Thursday, April 28, 2016

Forthcoming IPOs - Should one invest?

It’s raining IPOs. After a lull in the market, the markets are suddenly filled with IPOs and the biggest decision for the investor is which to pick and which to ignore. There are 2 IPOs to open this week and they will be 8th & 9th issues this year. The companies going for IPO are
  • ·         Thyrocare Technologies Limited;
  • ·         Ujjivan Financial Services Limited.

Thyrocare Technologies Limited, a diagnostics company, is going first from 27-Apr to 29-Apr with a price band of Rs. 420 to Rs. 446. The total size of the issue is 479.21 crores at the upper end of the price band. The company competes with Dr. Lal Path Labs, SRL Laboratories, Apollo Clinic etc. There are no new shares being issued by the companies. All shares are being sold by the promoters of the company. Post the issue, the promoters will hold 63.96% of the shares.

The IPO is attractively priced at 6.52 times price to book. Dr. Lal has a price to book of about 25 times and witnessed a listing gain of 31%.

The company had a 23% CAGR revenue growth over the last 5 years while its profit margin was over 25% in the last 2 years. The company had a revenue of Rs. 812.07 million for the year ending 2011 and it has grown to Rs. 1,870.46 million for the year ending 2015. For the 9 months ending December 2015, the revenue was at Rs. 1,745.52 million. The profit after tax for the same period has increased from Rs. 248.25 million in 2011 to Rs. 484.50 million 2015. The profit for 9 months ending December 2015 stood at Rs. 435.88 million. There has been a slight dip in the margin in the last 2 years even though the margins have been above 25% in each of the 5 years.

The PE ratio is in the range of 42 to 45 respectively when compared with the lower and upper band of the price. Dr. Lal has a PE of 69 on its current price and had a PE of 48 on its issue price. There are no other listed peers for us to compare this further. At these levels, I think the IPO is competitively priced. There seems to be an upside in the price in the near to medium future.

Ujjivan Financial Services Limited is the next financial services company to go for its IPO after Equitas in 2016. Like Equitas, this also has a license to open small finance bank by the RBI. That means that the FII holding in this company has to be 49% or less. Ujjivan’s IPO will open on 28-Apr and close on 02-May with a price band of Rs. 207 to Rs. 210 with a total size of Rs. 875 crores to Rs. 882 crores at the upper end. The company competes with the likes of Equitas, SKS microfinance etc. They primarily operate by providing collateral free, small ticket loans to active poor women along with loans to MSEs. They are also active with some non-credit offerings like insurance product with tie-ups with a few insurance companies.

The proceeds from the issue will be used by the company for 2 reasons:
  • ·   Augmenting the capital base to meet the future capital requirements as a small finance bank. 
  •     Reduce the FII holding to less than 49% to meet the banking requirements.

The income of the company has grown at 40% CAGR in the last 5 years with an income of Rs. 1,564 million in 2011 to Rs. 6,119 million in 2015. For the 9 months ending December 2015, the company has reported an income of Rs. 7,296 million ensuring that it is going to be a stellar growth in 2016 as well. The profits margins are at least 16% in the last couple of years with a CAGR growth of 45% bettering the revenues. For the 9 month period ending December 2015, the profits were Rs. 1,223 million confirm a stellar year.

The PE ratio of the company based on the diluted 2015 EPS at the higher end of the band stands at 19.49 against the industry PE of 25.16. Its peers like SKS and Sundaram Finance have PEs of 30 and 37 respectively. The company has a P/BV ratio of 2.46 which is slightly higher than Equitas when it listed but still lower than both SKS and Sundaram Finance which have a P/BV of 7 and 5 respectively. At these levels, this is another good pick to invest in. A must buy.

If one doesn’t want to invest in both IPOs and needs to pick a stock, my recommendation will be to invest in Ujjivan Financial though it will be best to invest in both IPOs.


What do you think? Drop me a line. Thoughts and feedback welcome.

No comments: