IPO

The Speciality Restaurants Limited IPO has ended, with a 2.54x subscription. Most of that came in from institutions who demanded more than 4.6x what they were allocated. Retail subscriptions were only 55% of theirs.

Did I like the IPO? A quick glance through the docs told me the company wanted Rs. 146 to Rs. 155 per share, for a 11.74 million (1.174 crore) share issue. The post money valuation’s around 700 cr. (7 billion).

The company seems to have earned a net profit of Rs. 15 cr. (Rs. 150 million) in the first nine months of the year, on revenues of 150 cr. (1.5 bn) That puts the pre-money P/E at about 28-30, which can be fairly high in the restaurant business, where net margins are like 10% or so.

Since they have around 80 outlets, and will build about 40 more in the next 3 years, they are valuing each outlet at an average of 6-7 cr (60 to 70 million). That’s a little high, considering their per-restaurant profit is about Rs. 25 lakhs (2.5 million). A fine dining restaurant handles itself for about 3 years at the lower end and 8 years at the upper end – beyond that, it loses its charm. Even if you take a 10 year cash flow, and add a bit in for a liquor license and tables/chairs/equipment, you might only get about 4 cr. (40 million) per restaurant as a valuation. Paying an additional 75% for the brand is crazy.

And then they don’t own their restaurants – they even lease some (many?) from their promoters. The promoters get paid a good sum – over 7 cr. (70 million) as just rent, but overall, they seem to get paid lesser than others. The promoters own competing businesses, and have, in the recent past, got the company to acquire one of the promoters’ restaurant businesses. While the transaction isn’t a problem, the concept of having a promoter as competition isn’t palatable.

Competition comes from everywhere. The aspirational category though doesn’t have too many listings though. (Jubilant Foodworks, a pizza franchisee is one) So there may be a first mover advantage.

While the company shows something good – they did at least go public – the appetite for this kind of IPO in the market will determine future course. The wild success of the Jubilant IPO must have meant that no institution wanted to miss this one – but retail sat out. Would I have bought? No way; too high priced – I’d buy it at a price of Rs. 50 or so. Still, fundamentals are boring; I would still get in if there is a huge breakout with volume, and exit with a stop loss.

The performance of IPOs in 2010-11 has been fairly pathetic, with the average return being -13% on the NSE. Removing BSE only stocks, I've charted a list of IPOs that happened this year, with their returns till last friday.

The best returns are of stocks like Gravita India (+160%), C Mahendra Exports (127%), Mandhana Industries (80%) and Talwalkars (72%) . (Click to see a huge picture) Notably, a government IPO - Coal India - has seen a 46% return on the back of rising coal prices. Gujarat Pipavav Port is still positive, while the smaller and popular IPOs of Lovable Lingerie, Persistent Infosystems and Career Point should help entrepreneurs that are actually making decent profits think of an IPO.

The worst performing IPO, Aster Silicates, went all the way to 250+ before crashing, in just a few days to end up 78% in the red. To the people who wanted to ride it up after listing, the return is even worse.

Of the losers, too many of them are shady small cap stocks that shouldn't deserve a mention. Of the notable non-shady stocks (or at least, people that have fancy degrees and wear ties) SKS Microfinance is in bad shape with a 44% negative return, most of which happened because of the AP government rules that took the carpet from under them.

Infra and power players like Nitesh Estates, Prestige Estates, Indosolar and SJVN fell more than 20% from the IPO prices.

As a follower but not a buyer of IPOs, I've seen that some stocks - notably those like Bedmutha Industries - are heavily manipulated. With huge volumes (over 50 cr. sometimes) and low delivery volumes, there seems to be a lot of circular trading or activity that smacks of promoter blessings. While there have been some investigations in the IPO process, we haven't seen any really strong effort to figure out how stocks are manipulated immediately after the IPO. With little history, it's difficult to trade them technically, and with little trader interest and low institutional support, such stocks can be easily moved around and rumours like "buy now before the juicy news comes" floated. But markets are markets, and money brings with it great incentives. All I can say is - if you trade them stick with a strong stop loss and expect that you'll get on the bad side of some manipulation.

Livemint's article prompted this post - because I wanted to see how they've all performed together. Overall, IPO investing has sucked unless you were a) selective and b) lucky.

I haven't included last year's IPOs (before 2004 April), but some of them have had horrible returns. NHPC sold at 36, and is below 24 after more than a year, a loss of 33% or more. NTPC is still below its IPO price of 201 (or lower if you were retail) last year.

Note: I've done my best to see if there were any bonuses or splits. Any data issues are mine alone, and regretted. Do let me know, though.

So the gym chain Talwalkars is going to go public. Notes:

• They’re raising 78 cr., with 60 lakh shares at an issue price of 123 to 128 rupees.
• That’s for 25% of the company, so the valuation is 312 cr. post money, 234 cr. pre.
• Revenue in FY09 – 60 cr., profits – 5.6 cr. FY10 looks like it will also see 60 cr. revenue and 5.8 cr. profit.
• That’s a P/E of about 40 for the company. I refuse to be surprised, but let’s see if there’s value.
• They have 55,000 members, and 58 clubs. That’s about 10K per user per year as revenue. Small scope for growth there, but there must be a number of dropouts. They charge about 15-20K per year.
• The aim is to grow to 100K customers by adding another 27 clubs. They’ll retire some 20 cr. of debt too (on which they pay around 3 cr. of interest per year). So if all iz well, they will get a revenue of: 100K x 10,000 per customer = 100 cr. plus the 3 cr. they save in taxes. Let’s assume they can raise prices 15-20% and get 120 cr. (Btw, these aren’t conservative estimates. The total number of gym-goers in India is currently 230,000. )
• Current margins are around 10%. Let’s up that a bit and say they will earn 15 cr. post tax. That will give us an EPS of about Rs. 6.25. At that EPS, the IPO price is a P/E of about 20. Not too bad; but remember, this is when they have achieved all their growth estimates and are at the edge – so the 20% growth from here will be tough.
• The huge plus point in India is that with the exception of Bangalore where you have great weather, indoor gyms are going to be a preferred location for exercise for the office going crowd. Try walking in the Gurgaon heat and you will find yourself turning into a blazing inferno. (I exaggerate; it’s okay between midnight and 1 am)

Stuff I don’t like:

• They don’t list prices on their site. I find that weird; the standard excuse is that prices change often. Dear Talwalkers, let me introduce you to the internet, where you can reflect changed prices as often as you want, that’s the point! But this is a common Indian malady so don’t expect concern from the guy who will load up on the stock anyway.
• There are 11 gyms running under the Talwalkars brand that are owned by promoters and which compete with the company. Free ride! And some relatives of the promoters have 13 gyms under the name Talwalkars which is their name as well so there’s more brand confusion.
• Competition: Their organized competition is Gold’s and Fitness First, which charge 3K-5K per month with annual discounts (price points are similar). Smaller local gyms are of the order of Rs. 500-1000 per month. Most apartment complexes have gyms for which fees are of the order of Rs. 300 to 500 per month. The market is very very tough, and organized players have huge real estate and operating costs in comparison with the competition.
• Calculations: Plus, unlike the west where organized players have HUGE gyms, Talwalkars’ standard gym size is a piddly 5,000 square feet, has 8 treadmills and 3 cross-trainers. That’s 11 people for the most requested cardio equipment. At 30 minutes per person per machine, and 10 hours of usage, we see a max servicing capabiilty of 220 people per day. Assuming people go to the gym twice a week that’s a serviceability of 700 people per gym per month. Make it a 1000 because there are enough suckers who pay and don’t gym. 27 new gyms is going to add capacity for just 27,000 more people – with their current 55K, this will add up to 82K and stop. If they actually do 100K with just 27 more clubs they will end up with many pissed off customers who simply won’t renew.
• Adding more clubs? Each club seems to cost 1.8 cr. to do. It’s not going to be easy to add a lot more clubs from free cash flow – consider that at the edge, net profits of Rs. 15 cr. a year, if fully reinvested in the business, may give you a max of 10 more clubs per year, or 10,000 members per year, which is only 10% growth.
• Their DRHP says Indian fitnes industry is hugely under-penetrated, at 0.4% versus 16%. But the 0.4% is only for the top 7 cities. That’s like saying see Bangalore has 32,000 gym goers out of a population of 8 million. 32,000 is HUGE for Bangalore, at the Talwalkars price point. Also see comparisons – Indian gyms have only 29% average retention rates which means you gotta churn, baby, churn.
• The debt – they have about 60 cr. of secured debt (other than what they borrowed from promoters). Every 1% increase in interest rates will hit their bottom line by 5-10%.

Tough industry but I think it’s a great space for a good organised player. I’m not sure if Talwalkars is that player, and if India is ready for it now versus say 5 years down the line (i.e. real estate will be more affordable, equipment costs will come down, more people will be interested etc.).

Note: I’m just putting in counter arguments. These may not be compelling, and by a stroke of luck we may have a HUGE increase in gym goers or a massive cost reduction due to exchange rate, and the business might boom. I’m known to have performed horribly as market sentiment has pushed stocks into much higher territory, so pinch of salt etc.

Overall I think the issue is too high a price. Something around the 60-80 levels would have been fair value, and I don’t even like fair value – it has to be a bargain. I haven’t experienced Talwalkars first hand, so I can’t comment on their service or quality. If you have and you think the deal is compelling enough to override the above arguments, you might want to buy. I’ll just skip and wait to see what the market says.

The recent IPO of Persistent Systems was hugely oversubscribed – over 92 times. Yet, today’s listing, in a market that is at a two year high, was strangely benign. The IPO was built at Rs. 310. The stock opened at 361, touched a high of 447 in minutes and then worked itself into a small range between 400 and 420 for the rest of the day. I thought we’d see a line from bottom left to top right, but here’s what it looks like:

Perhaps, like the mega starrer Sholay, it will take some time before it shoots up? The stock has a great P/E compared to peers, but obviously the falling dollar – at 44.45 today – can hit profitability.

Let’s now get into the boring but highly informative world of IPO financing. I’ve been told of “innovative” IPO financing by brokers; some of them offered 95 lakhs of financing for the 15 day IPO, if you put in 5 lakhs of your own. At that leverage, you could hope for some allocation, they said, and of course they would “prop up” the price on listing.

Let’s do the math: for the 95 lakh loan at about 12% a year, you’d pay Rs. 47,500 for financing the loan for the 15 day IPO period. You’d apply for about 33,000 shares and hope for the best.

Going with the basis of allocation you might have got about 316 shares (the non-institutional portion was oversubscribed 106 times). If you sold at the high of the day, you made Rs. 130 per share, which gives you only Rs. 41,080. If you could only sell at the close, your gain was Rs. 100 per share, or a 31,600 rupee gain.

Your payout is Rs. 47,500. Your maximum potential income is Rs. 41,000, and more realistically, Rs. 31,600. This, on an issue that gained 30% on listing. IPO Financing #fail.

You think you might have got the loan and used ASBA (Application Supported by Blocked Amount) to get some interest for the 15 day period, say 5%, which could offset your interest payout. You silly fool. Of course they don’t let you do ASBA; you have to apply through that broker, who’s going to make that extra interest as well.

Don’t get suckered by IPO financing. Someone’s laughing all the way to the bank, and it’s not you.

Also read: The cost of IPO Funding.

On it’s website, SEBI has released an excellent “Guide to understand and Offer Document” and instantly has also made it so difficult to find that one needs a “Guide to navigate the SEBI web site”, which is also a Ph.D. qualification in most colleges.

The guide is good – but doesn’t tallk about the getcha’s in the offer document itself – like how to make sense of the craziness of subsidiaries, or why they put "[*]” in places like EPS because of silly excuses like we don’t know the price yet, or how to read the fundamental information. Fair enough. That isn’t a SEBI education book, it’s a college course in itself.

The guide tells you how you can invest, where you can get copies of the offer document, how does Book Building work (they stop short of: No, it doesn’t) and how long it takes for allocation/listing. Useful starting point.

Offer documents are also available at merchant banker web sites. By the way, you may not know this, but once the issue is over, you can get the END copy of the Offer document to see how the [*] areas eventually got filled in, by looking at the “Final Offer Documents filed with ROC”.

I wrote a small piece years back (“What to look for in an Offer Document”) which only talks of a few red flags.

Note: I started writing this article reading Hindu’s note about it – and then noting they hadn’t linked to the SEBI guide. Why? Why do online editions of newspapers just not get it? (Apart from LiveMint, that is. They get it. For the most part.)