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    Submitted in partial fulfillment of the requirements

    For the award of the degree of

    Master of Business Administration



















    This project gave me a great insight about the IPO and its Process. The purpose of this

    Project was to understand the IPOs that were issued in the last 2-3 months; buyback of

    shares; IPO Grading and Reforms in IPO Process.

    The IPO was an extensive learning experience in which I involved myself with the live

    issues hitting the market. I began my study by going through the SEBI guidelines

    regarding eligibility norms, pricing structure, requirements of the promoters and their

    obligations, post issue obligations, book building guidelines etc.

    I enhanced my understanding over IPO issues of various companies by going through

    their Bid-cum application forms and the Red-Herring prospectus, which contained all the

    information regarding the issue, purpose of the issue, all the financials and results for the

    past 3-5 years and many other details which are required by an investor for a sound


    Proper study of few IPOs has been done by going through their past financials, business

    structure, investments, expansion strategies, growth potential, valuations etc.

    The Project report starts with defining the various public issues with the need for the

    company to take out an IPO. It goes on further to explain the advantages of an IPO. It

    analyses in detail the Indian IPO Scenario. It explains the evolution of the IPO in India

    and explains how the scene has changed dramatically after liberalization esp. after the

    introduction of book building process.




  • A company can raise capital through issue of shares or debentures. The various types of

    issues are:

    Public Issue, Rights Issue, Bonus Issue, Private Placement and Bought Out Deal

    There can be two kinds of public issues, namely:

    Initial Public Offer (IPO)

    Further Public Offer (FPO)

    Classification of Issues


  • IPOAn Initial Public Offer (IPO) is the selling of securities to the public in the primary

    market. It is when an unlisted company makes either a fresh issue of securities or an offer

    for sale of its existing securities or both for the first time to the public. This paves way for

    listing and trading of issuers securities. The sale of securities can be through book

    building or normal public issue.

    FPOFurther Public Offers are issued by companies or corporate bodies whose shares are

    already being traded in the capital market and they are issuing fresh shares either to fund

    the expansion of their existing business or to invest into other business activities.

    Reasons for Going Public

    Raising funds to finance capital expenditure programs like expansion,

    diversification, modernization, etc.

    Financing of increased working capital requirements

    Financing acquisitions like a manufacturing unit, brand acquisitions, tender offers

    for shares of another firm, etc.

    Debt Refinancing

    Exit Route for Existing Investors


  • Advantages of Going Public

    Facilitates future funding by means of subsequent public offerings

    Enables valuation of company

    Provides liquidity to existing shares

    Increases the visibility and reputation of the company

    Commands better pricing than placement with few investors

    Enables the company to offer its shares as purchase consideration or as an

    exchange for the shares of another company

    Disadvantages of Going Public

    Dilution of Stake makes co vulnerable to future takeovers

    Involves substantial Expenses

    Need to make continuous disclosures

    Increased regulatory monitoring

    Listing fees and Documentations

    Cost of maintaining Investor relations

    Takes substantial amount of management time and efforts




    Early Liberalization Phase: 1992-1995 (Fixed Pricing)

    The initiation of the process of reform in India also would not have been possible without

    changes in the regulatory framework. The New Economic policy (1991) led to a major

    change in the regulatory framework of the capital market in India. The Capital Issues

    (Control) Act 1947 was repealed and the Office of the Controller of Capital Issues (CCI)

    was abolished. The Securities and Exchange Board of India (SEBI), established in 1988

    and armed with statutory powers in 1992, came to be established as the regulatory body

    with the necessary authority and powers to regulate and reform the capital market. SEBI

    came to be recognized as a regulatory body for the capital market after the abolition of

    the CCI. The control on pricing of capital issue has been abolished and easy access is

    provided to the capital market. Initial Public Issue caught the attention of general public

    only after the success of Reliance, when millions of small investors made huge returns

    which were unheard of till then. Dhirubhai Ambani was the first promoter who raised

    huge amounts through the public issue route to finance large facilities.

    The issue process was smoothened, procedures were simplified and free pricing was

    allowed, although with certain restrictions, The Indian market had the concept of par

    value of equity shares, and anything above par was considered premium. The only

    companies that were allowed to come with premium issues were those, which had a three

    year profit-track record for the preceding five years. New companies without this record

    could float premium issues if their promoting companies had the same track record and

    they had to hold 50% of the post issue capital. Any new company floated by first

    generation entrepreneurs could only issue equity at par. There was no restriction about

    prices in a premium issue.

    The offer was always at a fixed price, whether premium or par. The companies had to

    appoint intermediaries like merchant bankers, registrars, bankers etc. Merchant bankers

    had the responsibility of fixing the prices, in consultation with the company, carrying out


  • with due diligence, preparing the prospectus (offer documents) etc. The prospectus had to

    be submitted to SEBI for getting scrutiny.

    The trend continued in the early nineties as many large projects were launched after the

    economy was liberalised. Many of these companies came out with public issues and the

    retail participation increased dramatically. But many of the companies which raised

    money during this period just disappeared without a trace.

    Late Liberalisation Period: 1996-2005 (Book Building)

    The late nineties and the first few years of the current decade did not see much activity in

    the primary market even though we saw a huge bull run led by technology stocks at the

    turn of the decade. The bad experiences of retail investors kept them away from the

    market and made it difficult for companies to launch successful issues. The corporate

    sector was recovering from the damage caused by large capacity expansions and new

    projects set up in the nineties.

    The dormant primary issues market came alive after 2003 mostly because of the

    divestment programme of the government. The issue of Maruti Udyog, through which the

    government sold part of its stake in the company, rekindled retail investor interest in the

    primary market. The issue was made at a very reasonable price and investors made very

    good returns immediately.

    The year 2004 saw the primary market activity at its historic peak as some large private

    companies also came out with issues. Further divestment by the government; including

    the largest ever issue by an Indian company from ONGC, attracted more retail investors

    into the market. The IPO market continues to buzz in the current year as well. Taking

    advantage of the strength in the secondary market, many high profle companies are lining

    up to raise money from the market. The year started with the issue from Jet Airways

    which attracted a lot of interest from investors. As a result of tougher regulations, the

    quality of the issues has gone up substantially.


  • 2006 onwards scenario:

    India's IPO market emerged as the eighth largest with $7.23 billion (Rs 30,000 crore) in

    net proceeds through 78 public issues, global research and consultancy firm Ernst &

    Young said in its Global IPO report. Across the world, the companies raised $246 billion,

    up from $167 billion in 2005, through a total of 1,729 IPOs, led by Chinese companies at

    the top with net proceeds of $56.6 billion. However, the biggest number of IPOs came

    from the United States with 187 offerings, followed by Japan with 185 and China with

    175 IPOs. According to the study, India's increasing number of larger deals has been

    driven by the growth of Indian corporations and their need for additional capital for

    potential acquisitions. In 2007 Indian IPOs continue to surge in numbers. Continued

    strength is expected in the real estate and energy sector. "The rapid growth in emerging

    market economies has resulted in a migration of capital from the developed economies

    into the emerging markets," E&Y said.

    The localisation trend in India is evidenced by several billion-dollar IPOs hosted by

    Indian exchanges. In 2006, India's largest IPO, Reliance Petroleum raised $1.8 billion,

    followed by the oil production and exploration company, Cairn Energy, which raised

    $1.3 billion with both companies listing on domestic exchanges.

    However, some Indian companies are also listing abroad, especially London, Singapore

    and Luxembourg, primarily for higher valuations and visibility, the report noted.

    The private equity rush into India is creating the potential for many IPO exits. In 2006,

    private equity firms invested more than $7 billion in India. Top global private equity

    funds as well as local funds, have been key drivers of Indian IPO markets.


  • 1.3 REGULATORY FRAMEWORK FOR IPOS Eligibility Conditions for Companies Issuing Securities

    The companies issuing securities offered through an offer document shall satisfy the

    following at the time of filing the draft offer document with SEBI and also at the time of

    filing the final offer document with the Registrar of Companies/ Designated Stock


    Filing of offer document

    No issuer company shall make any public issue of securities, unless a draft

    Prospectus has been filed with the Board through a Merchant Banker, at least

    30 days prior to the filing of the Prospectus with the Registrar of Companies


    Provided that if the Board specifies changes or issues observations on the

    draft Prospectus (without being under any obligation to do so), the issuer

    company or the Lead Manager to the Issue shall carry out such changes in the

    draft Prospectus or comply with the observation issued by the Board before filing

    the Prospectus with ROC.

    Companies barred not to issue security

    No company shall make an issue of securities if the company has been

    prohibited from accessing the capital market under any order or direction passed

    by the Board.

    Application for listing

    No company shall make any public issue of securities unless it has made

    an application for listing of those securities in the stock exchange

    Issue of securities in dematerialized form

    No company shall make public or rights issue or an offer for sale of

    securities, unless:


  • a. The company enters into an agreement with a depository for

    dematerialization of securities already issued or proposed to be

    issued to the public or existing shareholders; and

    b. The company gives an option to subscribers/ shareholders/

    investors to receive the security certificates or hold securities in

    dematerialized form with a depository.

    IPO Grading

    No unlisted company shall make an IPO of equity shares unless the

    following conditions are satisfied as on the date of filing of Prospectus with


    a. the unlisted company has obtained grading for the IPO from at

    least one credit rating agency

    b. Disclosures of all the grades obtained, along with the rationale/

    description furnished by the credit rating agency(ies) for each of

    the grades obtained.

    Eligibility Norms for IPO

    An unlisted company may make an initial public offering (IPO) of equity shares only if :-

    The company has net tangible assets of at least Rs. 3 crores in each of the

    preceding 3 full years (of 12 months each), of which not more than 50% is held in

    monetary assets.

    The company has a track record of distributable profits in terms of Section 205 of

    the Companies Act, 1956, for at least three (3) out of immediately preceding five

    (5) years.

    The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full

    years (of 12 months each).

    In case the company has changed its name within the last one year, atleast 50% of

    the revenue for the preceding 1 full year is earned by the company from the

    activity suggested by the new name.


  • The aggregate of the proposed issue and all previous issues made in the same

    financial year in terms of size (i.e., offer through offer document + firm allotment

    + promoters contribution through the offer document), does not exceed five (5)

    times its pre-issue networth as per the audited balance sheet of the last financial



    Fixed Pricing versus True Pricing (Book- Building)

    The traditional method of doing IPOs is the fixed price offering. Here, the issuer and the

    merchant banker agree on an issue price. Then the investor has a choice of filling in an

    application form at this price and subscribing to the issue. Extensive research has

    revealed that the fixed price offering is a poor way of doing IPOs. Fixed price offerings,

    all over the world, suffer from `IPO underpricing'. In India, on average, the fixed-price

    seems to be around 50% below the price at first listing; i.e. the issuer obtains 50% lower

    issue proceeds as compared to what might have been the case. This average masks a

    steady stream of dubious IPOs who get an issue price which is much higher than the price

    at first listing. Hence fixed price offerings are weak in two directions:

    dubious issues get overpriced and

    Good issues get under priced.


    A mechanism where, during period for which the IPO is open, bids are collected from

    investors at various prices which are above or equal to the floor price (the minimum

    price). The final price of the share is determined after the bid closing date, based on

    certain evaluation criteria.


  • The SEBI (Disclosure and Investor Protection) Guidelines, 2000, define the term

    `book-building' in a rather complex language as "a process undertaken by which a

    demand for the securities proposed to be issued by a body corporate is elicited and built-

    up and the price for such securities is assessed for determination of the quantum of such

    securities to be issued by means of a notice, circular, advertisement, document or

    information memoranda or offer document.''

    Book building process is a common practice used in most developed countries for

    marketing a public offer of equity shares of a company. However, Book building acts as

    scientific as well as flexible price discovery method through which a consensus price of

    IPOs may be determined by the issuer company along with the Book Running Lead

    Manager (i.e. merchant banker) on the basis of feedback received from individual

    investors as well as most informed investors (who are institutional and corporate

    investors like, UTI, LICI, GICI, FIIs, and SFCI etc). The method helps to make a correct

    evaluation of a companys potential and the price of its shares.


  • The Book-Building Process (Fig 1.1)

    In simple terms, book-building is a mechanism by which the issue price is discovered on

    the basis of bids received from syndicate members/brokers and not by the

    issuers/merchant bankers.







    I N V E S T O R S

    MFs Financial Foreign Financial NRIs Corporations HNIs Retail Investors Institutions Institutions

  • An Issuer Company can issue capital through book building in following two ways:

    75% Book Building process

    Under this type of public offer, the issue of securities has to be categorized into:

    Placement portion category

    Net offer to the public

    The option of 75% Book Building is available to all body corporate that are otherwise

    eligible to make an issue of capital to the public. The securities issued through the book

    building process are indicated as 'placement portion category' and securities available to

    public are identified as 'net offer to public'. In this option, underwriting is mandatory to

    the extent of the net offer to the public. The issue price for the placement portion and

    offers to public are required to be same

    100% of the net offer to the public through Book Building process - In the 100% of

    the net offer to the public, entire issue is made through Book Building process. However,

    there can be a reservation or firm allotment to a maximum of 5% of the issue size for the

    permanent employees, shareholders of the company or group companies, persons who, on

    the date of filing of the draft offer document with the Board, have business association, as

    depositors, bondholders and subscribers to services, with the issuer making an initial

    public offering.

    The number of bidding centres, in case of 75% book building process should not be less

    than the number of mandatory collection centres specified by SEBI. In case of 100%

    book building process, the bidding centres should be at all the places where the

    recognised stock exchanges are situated.


  • Book Building Process in India

    The steps which are usually followed in the book building process can be summarized


    The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.

    (2) Initially, the issuer company consults with the BRLM in drawing up a draft

    prospectus (i.e. offer document) which does not mention the price of the issues, but

    includes other details about the size of the issue, past history of the company, and a price

    band. The securities available to the public are separately identified as net offer to the


    (3) The draft prospectus is filed with SEBI which gives it a legal standing.

    (4) A definite period is fixed as the bid period and BRLM conducts awareness

    campaigns like advertisement, road shows etc.

    (5) The BRLM appoints a syndicate member, a SEBI registered intermediary to

    underwrite the issues to the extent of net offer to the public.

    (6) The BRLM is entitled to remuneration for conducting the Book Building process.

    (7) The copy of the draft prospectus may be circulated by the BRLM to the

    institutional investors as well as to the syndicate members.

    (8) The syndicate members create demand and ask each investor for the number of

    shares and the offer price.

    (9) The BRLM receives the feedback about the investors bids through syndicate


    (10) The prospective investors may revise their bids at any time during the bid period.


  • (11) The BRLM on receipts of the feedback from the syndicate members about the bid

    price and the quantity of shares applied has to build up an order book showing the

    demand for the shares of the company at various prices. The syndicate members must

    also maintain a record book for orders received from institutional investors for

    subscribing to the issue out of the placement portion.

    (12) On receipts of the above information, the BRLM and the issuer company determine

    the issue price. This is known as the market-clearing price.

    (13) The BRLM then closes the book in consultation with the issuer company and

    determine the issue size of (a) placement portion and (b) public offer portion.

    (14) Once the final price is determined, the allocation of securities should be made by the

    BRLM based on prior commitment, investors quality, price aggression, earliness of bids

    etc. The bid of an institutional bidder, even if he has paid full amount may be rejected

    without being assigned any reason as the Book Building portion of institutional investors

    is left entirely at the discretion of the issuer company and the BRLM.

    (15) The Final prospectus is filed with the registrar of companies within 2 days of

    determination of issue price and receipts of acknowledgement card from SEBI.

    (16) Two different accounts for collection of application money, one for the private

    placement portion and the other for the public subscription should be opened by the

    issuer company.

    (17) The placement portion is closed a day before the opening of the public issue through

    fixed price method. The BRLM is required to have the application forms along with the

    application money from the institutional buyers and the underwriters to the private

    placement portion.

    (18) The allotment for the private placement portion shall be made on the 2nd day from

    the closure of the issue and the private placement portion is ready to be listed.


  • (19) The allotment and listing of issues under the public portion (i.e. fixed price portion)

    must be as per the existing statutory requirements.

    (20) Finally, the SEBI has the right to inspect such records and books which are

    maintained by the BRLM and other intermediaries involved in the Book Building process


    Before establishment of SEBI in 1992, the quality of disclosures in the offer documents

    was very poor.

    The main drawback of free pricing was the process of pricing of issues. The issue price

    was determined around 60-70 days before the opening of the issue and the issuer had no

    clear idea about the market perception of the price determined.

    In Book Building the price is determined on the basis of demand received or at price

    above or equal to the floor price.

    The Allotment Process through Book-building:

    Step1-The Company will 'discover' its price

    Earlier, the company determined a fixed price for the stock issue. The issue was marketed

    to the general public through advertisements and a media campaign.

    Today, companies prefer a book building process. Book building is the process of price

    discovery. That means there is no fixed price for the share. Instead, the company issuing

    the shares comes up with a price band. The lowest price is referred to as the floor and the

    highest, the cap. Bids are then invited for the shares. Each investor states how many

    shares s/he wants and what s/he is willing to pay for those shares (depending on the price

    band). The actual price is then discovered based on these bids.

    Step2-Players of the game

    Three classes of investors can bid for the shares:


  • Qualified Institutional Buyers: QIBs include mutual funds and Foreign

    Institutional Investors. At least 50% of the shares are reserved for this category.

    Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor.

    At least 25% is reserved for this category.

    The balance bids are offered to high networth individuals and employees of the


    Individuals who apply for the IPO put in their bids.

    The process is transparent. One can check on the issue subscription at the BSE and

    NSE Web sites.

    After evaluating the bid prices, the company will accept the lowest price that will

    allow it to dispose the entire block of shares. That is called the cut-off price.

    The process can be illustrated with an example:

    Number of shares issued by the company = 100.

    Price band = Rs 30 - Rs 40.

    If individuals have bid for prices as follows:

    Bid Number of


    Price per share

    1 20 Rs 402 10 Rs 383 20 Rs 374 30 Rs 365 20 Rs 356 20 Rs 337 20 Rs 30

    The shares will be sold at the Bid 5 price of 20 shares for Rs 35.


    Because Bidders 1 to 5 are willing to pay at least Rs 35 per share.


  • The total bids from Bidders 1 to 5 ensure all 100 shares will be sold (20 + 10 + 20

    + 30 + 20).

    The cut-off price is therefore Bid 5's price = Rs 35.

    Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't get an allotment

    because their bids are below the cut-off price.

    The bids are first allotted to the different categories and the over-subscription (more

    shares applied for than the shares available) in each category is determined.

    Retail investors and high networth individuals get allotments on a proportional


    If a retail investor has applied for 200 shares in the issue, and the issue is over-

    subscribed five times in the retail category, he qualify to get 40 shares (200


    Sometimes, the over-subscription is huge or the issue is priced so high that the

    bidder can't really bid for too many shares before the Rs 50,000 limit is reached.

    In such cases, allotments are made on the basis of a lottery.

    If a retail investor has applied for 5 shares in an issue, and the retail category has

    been over-subscribed 10 times, the investor is entitled to half a share.

    Since that isn't possible, it may then be decided that every 1 in 2 retail investors will

    get allotment. The investors are then selected by lottery and the issue allotted on a

    proportional basis among.


    1. Total shares on offer@ Rs. 600 per share: 10 crore shares

    2. Shares on offer for retail category: 2.5 crore shares

    3. The total issue is over subscribed 4 times whereas the retail category is over

    subscribed 8.25 times


  • 4. Issuer decides to fix the minimum application / bid size as 9 shares (falling

    within the range of Rs. 5000- 7000). Application can be made for a minimum of 9

    shares and in multiples thereof.

    Assume three retail investors A, B & C. A has applied for 81 shares. B has applied for 72

    shares and C has applied for 45 shares. As per allotment procedure, the allotment to retail

    individual investors would be on proportionate basis i.e., at 1/8.25th of the total number of

    shares applied for. The actual entitlement shall be as follows:

    1.5 Reverse Book Building

    Reverse book-building is a mechanism by which companies listed on a stock exchange

    can delist their shares. The reasons for delisting may be several and sometimes


    The reverse book building is an efficient price discovery mechanism of de-listing of

    securities, which is provided for capturing the sell orders on online basis from the

    shareholders through respective BRLM. In the reverse book-building scenario, the

    acquirer or promoter of a company offers to get back shares from the shareholders. It is a

    mechanism where, during the period for which the reverse book building is open, offers



    Name of


    Total Number of

    shares applied for

    Total number of shares eligible to be allotted

    (No. of shares applied for / 8.25)1 A 81 81/8.25 = 9.82 shares rounded off to 10 shares 2 B 72 72/8.25 = 8.73 shares rounded off to 9 shares (i.e.

    minimum application size). 3 C 45 shares 45/8.25=5.45 shares.

    Application liable to be rejected. (as the

    entitlement is less than the minimum application

    size). However, the successful applicants out of

    the total applicants shall be determined by

    drawal of lots.


  • are collected at various prices, which are above or equal to the floor price from the share

    holders through trading members appointed by the acquirer or promoter of a company.

    The reverse book building price (i.e. final price/ exist price) is determined by BRLM in

    consultation with the acquirer or promoter of the company after the offer closing date in

    accordance with the SEBI (De-listing of Securities) Guidelines, 2003. which desires to

    get de-listed, in accordance to book building process. The offer price has a floor price,

    which is fixed for de-listing of securities below which no offer can be accepted. The floor

    price is the average of 26 weeks traded price quoted on the stock exchange where the

    shares of the company are most frequently traded preceding 26 weeks from the date of

    public announcement is made. There is no ceiling on the maximum price.

    1.6 Buy Back Of Shares

    It is a process whereby a company purchases its own shares or other specified securities

    from the holders thereof for improving the earnings per share (EPS), or to improve return

    on capital or return on net worth and to enhance the long-term shareholder value, among

    other things.


    To increase promoters holding

    Increase earning per share

    Rationalize the capital structure by writing off capital not represented by available


    Support share value

    To thwart takeover bid

    To pay surplus cash not required by business

    COMMENT It is an interesting fact to note that MNCs are using buyback process as

    the best strategy to maintain their share price in a bear run by buying back the shares

    from the open market at a premium over the prevailing market price.


  • Procedure for Buy Back

    Where a company proposes to buy back its shares, it shall, after passing of the

    special/Board resolution make a public announcement at least one English

    National Daily, one Hindi National daily and Regional Language Daily at the

    place where the registered office of the company is situated.

    The public announcement shall specify a date, which shall be specified date for

    the purpose of determining the names of shareholders to whom the letter of offer

    has to be sent.

    A public notice shall be given containing disclosures as specified in Schedule I of

    the SEBI regulations.

    A draft letter of offer shall be filed with SEBI through a merchant Banker. The

    letter of offer shall then be dispatched to the members of the company.

    A copy of the Board resolution authorizing the buy back shall be filed with the

    SEBI and stock exchanges.

    The date of opening of the offer shall not be earlier than seven days or later than

    30 days after the specified date

    The buy back offer shall remain open for a period of not less than 15 days and not

    more than 30 days.

    A company opting for buy back through the public offer or tender offer shall open

    an escrow Account.

    COMMENT MNCs are taking advantage of the depressed market conditions to

    mop up the shares. There is nothing legally wrong in buying back shares, but it

    should be by paying a fair price to minority shareholders.

    1.7 Difference between Delisting and Buyback


  • De-listing is different from buy back of securities in which the securities of a company

    are extinguished with consequent reduction of capital of the company. In the case of de-

    listing there is no reduction of capital. It is needless to mention that in the case of buy

    back securities, the company itself is the acquirer and hence provides the funds for buy

    back. In the case of de-listing, the securities are acquired by a person other than the

    company and who could be the promoter, majority shareholder or a person in control of

    the management and the funds have to be provided by that acquirer.



  • Intermediarys help corporations design securities that will be attractive to investors, buy

    these securities from the corporations, and then resell them to savers in the primary


    Merchant Bankers/ Lead Manager

    Merchant bankers play an important role in issue management process. Lead managers

    have to ensure correctness of the information furnished in the offer document. They have

    to ensure compliance with SEBI rules and regulations as also Guidelines for Disclosures

    and Investor Protection. To this effect, they are required to submit to SEBI a due

    diligence certificate confirming that the disclosures made in the draft prospectus or letter

    of offer are true, fair and adequate to enable the prospective investors to make a well

    informed investment decision. The role of merchant bankers in performing their due

    diligence functions has become even more important with the strengthening of disclosure

    requirements and with SEBI giving up the vetting of prospectuses. Their functions are:

    To act as intermediaries between the company seeking to raise money and the

    investors. They must possess a valid registration from SEBI enabling them to do

    this job.

    They are responsible for complying with the formalities of an issue, like drawing

    up the prospectus and marketing the issue.

    If it is a book building process, the lead manager is also in charge of it. In such a

    case, they are also called Book Running Lead Managers.

    Post issue activities, like intimation of allotments and refunds, are their

    responsibility as well.


    Underwriters are required to register with SEBI in terms of the SEBI (Underwriters)

    Rules and Regulations, 1993. In addition to underwriters registered with SEBI in terms of

    these regulations, all registered merchant bankers in categories I, II and III and

    stockbrokers and mutual funds registered with SEBI can function as underwriters. Part III


  • gives further details of registration of underwriters. In 1996-97, the SEBI (Underwriters)

    Regulations, 1993 were amended mainly pertaining to some procedural matters.

    Bankers to an Issue

    Scheduled banks acting as bankers to an issue are required to be registered with SEBI in

    terms of the SEBI (Bankers to the Issue) Rules and Regulations, 1994. These regulations

    lay down eligibility criteria for bankers to an issue and require registrants to meet

    periodic reporting requirements. Part III gives further details of registration of bankers to

    an issue.

    Portfolio managers

    Portfolio managers are required to register with SEBI in terms of the SEBI (Portfolio

    Managers) Rules and Regulations, 1993. The registered portfolio managers exclusively

    carry on portfolio management activities. In addition all merchant bankers in categories I

    and II can act as portfolio managers with prior permission from SEBI. Part III gives

    further details of the registration of portfolio managers.

    Registrars to an Issue and Share Transfer Agents

    Registrars to an issue (RTI) and share transfer agents (STA) are registered with SEBI in

    terms of the SEBI (Registrar to the Issue and Share Transfer Agent) Rules and

    Regulations, 1993. Under these regulations, registration commenced in 1993-94 and is

    granted under two categories: category I - to act as both registrar to the issue and share

    transfer agent and category II - to act as either registrar to an issue or share transfer agent.

    With the setting up of the depository and the expansion of the network of depositories,

    the traditional work of registrars is likely to undergo a change.

    1.9 IPO Grading


  • IPO grading (initial public offering grading) is a service aimed at facilitating the

    assessment of equity issues offered to public. The grade assigned to any individual issue

    represents a relative assessment of the fundamentals of that issue in relation to the other

    listed equity securities in India. IPO grading is positioned as a service that provides an

    independent assessment of fundamentals to aid comparative assessment that would

    prove useful as an information and investment tool for investors. Moreover, such a

    service would be particularly useful for assessing the offerings of companies accessing

    the equity markets for the first time where there is no track record of their market


    IPO grade assigned to any issue represents a relative assessment of the fundamentals of

    that issue in relation to the universe of other listed equity securities in India. This grading

    can be used by the investor as tool to make investment decision. The IPO grading will

    help the investor better appreciate the meaning of the disclosures in the issue documents

    to the extent that they affect the issues fundamentals. Thus, IPO grading is an additional

    investor information and investment guidance tool.

    Credit Rating agencies (CRAs) like ICRA, CRISIL, CARE and Fitch Ratings who are

    registered with SEBI will carry out IPO grading. SEBI does not play any role in the

    assessment made by the grading agency. The grading is intended to be an independent

    and unbiased opinion of that agency. IPO grading is not mandatory but is optional and the

    assigned grade would be a one time assessment done at the time of the IPO and meant to

    aid investors who are interested in investing in the IPO. The grade will not have any

    ongoing validity.


    No unlisted company shall make an IPO of equity shares or any other security

    which may be converted into or exchanged with equity shares at a later date,

    unless the following conditions are satisfied as on the date of filing of Prospectus

    (in case of fixed price issue) or Red Herring Prospectus (in case of book built

    issue) with ROC:


  • The unlisted company has obtained grading for the IPO from at least one

    credit rating agency;

    Disclosures of all the grades obtained, along with the rationale/description

    furnished by the credit rating agency(ies) for each of the grades obtained,

    have been made in the Prospectus (in case of fixed price issue) or Red

    Herring Prospectus (in case of book built issue); and

    The expenses incurred for grading IPO have been borne by the unlisted

    company obtaining grading for IPO.

    Most of the market analysts have welcomed this move of SEBI as it will help the

    investors in a volatile market to know whether the merchant banker has carried the

    exercise in determining the price of an issue in a proper manner or not. It will also help

    the investors in knowing whether the price of the issue is justified or not. They even said

    that management of a good company will never get afraid of getting graded of their IPOs

    if they are good. The only demerit of this step by the SEBI as said by many experts is that

    there will be a slowdown in the number of IPOs coming out as grading will be a bit

    lengthy process and there will be a cost-factor attached to it also.


    IPO grading covers both internal and external aspects of a company seeking to make an

    IPO in general. The internal factors include competence and effectiveness of the

    management, profile of promoters, marketing strategies, size and growth of revenues,

    competitive edge, technology, operating efficiency, liquidity and financial flexibility,

    asset quality, accounting quality, profitability and hedging of risks. Among external

    factors, the key one is the industry and economic/business environment for the issuer.

    Here, it is important to note that internationally, the global rating agencies such as

    Standard & Poors and Moodys do not perform grading of IPOs at all. While Standard &

    Poors is the majority stakeholder in CRISIL Ltd, Moodys is the single biggest

    stakeholder in ICRA Ltd. Similarly, the third global player Fitch IBCA (which acquired

    another rating agency Dun & Bradstreet in 2000) also does not grade IPOs as yet. The


  • IPO grading is indicated on a five point scale and a higher score indicating stronger


    An IPO grading Scale

    IPO grade Assessment 5/5 Strong fundamentals 4/5 Above average fundamentals 3/5 Average fundamentals 2/5 Below average fundamentals 1/5 Poor fundamentals


  • Data-flow diagram showing the entire IPO-grading


    This process will ideally require 2-3 weeks for completion, so it may be a good idea for

    companies to initiate the grading process about 6-8 weeks before the targeted IPO date to

    provide sufficient time for any contingencies.


  • Cost Involved In IPO Grading

    Though nothing has been declared officially but most of the credit rating has said that

    IPO-grading would not cost much to the issuers. They would be charging 10 basis points

    of the amount to be raised with a ceiling of about Rs 10-15 lakhs. Thus, even in the case

    of a mega IPO, there would be a cap on fees, he noted. Around 100 IPOs hit the market

    on an average every year. However, despite this seemingly big number, the total receipts

    for the entire rating industry on account of grading fees would be only about Rs 10-15


    Benefits of IPO Grading

    There are various positive sides of an IPO grading. The most significant factors that go in

    favor of IPO grading are:

    (a) Professional and Independent Appraisal: IPO grading will create awareness about

    the fundamentals of the companys IPO and will provide focused company information

    as a key input to prospective investors that will be helpful in taking an investment

    decision, in a manner similar to what a credit rating is for debt investors.

    (b) Removal of Information Burden: Where disclosures of issues are large and

    complex, a service analyzing and interpreting these disclosures independently and

    quickly will be extremely useful in cutting through the clutter. Thus, the usefulness of

    IPO grading would be particularly high for small investors as it will serve as a guide

    about the company coming out with the issue.

    (c) Impediment for Weak Companies: While fundamentally sound companies will gain

    from the market, companies whose fundamentals are not very strong will be impeded in

    building up speculative demand among investors. Such weak companies will need to

    offer pricing, which will adequately compensate investors for the risks they take.

    Therefore, IPO grading provides disincentives for weak companies planning to come to

    the market to raise easy capital.


  • (d) Improved Investors Sophistication: It is perceived that an independent and

    informed opinion on the fundamental quality of the company will bring about greater

    level of investor sophistication in a scientific manner. In fact, investors may take

    investment decisions in a better way on the basis of opinion of CRAs regarding IPO

    grading. However, the assessment is not a recommendation to buy or not buy a stock. It

    is, instead, a powerful tool to assist the investors in making up their mind about the

    quality of a company proposing to offer an IPO investment option.






    The literature review on IPOs can be divided in the following main heads-

    a) Reason and timing of going public

    Going public marks a watershed in the life cycle of the firm. While increased

    equity can support the firms future plans of growth, the trade off for the firm is that of

    increased public scrutiny.

    Brealy and Myers (2005) state that in the context of USA the firms may seek

    private equity in their initial years and only later go for public issues.

    Pagano, Panetta and Zingales (1998) in their study of Italian firms, find that

    firms going public are not seeking money for growth but are rebalancing their

    accounts after high investment and growth.

    Lerner (1994) found that there are times (windows of opportunity) when the

    markets could be extremely optimistic about a particular industry and it may be a

    good time for the firms in that industry to go public.

    The post IPO period sees a reduction in leverage as well as investment. They state that

    going public is a conscious choice that some firms make while some others prefer to

    remain private. Thus going public is not a natural element in the life cycle of a firm.

    b) Valuation of IPOs

    Benveniste and Spindt (1989) find that under writers try to resolve the

    information asymmetry problem between the firm and the investors by providing

    an incentive to the investors to reveal their private information about the firm.

    Kim and Ritter (1999) in their study of 190 firms find that under writers forecast

    the next years earnings numbers and multiply them with PE ratios of comparable


  • firms in the industry to get the approximate price of the IPO. However they also

    found that PE ratios using historical earnings numbers do not give accurate results

    whereas when forecasted earnings numbers are used then the valuation is much

    more accurate.

    Purnanandam and Swaminathan (2002) say that IPOs are priced 50% higher

    than industry peers. Also they find that more the IPO is overpriced with respect to

    its peers, worse is its long term performance.

    c) Allocation mechanism

    The allocation mechanisms are specified by the regulators in

    different countries. Loughran, Ritter and Rydqvist (1994) find 3 main categories across

    countries-Auctions, Fixed price offers and Book Building. Sherman (2005) finds that

    Book building is a superior mechanism for selling IPOs rather than auctions.






    1. Descriptive Research

    Descriptive research is used to obtain information concerning the current status of the

    phenomena to describe what exists with respect to variables or conditions in a situation.

    Descriptive research, also known as statistical research, describes data and characteristics

    about the population or phenomenon being studied. Descriptive research answers the

    questions who, what, where, when and how. Although the data description is factual,

    accurate and systematic, the research cannot describe what caused a situation

    2. Analytical Research

    Analytical research takes descriptive research one stage further by seeking to explain

    the reasons behind a particular occurrence by discovering causal relationships. Once

    causal relationships have been discovered, the search then shifts to factors that can be

    changed (variables) in order to influence the chain of causality.



    Main Objective:

    An attempt has been made to analyze the various IPOs and recommend others to

    invest in good initial public offerings after thorough research of financial

    statements of the companies.

    Sub objectives: To understand various dimensions and problems in IPO process and to suggest


    To understand post IPO performance.

    To analyze financial position of Companies as depicted in its Annual report as it

    serve an important basis for investors to judge company performance and future




    Secondary data has been collected. This kind of data has been previously collected. This

    is the kind of data that should always be collected first. I have taken this data from

    different web sites and newspapers.





    Issue DetailsIssue Opens March 25.2008Issue Closes April 02,2008Price Band Rs. 125-150Face Value Rs. 10Issue Size 3,750,000 sharesListing NSE, BSEQIBs 1,875,000 sharesNon Institutional 5,62,500 shares

    Retail 1,312,500 shares

    Company BackgroundIncorporated in 1998, Kiri Dyes and Chemicals Limited is engaged in the business of

    manufacturing of reactive dyes which are called synthetic organic dyes used for cotton

    fabrics like garments, dress materials, bed-sheets, carpets etc. The dyes are of basically

    colours like black, blue, and red, orange, yellow and numerous variants of these basic

    colours identified by color index number internationally. The product range of company

    caters to textiles, leather, and paint and printing-ink industries with total production

    capacity of 10800 MTPA.

    With plans for further backward integration, the IPO is to fund capital expenditure to set

    up a plant to manufacture sulphuric acid, oleum and chloro sulphonic acid, with a

    combined capacity of 1, 80,000 tonnes, and a dyes and intermediates unit. A 2.9-MW

    power plant that can run from the steam generated by the sulphuric acid plant is also on

    the anvil. The electricity generated will be sufficient not only to run the sulphuric acid

    plant but also the intermediate plants of VS and H-Acid.


  • Following the expansion, the capacity to manufacture sulphuric acid will be 1, 00,000

    tonnes, oleum 43,200 tonnes and chlorosulphonoic acid 36,000. The plant to manufacture

    sulphuric acid and its sub-products is to be completed by December 2008. Around 25%

    of the capacity of sulphuric acid, oleum and chlorosulphonic acid will be used to produce

    dye-intermediates: H-Acid and V.S. The remaining produce will be marketed directly to

    bulk end-users in the detergent and chemical industry and other large consumers.

    The capacity to produce dyestuff will be increased 3,000 tonnes to 15,000 tonnes by the

    fiscal ending March 2010 (FY 2010). The capacity to manufacture dyes intermediates VS

    will become 4,200 tonnes in FY 2009 and then further increase to 4,800 tonnes in FY

    2010. The capacity to produce H-acid will increase to 4,200 tonnes in FY 2010.

    The Industry produces a wide spectrum of products, which include Pharmaceuticals,

    Dyes, Man-made Fibers, Plastics, Pesticides, Fertilizers, Cosmetics and Toiletries, Paint,

    Auxiliary Chemicals and wide range of organic and Inorganic compounds for

    applications ranging from automobiles, textile industry, engineering industry,

    construction chemicals and food additives to veterinary and health care products.

    The company is engaged in the business of manufacturing and marketing of:

    1. Reactive Dyes Synthetic Organic Dyes (S. O. Dyes)

    2. Dyes Intermediate: Vinyl Sulphone

    3. Dyes Intermediate: H-Acid

    Purpose of the Issue:


  • 1.To fund the capital expenditure for setting up of a plant to manufacture Sulphuric Acid,

    Oleum and Chloro Sulphonic Acid with a combined capacity of 500 M.T. per day

    adjacent to its existing unit at Village Dudhwada, Taluka Padra, District Vadodara;

    2. To fund the capital expenditure for Dyes and Intermediates Unit located at GIDC,

    Vatva, Ahmedabad;

    3. To fund the additional working capital margin;

    4. To meet Issue expenses;

    5. To meet expenses of the Issue in order to achieve the benefits of listing on the Stock



    1. OPM has increased from 7.9% in FY 06 to 10.7% in FY 07. For half year ended

    September 2007, OPM stands at 15%.

    2. KDCLs source of revenue is well diversified. Therefore, the companys revenue will

    not be majorly affected if any of the markets slow down.

    3. KDCLs source of revenue is well diversified. Therefore, the companys revenue will

    not be majorly affected if any of the markets slow down.

    4. Stringent environmental laws in the western countries have led to discontinuance of

    production of certain dyes for textiles and leather. This has led to shift in manufacturing

    capacity from the US and the European Union to South East Asia. Climatic conditions in

    India are favorable for the manufacture of such products. Also, the new usage of

    dyestuffs in electronic, high-tech printing, and bio medical applications augurs well for

    the high-valued dyestuff products.

    5. Backward integration and JV with global giants will help to save cost and strengthen

    research and development facility.



  • 1. Operates in a highly competitive and unorganised business environment with many big

    and small players exporting and manufacturing dye and dyestuff. The increased

    competitive pressure may adversely affect margin.

    2. Had negative cash flows of Rs. 4.88 crore and Rs.9.42 crore from operating income in

    FY 2007 and FY 2006.

    3. Currently paying MAT (minimum alternate tax) on account of benefits of exemption

    received under Section 10 B of the Income-Tax Act, 1961, as it is a 100% export-oriented

    unit (EOU). This status will expire in March 2010. The withdrawal of tax incentives

    would increase the tax liability and adversely impact profitability.

    4. The debt-equity ratio of the company increased from 1.10 times in FY 05 to 1.76 times

    in FY 07 due to increase in the long term debt taken by the company from Rs. 19.64 crore

    in FY 05 to Rs. 59.67 crore in FY 07.

    Fundamental Analysis

    The booming Indian Economy has had a favorable impact on the business of the

    company for the year 2006-07.The growth in the economy as well as manufacturing

    sector has thrown up substantial opportunities in the companys core sector of operation

    such as Manufacturing Dyes and Intermediates, which has helped the company perform

    well during the year 2006-07.


    The company is one of the leading players in the manufacturing and exports of

    Dyes in India in terms of revenue and profits.


  • The company also got expertise in Domestic and International trading of its


    It provides all the technical services of its products as well as all application

    information to improve customization of its products.

    Threats Frequent and unexpected changes in the EXIM Policies

    Entry of new competitors in the same line of activities.

    Ratio Analysis

    As on 31-Mar-07 31-Mar-06 31-Mar-05

    OPBIT/Prod.cap.empl.(%) 15.25 11.52 14.84

    PBIT/Cap. Employed (%) 15.13 11.50 14.88

    PAT/Networth (%) 25.49 18.02 17.45

    Tax/PBT (%) 4.27 5.93 4.74

    Total Debt/Networth (x) 1.76 1.45 1.10

    Long Term Debt/Networth (x) 0.44 0.23 0.04

    PBDIT/Finance Charges (x) 3.00 3.39 2.61

    Current Ratio (x) 4.75 4.90 2.78

    RM Inventory (days consumption) 0.00 0.00 0.00

    FG inventory (days cost of sales) 0.00 0.00 0.00

    Receivables (days gross sales) 88.69 109.90 101.98

    Creditors (days cost of sales) 0.00 0.00 0.00

    Op. curr. assets (days OI) 195.00 209.00 223.00

    The ideal current ratio is 2:1.but the current ration of both the years exceeds the

    ideal ratio which indicates that funds are not used efficiently and lying idle.


  • An ideal debt equity ratio is 2:1.but the debt equity ratio of both the years is low

    which implies the use of more equity than debt, which means a larger safety

    margin for creditors since owners equity is considered as a margin of safety by

    creditors and vice-versa.

    Inventory is one area where management has achieved constant success. It has

    tried to reduce operating cycle of the division for which it was imperative to

    reduce the inventory storage periods consisting of the three components --- raw

    material, work in progress, and finished goods. The inventory turnover ratio has

    increased from previous year from 9.517 times to 13.766 times. A very high

    inventory turnover indicates that overtrading and it may leads to shortage of the

    working capital.

    The ideal quick ratio is 1:1. But the quick ratio of both the years i.e. 3.296 times

    and 2.878 times exceeds the ideal ratio. Higher quick ratio means excessive

    amount of liquid assets have been invested.

    Fixed Assets Turnover ratio has decreased from 4.9399 times to 3.1603 times so

    it is not a good sign, it indicates that fixed assets remained idle and therefore, the

    management should investigate and determine the reasons for the decline.

    Return on investment of kiri dyes first decreases in year 2006-07 but then slightly

    increase in year 2007-08.The reason for such a low return is that more than half of

    the total capital employed used in calculating return on capital hardly yield any


    Company Analysis

    Kiri Dyes & Chemicals Ltd. (KDCL) was incorporated as a private limited

    company in May 1998 and was converted into a public ltd co. in May 2006.

    KDCL is engaged in the business of manufacturing and marketing of:

    1. Reactive Dyes- Synthetic Organic Dyes (S.O. Dyes)


  • 2. Dye Intermediates- Vinyl Sulphone and H-Acid

    KDCLs production hub is centrally located in Gujarat. S.O. Dyes are

    manufactured and processed in three plants located in Vatva, Ahmedabad and dye

    intermediates are being produced at Padra plant in Vadodara.

    The installed capacity for dyestuff (S.O. Dyes) was 10,800 MT per annum with

    capacity utilization of 77.37% in FY 07.

    The installed capacity for dye intermediates (Vinyl Sulphone and H-Acid) was

    3,600 MT per annum each with capacity utilization of 42.94% and 4.17%

    respectively in FY 07.

    KDCLs product range comprises of more than 120 dyestuffs used by textiles,

    leather, and paint and printing-ink industries.

    KDCL supplies reactive, acid, and direct dyes as well as dye-intermediates in

    various forms like standardized spray dried/tray dried - powder/granular, crude

    and reverse osmosis.

    KDCL has seen increase in the % share of the domestic market from 0.80% in FY

    03 to 33.55% in FY 07. For half year ended September 2007, the same has

    increased nearly to 49%.

    KDCLs major chunk of export revenue comes from Turkey (18%) and Korea

    (18%) followed by Bangladesh (17%), USA (15%), Taiwan (7%) and Indonesia


    Some of KDCLs top customers includes both Indian and global companies such

    as, Dystar (India) Pvt ltd (India), Kyungin Synthetic Corporation (Korea), Sen Er

    Boya Kimya (Turkey), Biddle Sawyer Corporation (USA), Befuwell Enterprise

    Co Ltd (Taiwan) and Shangyu Yide Chemical Co. Ltd (China).

    On November 1, 2007, KDCL entered into the Memorandum of Understanding

    with M/s. Zhejiang Lonsen Group Stock Co. Ltd. with the objective to establish a

    joint venture manufacturing facility in India for the production of reactive dyes.

    Post issue promoter and promoter group shareholding will reduce from 88.76% to



  • Valuation of IPO

    Kiri Dyes and Chemicals ltd earning per share (EPS) works out to be 8.91.

    Post issue EPS is Rs 11.87 (based on PAT of year ending on March 31st, 2008).

    Post issue PE at upper price band is 12.64 and at the lower price band is

    10.53.The shares have been offered at a price band of Rs. 125/- to Rs. 150/- per


    It is clearly shown from the table given above that P/E ratio of KDCL is quite

    high. Even the P/BV of KDCL is on the higher side in comparison to its peers.

    The company has shown a good top line, but there are other listed companies

    whose top line is far better than that of KDCL and they are available at relatively

    cheaper P/E multiple than KDCL.

    On the other hand the company has registered negative cashflows from its

    operating activities of Rs 94.20 million and Rs 48.87 million during FY06 and


    Another major drawback is the industry in which the company operates as it is

    highly competitive and there are several unorganized players. This has led to


  • lower margins enjoyed by the players which in turn have affected the profitability

    of the companies in this sector.

    Hence it is recommended to AVOID to the Issue.




  • Industry: Chemicals Industry

    Price Band: Rs. 125-150

    Recommendation: Avoid


    Issue Details


  • Issue Opens March 24.2008Issue Closes March 27,2008Price Band Rs. 540-610Face Value Rs. 10Issue Size 4,063,158 sharesListing NSE, BSE

    Company Background

    Incorporated in 1997, Titagarh Wagons Limited is one of the leading private sector

    wagon manufacturers in India. It is in the business of manufacturing railway wagons,

    Bailey bridges, Heavy Earth Moving and Mining equipment, steel and SG iron castings

    of moderate to complex configuration etc.

    They also manufacture other products for the Indian defence establishment, such as

    special purpose wagons, shelters and other engineering equipments. They had

    approximately 16.9% market share in the wagon manufacturing segment in Fiscal 2006,

    which has further increased to approximately 22.1% in Fiscal 2007.

    Titagarh Wagons Limited is the only private sector company registered with the Ministry

    of Defence, Government of India to manufacture Bailey bridges and other related

    accessories in India. Titagarh Wagons Limited aspires to be a leader as a manufacturer of

    heavy engineering equipment and a world-class service provider for the infrastructure

    sector. They operate two manufacturing facilities located at Titagarh and Uttarpara, in

    West Bengal.

    Titagarh Wagons Limited operates two manufacturing facilities located at Titagarh and

    Uttarpara, in West Bengal. The Uttarpara unit functions as its second manufacturing plant

    for wagons, in addition to manufacturing heavy earth moving and mining equipment. As

    an Industry Partner to the Defence Research and Development Organisation, Ministry

    of Defence (DRDO), the Company also manufactures other products for the Indian

    Defence establishment, such as special purpose wagons, shelters and other engineering

    equipments. The Company is structured along three broad business lines: a) wagon


  • manufacturing division, b) special projects division (includes defence, bailey bridges and

    other fabricated equipment) and c) heavy earth moving and mining equipment division

    Purpose of the Issue

    The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to

    raise capital to:

    1. Set up an EMU manufacturing facility at our Uttarpara unit;

    2. Modernize and expand our existing facilities at our Titagarh and Uttarpara units;

    3. set up an axle machining and wheel set assembly facility at our Uttarpara unit;

    4. Construct a corporate office and a design cum research and development office;

    5. Strategic acquisition or investments;

    6. Brand building exercise;

    7. General corporate purposes.


    1.On the financial front, TWLs performance has been impressive with net sales

    registering a CAGR growth of over 60% and net profits up at a CAGR of close to 65%

    during 2005-07. The net profit margins (% of net sales) increased from 9% in FY 2005 to

    12.50% for the half year ended 30th September, 2007. The current size of the order-book


  • as on 31st January 2008 stood at Rs 7531.13 million which translates into 2.65 times FY

    2007 revenues thus rendering good growth visibility for future.

    2. It receives 20-30% of the basic value of contract in advance, which is reflected in

    higher current liabilities thereby decreasing the requirement of working capital, again,

    reflected by lower interest cost as a percentage of sales, thereby positively affecting the

    profitability of the company.

    3. The company is isolated against the risk of increasing steel prices as orders placed by

    Indian Railways usually include free supply of materials of high value such as steel,

    bogies and wheel sets. Moreover, the company has a price-escalation for its orders,

    thereby isolating it from increasing pressure on the margins incase of rise in its raw-

    materials or labor expenses.

