas Ltd. is one of the largest city gas distribution companies in India. Established in 1995 they have more than 20 year of experience in supplying natural gas in Mumbai and are presently sole authorised distributor of compressed natural gas (CNG) and Pipeline Natural Gas (PNG) in Mumbai, its adjoining areas and the Raigad district in the state of Maharashtra. They are coming up with an IPO on 21 June 2016. The details are as under:

Company	Mahanagar Gas Limited IPO
Profile	Mahanagar Gas Limited is one of the largest city gas distribution (“CGD”) companies in India. Company has more than 20 years of experience in supplying natural gas in Mumbai and are presently the sole authorised distributor of compressed natural gas (“CNG”) and piped natural gas (“PNG”) in Mumbai, its Adjoining Areas and the Raigad district in the state of Maharashtra, India. Company is  promoted by GAIL and BGAPH, each of who holds 49.75% of the Equity Shares. GAIL is a Maharatna public sector undertaking and the largest natural gas transmission company in India. BGAPH is headquartered in Singapore and is a part of the BG Group, an international exploration and production and LNG company.
Offer Period	Offer Opens :  Tuesday, June 21, 2016 Offer Closes :  Thursday, June 23, 2016
Lead Manager	Kotak / Citi
Price Band	Rs.380/- to Rs.421/- per equity share
Bid Lot	35 Equity share and multiple of 35 equity shares thereafter
Issue Size overall	Offer for sale 2,46,94,500 equity shares (equal sale by GAIL & British Gas {now Shell}) (Rs. 938.39 cr. @ lower price band & Rs.1039.64 cr. @ Upper price band)
Employee Reservation :	Upto 2,00,000 equity shares
Employee Discount:	Rs. 38/- per equity share only for Employee category.
Face Value:	Rs.10 each
Net Offer:	2,44,94,500 equity shares (Rs.930.79 crs @ lower price band & Rs.1031.22 crs @ upper price band)
QIB (including Anchor)	50% of the Offer(12247250 Equity shares) (Rs.465.40 crs @ lower price band & Rs.515.61 crs @ upper price band)
NIB	15% of the Offer(3674175 Equity shares) (Rs.139.62 crs @ lower price band & Rs.154.68 crs @ upper price band)
Retail	35% of the Offer(8573075 Equity shares) (Rs.325.78 crs @ lower price band & Rs.360.93 crs @ upper price band)
Mode of Payment	ASBA Mandatory (No Cheque will be accepted)
Registrar	Link Intime India Pvt. Ltd.

 

Quick facts

• Mahanagar gas is a joint venture between Gas Authority of India ( GAIL) and BG Asia Pacific Holdings Private Ltd (BGAPH) each owning 49.75% of its equity shares. GAIL is a Maharatna Public sector undertaking and the largest natural gas transmission company in India while Singapore based BGAPH is a part of Royal Dutch Shell
• Mahanagar gas distributes CNG for use in motor vehicles and PNG for use in household, commercial and industrial use
• The number of CNG operated motor vehicles has grown steadily at a CAGR of 12.42% from 31 March 2009 to 30 June 2015
• They have won several awards for contribution towards society and commitment towards health and wealth
• On the upper price band the offer is to raise ~Rs. 1000 Cr which means it will be a mid cap issue

Strengths

• Well positioned in Mumbai which is second largest metropolitan cities in India

They are the sole authorised distributor of CNG and PNG in Mumbai, its adjoining areas and Raigad district. Mumbai is regarded as the commercial and financial capital of India and contributes more than 22% to Maharashtra’s Gross State Domestic product. The growing population in Mumbai and increasing number of vehicles converting to CNG will prove beneficial for them.

• Cost effective availability of domestic natural gas

The natural gas is first allocated to GAIL and then to city gas distribution network. The price of domestic natural gas allocated is significantly lower than the market price of imported natural gas. Also the geographical location enables them to benefit from lower transportation cost as they are close to the source of production of natural gas.

