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he other day, I was in conversation with a friend when the discussion steered to the stock market and Initial Public Offerings. An IPO is when a company for the first time lists its stock on the stock exchange goes public in investment jargon.
My friend spoke about the way her investment in Indiabulls has paid off. Indiabulls, an online trading portal and stock market information provider, came out with an Initial Public Offering in September 2004 at Rs 19 per share.
The issue was a stupendous success and investors can't wipe the smile off their faces. Today it is quoting above Rs 100.
That brought her to the next question: should I invest in the India Infoline Limited IPO?
Let's look at it.
Where does IIL's income come from?
Think India Infoline and immediately the website India Infoline comes to mind. This website provides a great amount of stock market information and advisory. But does not generate revenue for the company.
The bulk of the company's earnings come from its online broking portal 5paisa. In fact, around 60% of the company's earning are derived from here.
Other than the online presence, IIL also earns revenue from offline distribution of mutual funds, life insurance products, government bonds and fixed deposits.
What is the competition that the company faces?
Since the bulk of the profits come from online broking, let's look at that.
IIL is certainly not the only company offering online equity trading.
A number of others are jostling for attention: ICICI Direct, Kotak Street, India Bulls, HDFC Securities and Sharekhan to name the prominet players.
These companies too have lined up a slew of initiatives to attract customers to their online trading platform.
Also, profits are very dependent on the current market conditions. When market sentiment is good and investors are flocking in droves to the market, brokerage in trading will rise. So in a bull run, you can expect the company to do well.
What if the market slumps and brokerage revenues too? Well, that will directly hit the profits.
The market for retail distribution of financial products, online brokerage and offline distribution is extremely competitive. It is going to be no cake walk for IIL.
The growth of this industry will also be dependent on the penetration of computers into various towns and cities and online capabilities being simultaneously provided.
Has it been making profits?
IIL has consistently logged in losses for four consecutive years from March 31, 2000 to March 31, 2003.
These loss figures read as Rs 4.5 crore (Rs 45.48 million), Rs 13.1 crore (Rs 131.08 million), Rs 5.8 crore (Rs 58.86 million) and Rs 4.7 crore (Rs 47.07 million) respectively.
However, IIL turned the corner and made profits for the financial year ended March 31, 2004 at Rs 7.4 crore (Rs 74.80 million).
Net profit for nine months ended December 31, 2004 stands at Rs 13.5 crore (Rs 135.43 million).
How is the IIL stock valued?
Let's see what the ratios throw up.
Earnings Per ShareEPS is arrived at by taking the net profits and dividing it by the total number of shares.
Based on the nine monthly profit figures, IIL's EPS translates to Rs 3.14.
EPS = Net profit (Rs 13.5 crore) / Total number of shares (4.3 crore) = 3.14.
Price Earnings ratioThe PE is the market price of the share (here, we take the issue price of Rs 80 at the upper end of the price band) divided by the EPS.
Therefore, PE = market price (Here we assume Rs 80 at the upper end of the band) / EPS (3.14) = 25.47.
A P/E ratio of 25.47 means that the company has Re 1 of annual per share earnings for every Rs 25.47 in share price.
Generally, a lower PE ratio stock is much sought after indicating that there is room for growth.
Compared to Indiabull's current PE of 92, IIL's figure of 25.47 looks very cheap.
To understand ratios, read How to spot a good stock.
Is the stock expensive?
Indiabull's IPO was priced at Rs 19 and IIL's IPO is priced at between Rs 70 and Rs 80. This is a huge difference!
If you think that this IPO is going to perform like the India Bulls IPO, you may be in for a rude shock.
The India Bulls stock had an issue price (price at which you buy the shares during an IPO) of Rs 19 that rose to Rs 23.85 the first day it was listed (an increase of 25%).
If you think of buying it at the IPO stage to sell it on listing and book a huge profit, you may not get what you want.
Opt for this only if you believe in the future prospects of the company and are willing to stay in for the long haul.
Why does it need the IPO money?
Expansion and upgradation of technology.
Currently, the company has 73 of these offline branches across 36 towns and cities in India.
Now, the company has ambitious plans to open an additional 77 branches across 50 cities in India. This is a staggering 100% jump in its branch network over what it has now!
Of the Rs 95 crore (Rs 950 million), it hopes to garner at this IPO, as much as Rs 63 crore (Rs 630 million) will be earmarked for branch expansion, upgrading technology platforms and for acquisition. That's right, they plan to acquire companies in the bargain though they are tightlipped about potential acquisition target/s.
How are the shares allotted?
Employees of the company: 8,78,138 shares
Qualified Institutional Buyers: 55,00,000 shares
Non-institutional investors: 27,50,000 shares
Retail investors: 27,50,000 shares
To understand the allotment process, read Want to bid for shares?
Meanwhile, IIL's promoters (and this seems to be a common practice nowadays) Mr Jain and Mr Venkataraman have been allotted 4,30,000 preferential shares at face value. That's right, they get it for Rs 10 each, you get it for Rs 80.
Before you jump to your feet, let me remind you that this has been done to compensate the promoters for forgoing the 10% profit sharing agreement that they had with IIL.
The logic: this 10% profit instead of going to the promoters will now go to the shareholders.
In a nutshell
Number of shares to be issued: 1,18,78,138
Face value: Rs 10
Issue price: Rs 70 80 price band
Issue dates: April 21 - April 27
DON'T MISS!
India Infoline sets IPO price at Rs 70-80
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