Market watch: Why should an IPO be analysed?

At a time when every successive listing seems to being doing even better than the last one, I am reminded of a question one of my management students asked me way back in 2000 at the peak of the IT boom. He asked “Why should one even analyse an IPO when it is certain that it will list well?” I did answer him, and it probaly made far more sense to him a year later than it did in the class.

In this, the first of a two part series on recently listed companies who prices have dipped post-listing, we shall cast a glance at the fortunes of Nelcast, Decolight Ceramics and Transwarranty Finance.

Nelcast, which is engaged in the manufacture of castings listed at Rs 252 against an issue price of Rs 219 before slipping to its present position of Rs 163. The cast iron made by this company scores over conventional grey iron in terms of versatility, cost efficiency and tensile strength. It resultantly finds preferred application in automobile, railway and earth moving equipment segments.

Globally, foundries are being locked out due to shortage of skilled labour resulting in unwieldy labour costs, besides environmental concerns. This in turn, provides an opening to companies like Nelcast.

However, having forseen this opportunity, most companies in this segment are already moving ahead with massive expansions, which will inevitably skew the prevalent favourable demand-supply gap. This perhaps, explains the current lack of fancy at this counter.

Decolight Ceramics is a Gujarat based vitrified ceramics manufacturing company. Its shares listed at Rs 70 against an issue price of Rs 54 before slipping and now quoting at Rs 31. This company raised funds to diversify and planned to set-up a aluminium composite panels manufacturing unit and a 4.6MW wind turbine generator.

The fortunes of the last two objectives were directly dependent on the success of the IPO for funding. Given that the project implementation schedule had already been revised, risks associated with a time and cost overrun had been factored in by potential investors.

As for its traditional vitrified ceramics segment, competition is increasing by the day and capacities are being multiplied. Adding to these woes is the indiscriminate dumping by Chinese manufacturers that threatens to take the bottom off this market. Clearly then, the non-performance of this stock was foreseeable.

A relatively unknown company in the financial services segment, Transwarranty Finance listed at Rs 56 against an issue price of Rs 52 before slipping and now quoting at Rs 32. To start with, only around Rs 8 crore (less than 25 per cent) of the issue proceeds (Rs 33 crore) had been earmarked for the creation of net tangible assets, making a discussion of issue objectives redundant.

Then, approximately half the rather limited turnover comprised income from investment banking and the dependence on a limited number of clients aggravated that risk. Needless to say, the financial services sector is intensely competitive, with big guns ruling the roost and M&As appear inevitable. Now, M&A possibilities could have been a positive here, except for the fact that Transwarranty seems to have no real niche. Again, what has happened to its share price is hardly surprising.

Mind you, this shareholder value erosion has happened against the back of an unprecedented bull run. Perhaps, in a weak market, such issues might not have gone through at all. More next week.

(The writer is CEO, Lotus Knowlwealth, a knowledge based consulting firm)