• Infrastructure exclusivity

They have the exclusivity to lay, build, expand and operate a city gas distribution network in Mumbai until 2020, in Adjoining areas till 2030 and in Raigad district till 2040. The period of exclusivity is extendable in blocks of 10 years as per regulations on fulfilment of certain criteria. This mandates a new operator in their area to use only their distribution network upon the payment of transportation tariff to them. They have built an exclusive supply network in Mumbai and its adjoining areas in the past 20 years.  There are significant entry barriers for competitors to enter into their area of operation due to infrastructure exclusivity, need for a large investment to establish distribution network and lead time in the allocation of domestic natural gas and obtaining required regulatory approvals

• Experience in successful development and operation of city gas distribution business

They have built in house project management capabilities, robust operation and maintenance processes. They have implemented safety management systems to ensure uninterrupted distribution of natural gas.

Risk factors

• A majority of natural gas supply requirements are met by allocation of domestic natural gas in accordance with the new domestic natural gas pricing guidelines 2014. Any increase in price of natural gas or any reduction in allocation amount of domestic natural gas may have adverse effect on their business.
• The price of domestic natural gas purchased is in US Dollars while the selling Price is in Rupee terms. Therefore it is subject to currency risk.
• If alternative fuels example petrol, diesel, etc become more cost effective their business results will be impacted.
• Their major business is attributable to their CNG business. Any decrease in CNG sales will impact the business.
• Any breakdown in the network infrastructure through which they supply natural gas could adversely impact the business.
• They are required to maintain number of license, permits and authorisations. Breach could adversely impact the business.

Valuations

Data Source: DRHP

Increasing Net Profit after tax from 2011 to 2015 with slight dip in 2013

Valuation compared to peers

Data Source: DRHP

The issue is available at a PE of ~12.50 at the upper price band and a PE of ~11.30 at the lower price band, based on basic EPS, which is lower compared to its peers. The return on net worth is also above 20% which is higher compared to its peers.

Our opinion

You can subscribe to this issue. Its infrastructure exclusivity and entry barriers are big positives. Its valuations are reasonable compared to peers. Also rising prices of oil, petrol and diesel may increase demand for CNG motor vehicles.

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IPO under the lens: Narayana Hrudayalaya

NH is one of the leading private healthcare service providers in India, operating a chain of multispecialty, tertiary and primary healthcare facilities. It was founded in the year 2000 by Dr. Devi Prasad Shetty.

 

Image Source: www.climasyseng.com

NH is coming with an IPO. The details are as follows:

Data source: Kotak Securities Ltd.

Quick facts

• Their centres provide advanced levels of care in over 30 specialties, including cardiology and cardiac surgery, cancer care, neurology and neurosurgery, orthopaedics, nephrology and urology, and gastroenterology.
• In FY 2015 and the 3 months ended June 30, 2015, they had a daily average of 534 inpatient admissions and 4,477 out-patients, and performed a daily average of 312 surgeries and procedures and 513 dialyses.
• 3 of their hospitals are accredited by the JCI, USA for meeting international healthcare quality standards for patient care and organisation management and 4 of their hospitals are accredited by the National Accreditation Board for Hospitals and Healthcare Providers, India (“NABH“). In addition, they have submitted applications for accreditation to the NABH for 8 hospitals.

Competitive strengths 

• They have pan India network

23 hospitals, 8 heart centres and 25 primary care facilities across India. They have a strong brand recognition in Southern state of Karnataka and Eastern India.

• Karnataka comprised 4 hospitals in Bengaluru and a hospital each in Mysore, Bellary and Shimoga and 7 heart centres totalling 2,344 operational beds, with a capacity of 2,913 beds.
• Hospitals in Hyderabad and Telangana have 305 current operational beds.
• As of 31 July 2015 they operated 10 hospitals in Kolkata, Howrah, Barasat, Eastern Metropolitan bypass, a multi specialty hospital in Jamshedpur, Jharkhand, a superspecialty hospital in Guwahati, Assam and a hospital each in Durgapur and Behrampur.
• Western and Central India comprises 5 hospitals in Jaipur, Raipur and Palampur, Ahmedabad, Mahuva with 857 current operational beds with a capacity of 1008 beds.

• Demand supply mismatch

Significant infrastructural gaps persist in the Indian hospital industry. The bed availability in India was at seven per 10,000 in 2014, significantly lower than the WHO guideline of 30 beds per population of 10,000. Demand-supply mismatch with a combination of macroeconomic factors, including changing demographics, increasing affluence of the Indian population, greater health awareness, rising incomes, changes in the disease profile (towards lifestyle-related ailments) and rising penetration of health insurance is likely to lead to an increase in demand for quality healthcare services. Apart from this, increasing trend of medical tourism for low cost of surgery and critical care in India is expected to be a key growth driver for healthcare delivery in India.

• Strong legacy in cardiac and renal sciences and strong capabilities in other specialties

They have expanded their core specialty areas to include  cancer care, neurology and neurosurgery, orthopaedics, and gastroenterology. In FY 2015, they performed a total of 112,008 surgeries and procedures.The contribution to in-patient billed revenue from areas outside of cardiac and renal sciences increased from 32.27% in FY 2013 to 38.29% in FY 2015.

• Recognised brand for clinical excellence and affordable healthcare.

• “Public Health Champion Award” under the category of Innovation by the WHO India in 2015,
• Frost and Sullivan “India Healthcare Excellence Awards2015” as comprehensive Cardiology Service Provider Company,
• “VC Circle Healthcare Award” as the best multispecialty tertiary care hospital chain in 2015, recognition of their operational excellence in the Boston Consulting Group Local Dynamos 2014,
• “India Health & Wellness Award” for Superspecialty Hospital in 2014, and Porter Prize for Industry Architectural Shift in 2013.

• Effective model of capital deployment to achieve growth

• Hospitals that they own and operate;
• Hospitals and heart centres that they operate and pay a revenue share to the owner of the hospital premises;
• Hospitals, standalone clinics and primary care facilities that they operate on a lease or licence basis; and
• Hospital management services that they provide to third parties for a management fee (“ManagedHospitals“).

This approach has allowed them to make more efficient use of capital and achieve an effective cost of capital per bed of Rs. 25.5Lakh as of 31 March 2015.

Their acquisitions have positioned them well. They evaluate each acquisition based on long term strategic value, potential synergies, expected returns, valuation, cost of financiang, etc.

• High quality doctors and medical support staff

 Their doctors and consultants are some of the most experienced within their respective specialties in India. As of July 31, 2015, they had 11,478 employees and students, including 818 doctors, 5,438 nurses, 2,009 paramedical staff, and engaged the services of an additional 1,660 doctors on a consultancy basis (including visiting consultants).

Risk Factors

• They operate in a highly regulated industry. Failure to obtain licence will impact business operations.

• They derive ~57.98% from 3 key hospitals- NICS, MSMC at Karnataka and RTIICS in Kolkata. As of 31 March 2015 more than half of their total in patient revenue was generated from cardiac care and cardiology procedures. Any material impact on these will impact their revenues and profitability.

Valuations

Data Source: Axis capital

The Earnings have fallen by ~1.33% in FY15. Also there is fall in Revenue Growth numbers.

Negative Return on Net Worth

 Comparison with listed industry peers

NH’s Revenue from operations is low compared to peers. Also it has negative Earning per share and Return on net worth compared to its peers.

Our Opinion

Its financials are not attractive due to negative earnings in the recent past. Going by its pan Indian presence, operational excellence, strong brand image and potential for growth in healthcare sector one can look to invest in this keeping a long term perspective in mind, from the secondary market after listing. We do not recommend to subscribe to this IPO.

Source: DHRP

 

 

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IPO under the lens – Dr. Lal Pathlabs

Dr. Lal Pathlabs provides diagnostic and related healthcare tests and services in India. It was incorporated on 14 February, 1995. They offer patients and healthcare providers a broad range of diagnostic and related healthcare tests and services for use in core testing, patient diagnosis and the prevention, monitoring and treatment of disease and other health conditions.

Image Source: dir.indiamart.com

Dr. Lal Pathlabs Ltd. is coming with an IPO. The details are as follows:

Data Source: Axis Capital

Quick Facts:

• They have built a national, “hub and spoke” network that includes their National Reference Laboratory in New Delhi, 163 other clinical laboratories, 1,340 patient service centers and over 5,000 pickup points as of March 31, 2015.The “hub and spoke” model, whereby specimens are collected across multiple locations within a region for delivery to a predesignated clinical laboratory for centralized diagnostic testing, provides greater economies of scale. Their network is present across India, including large cities such as New Delhi, Mumbai, Bengaluru, Chennai, Hyderabad and Kolkata.

• The healthcare tests and services include:

Data Source: Axis Capital

• Their centralized information technology platform fully integrates their large network through a common logistics and payments system and tracks their operations and internal performance metrics, thereby enabling them to improve the efficiencies of their business.

Competitive Strengths:

• Improving Revenue from Operations and PAT as a percentage of revenue.

Data Source: Axis Capital

The EV/EBITDA for FY 15 at 27 is in line with another diagnostic chain, Metropolis and greater than Apollo Hospitals at 25 times EV/ EBITDA a per The Economic Times Report

The Return on Capital Employed at 45.79% is higher compared to Apollo at 13.15% as per The Mint Report

• They have built a national network consisting of their National Reference Laboratory in New Delhi, 171 other clinical laboratories and 1,554 patient service centers as of September 30, 2015. Their nationwide network and reputation for providing quality diagnostic healthcare services positions them well to take advantage of the growth of the Indian diagnostic healthcare services industry. Combined with the current fragmentation of the industry, it can be viewed as an opportunity for additional growth as smaller stand-alone laboratories and centers are choosing to join larger diagnostic healthcare services chains like Lal Pathlabs as franchisees or as attractive acquisition targets.

• Their centralized information technology platform fully integrates their large network through a common logistics and payments system, thereby allowing them to collect more efficiently samples and payments from patients and healthcare service providers. It also tracks their operations and internal performance metrics, thereby enabling improvement of operating efficiency of their business.it also gives healthcare providers convenient, online access to diagnostic results. Furthermore, the growth of their network is supported by the scalability of their technology platform, which readily can adapt to the increased data requirements of additional clinical laboratories and patient service centers.

Risk Factors:

• The diagnostic healthcare services industry in India is highly competitive and has low barriers to entry.
• Business interruptions at their National Reference Laboratory may adversely affect their ability to process clinical tests and highly complex tests. A significant portion of their business comes from Northern and Eastern India, and any loss of business in these areas could have a material and adverse effect on their business.

Data Source: DRHP

• Their business depends on the performance of franchisees and business partners. Any non-performance by these franchisees or business partners may adversely affect their business operations, profitability and cash flows. Some of their laboratory operations are undertaken jointly with third parties, whose interests may differ from theirs and such arrangements, entail certain risks.

Data Source: DRHP

• Technological advancement may lead to more cost-effective technologies or non-invasive diagnostic healthcare tests that can be performed without the use of specialized diagnostic healthcare service centers or laboratories, which could adversely affect their business, financial condition, results of operations and cash flows.

• They depend on third-party manufacturers for testing equipment and reagents such that price increases for testing equipment and/or reagents, and the discontinuation or recall of existing testing equipment and/or reagents as well as the failure or malfunction of any of their equipment could adversely affect their business.

 Our View

Despite “hub and spoke” and a centralized IT platform we believe the valuations of 46-47 P/E are high compared to peers. The earnings have grown at ~16% for FY 2014 to 2015 and at ~46% for FY 2013 to FY 2014. We do not recommend subscription to this IPO.

Data Source: DRHP.

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IPO under the lens – Alkem Laboratories Ltd.

Alkem is a leading Indian pharmaceutical company with global operations, engaged in the development, manufacture and sale of pharmaceutical and nutraceutical products. It was ranked fifth in the Indian pharmaceutical market in terms of domestic sales for fiscal year 2015.

Image Source: http://www.dreamstime.com

It is coming up with an IPO and the details are as follows:

Data Source: Axis Capital

Image Source: http://www.bdnews21.com

Background:

Alkem was established in 1973, and they produce branded generics, generic drugs, active pharmaceutical ingredients (“APIs”) and Nutraceuticals, which they market in India and 55 countries internationally, primarily the US. Alkem has 16 Manufacturing Units; 14 in India & 2 in U.S.  5 of their facilities are USFDA, TGA and UK-MHRA approved.

 Competitive Strength:

• Market leadership in various therapeutic areas and ability to build market leading brands in the domestic market

 Alkem was ranked fifth in the Indian pharmaceutical market in terms of domestic sales for fiscal year 2015.

They are also among the top ten companies in the vitamins, minerals, nutrients in terms of Indian market share for March 2015.

Data source: RHP, Axis capital.

The above figure shows improving EBITDA margins and PAT as percentage to revenue.

• Reasonable valuations:

(1) Based on restated consolidated financials of Alkem for fiscal year 2015.(2)Based on audited consolidated financials for fiscal year 2015. Based on closing market price as on October 30, 2015, available on www.bseindia.com

 Data Source: DRHP

* P/E at upper end of the price band.

• Extensive sales, marketing and distribution networks in India:

As a result of their strong sales, marketing and distribution capabilities, their products were prescribed by an estimated 70.7% of total prescribers and an estimated 71.9% of total prescribers, across various specialties in fiscal year 2015 and in the six months ended September 30, 2015 respectively. Their medical representatives cover all states in India, including rural areas.

• Strong Research and development capabilities:

Alkem’s research and development department carries out process development and analytical research for their domestic and international markets. As of October 31, 2015, they employed 480 scientists working on various drug products and substances in India and the US. In addition, they also have a regulatory affairs team, which is responsible for various filings and approvals related to their products in India and internationally. They also have a dedicated in-house team of intellectual property experts for their products and processes in various geographical markets. As of October 31, 2015, they had filed 69 ANDAs in the US of which 21 have been approved and three have received tentative approvals.

They also have a 60-bed clinical research organization facility where they conduct studies on healthy volunteers to prove the effectiveness of developed formulations. This facility has been audited by the USFDA, UK-MHRA and other regulatory agencies.

They have a strong pipeline of products under development for their focus markets.

• Fastest growing and established international markets:

Alkem has expanded internationally through both organic growth and certain strategic acquisitions. The US is the key focus market for their international operations.

Revenues from their international operations have grown at a CAGR of 45.7% between fiscal year 2011 and 2015. The contribution of the net revenues from the international operations has grown from12.6% of the net revenues from operations in fiscal year 2011 to 25.3% of the net revenues from operations in fiscal year 2015.

• Geographically diversified manufacturing facilities:

They operate 14 manufacturing facilities in India, 3 of which are USFDA approved and also have other key approvals from international regulatory agencies such as TGA Australia and UK-MHRA among others for certain of their facilities. Some of their manufacturing plants enjoy excise and income tax benefits that are available for different periods.

Risk Factors

• Their operations are subject to extensive regulation in each market in which they do business. Regulatory authorities in each of these markets must approve their products before they can market them.

• In many countries in which they currently operate, including India, pharmaceutical prices are subject to regulation. The existence of price controls can limit the revenues they earn from their products.

• They are susceptible to product liability claims that may not be covered by insurance which may require substantial expenditure and may adversely affect their reputation and if successful, could require them to pay substantial sums.

• Their international operations expose them to complex management, legal, tax and economic risks, which could adversely affect their business.

• Stricter marketing norms prescribed by a new code of conduct in India for companies doing business in the pharmaceuticals industry could affect their ability to effectively market their products.

• If their research and development efforts do not succeed, this may hinder the introduction of new products.

Our Opinion  

Since Alkem has healthy EBITDA margin and PAT as a % of revenue, and compared to the P/E of peer companies, Alkem laboratories looks reasonably priced, investors may consider subscribing to this issue. Due to the expectation around a Fed rate hike by the US in the near term, investors need to be cautious and purchase the stock from a long term perspective, and not for listing gains.

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IPO under the lens – Coffee Day Enterprises IPO

Coffee Day Enterprises is coming with an IPO on 14^th October 2015.

Coffee Day Enterprises Limited (CDEL) is the parent company of Café Coffee Day’s. Apart from CCD its holdings include Coffee Day Hotels and Resorts Pvt Ltd, Global Technology Ventures Ltd and Tanglin Developments Ltd.

Details for the IPO are as follows

Coffee day Enterprises Limited IPO
Offer Period	Offer Opens On :  Wednesday, October 14, 2015 Offer Closes On :  Friday, October 16, 2015
Price Band	Rs.316/- to Rs.328/-
Bid Lot	45 Equity shares and multiple of 45 Equity Shares
Global Book Running Lead Manager	Kotak Mahindra Capital Company Limited/ Citi / Morgan Stanley
Book Running Lead Managers	Axis Capital/ Edelweiss/ Yes Bank
Registrar	Link Intime India Private Limited
Syndicate Member	Kotak Securities Limited is one of the Syndicate member
Offer Structure
Issue Size:	Rs.1150 cr.
Employee Reservation:	Rs.15 cr.
Net issue to Public:	Rs.1135 cr.
QIB’s	50% of Net Issue Rs.568 cr.(including Anchor)
NIB’s	15% of Net Issue Rs.170 cr.
Retail (upto Rs.200,000)	35% of Net Issue Rs.397 cr.
Listing	BSE & NSE

The Breakup..

Out of the INR 1,150 crore

• Nearly INR632.8 crore will be used for repayment of loans
• 7 crore will be used for expansion of its retail network. Included in its expansion plans are 216 new outlets and 105 Coffee Day Xpress kiosks by FY 2016/17.
• Another INR97.3 crore will be invested in manufacturing and assembling of vending machines.
• CDEL has also earmarked INR60.6 crore for refurbishment of existing outlets and vending machines
• Setting-up of a new coffee roasting plant near its existing facility in Chikkamagaluru will involve INR41.9 crore.
• And the rest for general operational purposes.

Existing investors

The IPO will only involve issue of fresh shares and will not have any offer for sale (OFS) from existing investors. The list of existing investors include VG Siddhartha-led promoter group with 92.74% stake in the company, private equity firm KKR and Infosys co-founder Nandan Nilekani hold 3.43% and 1.77% equity stake respectively. Bennett Coleman & Company Limited and Rakesh Jhunjhunwala’s Rare Enterprises hold (13,68,304 shares or 1.17%) and (275,856 shares or 0.24%) respectively.

Pros and Cons

Pros

• Market share of 46% in organized café outlet market:

The Company owns 46% share in the organized café outlets market.

At the end of 2014, there were 1,472 Café Coffee Day outlets in more than 200 cities while Barista – its nearest competitor – has all of 169 outlets and Starbucks – global leader in the trade –has just 64 outlets.

• Brand Power: CCD is the most renowned brand in Tier I cities with expansion plans in Tire II Cities.
• Diversified Business: Holding Company CDEL has diversified business with coffee business accounting for more than 50% of the total revenue, 36.9% from logistics, 7.5% from Financial Services and 3.3% from Technology parks. 

Cons

• Not a profit making Business: In spite of huge market share the company is not able to make profit. Huge Finance cost is eating out on the profits. While revenues doubled over the past four years, it made an operating profit only in one of those past four years—back in FY10-11.
• Business Model: Its continuous expansion is leading to operating losses and the nature of business is also volatile.

Risk Factors

• The coffee business segment is highly competitive: The coffee business, including quick service food and beverages retail business through their Café Network outlets, Coffee Day Xpress kiosks, F&G outlets and the vending business, currently faces and may continue to face intense and increasing competition from both local and international competitors in terms of price, product offerings, product experience, quality, advertising initiatives, customer service, reputation, ambience, locations, attractiveness and maintenance of outlets for coffee, food and beverages.
• Subject to risks associated with leasing space: Payments under the leases accounted for a significant portion of their operating expenses in CDGL. A significant number of their lease agreements for their Café Network outlets may not be duly registered or adequately stamped. In the event of dispute they may not be able to enforce leasehold rights. Therefore, they may not be able to operate our Café Network outlets and Coffee Day Xpress kiosks successfully.
• Large number of approvals: They require a number of approvals, licenses, registrations and permits for our Café Network outlets, F&G outlets, vending machine business, Coffee Day Xpress kiosks, distribution centres, coffee roasting plant and coffee curing plant and the failure to obtain or renew them in a timely manner may adversely affect their operations. 

Valuations         

As per consolidated financial statements

Fiscal year ended/ Period Ended	EPS	Return on Net Worth
31-Mar-12	1.65	3.12%
31-Mar-13	-1.83	3.29%
31-Mar-14	-6.6	-13.85%

As we can see the Earning per share is negative for the years 2013 and 2014

Also the return on net worth is negative for the year 2014.

Our Opinion

The company is in existence since 1996 and is still struggling to make profits. We do not recommend investing in this IPO.

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