    4. Entry of competitors into the sector is restricted due to higher entry barrier on account

    of qualification and pre-qualification criteria for manufactures and huge capital

    expenditure requirement.

    5. The Indian Railways in anticipation of strong freight traffic is expected to place order

    for procurement of 20,000 wagons for the year and plans to introduce steel coaches in

    trains from 2010. This could be expected to lead to further swelling of the companys

    order-book thereby enhancing its bottom-line.


    The company is greatly dependent on its suppliers for critical components such as

    wheel sets which also constitute 35% of the sales price of wagons manufacture for

    Non-Indian Railway clients.


  • TWL has proposed an investment of Rs 350 million Cimmco Birla, a loss making

    company under the BIFR scheme, which is subject to necessary approvals from

    BIFR. The ability to successfully turn around the company still remains a

    challenge and can adversely impact the performance of TWL.

    Another negative for the company is the low capacity utilization as it stood of

    45% and 20% for wagons and steel bridges in FY07 respectively.

    The average collection period has increased to 46 days in FY07 from 30 days in


    Fundamental Analysis

    India railway budget 2008-09 planned to manufacture 20,000 wagons, which

    would be the highest level of wagon productions so far.

    Movement of cargo via rail account for approximately 30% of the total cargo

    transported in volume terms and 11% in value terms.

    The freight loading expected for FY 2008 has been pegged at 785 million

    tonnes, and by the terminal year of the 11th Five Year Plan, the Railways

    are targeting a freight loading of 1,100 million tonnes

    Ratio Analysis


  • As on 31-Mar-07 31-Mar-06 31-Mar-05

    OPBIT/Prod.cap.empl.(%) 43.23 26.26 40.80

    PBIT/Cap. Employed (%) 40.92 24.42 46.38

    PAT/Networth (%) 27.66 18.76 49.57

    Tax/PBT (%) 38.29 33.39 28.66

    Total Debt/Networth (x) 0.37 0.39 0.71

    Long Term Debt/Networth (x) 0.10 0.29 0.61

    PBDIT/Finance Charges (x) 8.81 9.70 9.04

    Current Ratio (x) 1.91 1.68 1.55

    RM Inventory (days consumption) 119.92 154.95 37.70

    FG inventory (days cost of sales) 18.07 2.44 1.01

    Receivables (days gross sales) 52.57 67.28 33.81

    Creditors (days cost of sales) 50.80 59.02 32.17

    Op. curr. assets (days OI) 251.00 418.00 155.00

    The ideal current ratio is 2:1 and the current ratio of the year 06-07 has improved

    as compared to previous year which indicates that the funds are utilized


    An ideal debt equity ratio is 2:1.but the debt equity ratio of both the years is low

    which implies the use of more equity than debt, which means a larger safety

    margin for creditors since owners equity is considered as a margin of safety by

    creditors and vice-versa.


  • The ideal quick ratio is 1:1. But the quick ratio of both the years slightly increases

    than the ideal ratio. Higher quick ratio means excessive amount of liquid assets

    have been invested.

    Fixed Assets Turnover ratio has increased from 4.34 times to 9.35 times so it is a

    good sign for the company.

    Gross profit has increased which is plus point for the company. This ratio should

    be adequate to cover the administrative and marketing expenses and to provide for

    fixed charges, dividends and building up reserves.

    Valuation of IPO

    Titagarh Wagon limited earning per share on post-IPO fully diluted equity

    works out to be Rs 28.23.

    At the offer price band of Rs 540 Rs 610, the IPO is available at 19.13 at the

    lower price band and 21.61 at the upper price band to its FY08 annualized

    post-issue EPS.

    The comparable listed peer for the company is Texmaco Ltd., which is now

    ruling at Rs.1, 300. Texmaco is likely to have a topline of Rs.700 crore, with

    PAT of Rs.55 crores, translating into an expected EPS of Rs.55 for FY 08, on

    an equity of Rs.10.44 crores. Book value per share of Texmaco is likely to be

    Rs.200 as at 31-03-08. This means share is presently ruling at a PE of 24 for


    While comparing Titagarh with Texmaco, its book value post issue, would be

    close to Rs.200, if shares are issued at Rs.610 per share. The same would be at

    Rs.192, if shares are issued at Rs.540. Considering an expected EPS of Rs.31

    for FY 08, share at the upper band is issued at a PE multiple of close to 20.

    Even post issue stake of promoters at 49% is close to 53% of Texmaco. FII

    stake of 38% in pre-issue instills confidence.


  • Share at lower band of Rs.540 is quite attractive and at the upper band of

    Rs.610 also, leaves room for gain, as FY 09 performance of the company

    would be quite good.

    Hence it is recommended to subscribe to the issue.



  • Industry: Wagon Manufacturer

    Price Band: Rs. 540-610

    Recommendation: Subscribe



  • Issue DetailsIssue Opens March 10.2008Issue Closes March 13,2008Price Band Rs. 167-200Face Value Rs. 10Issue Size 16,550,000sharesListing NSE, BSE

    Company BackgroundIncorporated in 2001, Gammon Infrastructure Projects Limited ('GIPL') is an

    infrastructure project development company promoted by Gammon India Limited, to

    participate in the development of infrastructure projects on a public private partnership

    ("PPP") basis. GIPL is among the first company in India to be modeled as an

    infrastructure developer holding company with investments spread across various sectors.

    GIPL currently undertake and development of infrastructure projects on PPP basis across

    sectors such as Roads & Expressways, Ports, Hydro Power, Urban infrastructure,

    Airports, Special Economic Zones, Water and Wastewater management, Railways,

    Power Transmission lines, and Agricultural Infrastructure.

    GIPL is present in the following areas of Infrastructure development:

    Project Development

    Project Advisory

    Sector Specific Operations & Maintenance

    Currently infrastructure project development business includes thirteen projects, of which

    four are already in the operations phase, five are in the development phase and four are in

    the pre-development phase.

    Purpose of the Issue

    The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to

    raise capital:


  • To contribute to a part of the investment required by KBICL, subsidiary formed

    for design, construction, finance & maintenance of 1.8 kilometer long four-lane

    bridge across river Kosi;

    To contribute to a part of the investment required by GICL, subsidiary formed for

    design, construction, finance & maintenance of 32 kilometer long four-lane

    bypass to Gorakhpur town on NH-28 in the state of Uttar Pradesh;

    To contribute to a part of the investment required by SHPVL, subsidiary formed

    for developing the Rangit-II hydroelectric power project in the state of Sikkim;

    Infusion of funds into MNEL, subsidiary formed for the four-laning of the 99.5

    kilometers Vadape-Gonde section (between Mumbai and Nasik)

    Meet general corporate purposes;

    Meet expenses of the Issue in order to achieve the benefits of listing on the Stock



    Operational BOT projects are a balanced mix providing assured return projects

    (annuity projects) and capturing market upside, i.e., traffic (toll projects). Of the

    three operational road projects, two are annuity projects providing assured return.

    The New Mattencherry bridge project in Cochin is a toll-cum-annuity-based

    project with the toll fully linked to the wholesale price index. Of the three road

    projects under development, two are annuity projects and one is a toll project.

    With GIL, a leading construction company, as parent, has strong project execution

    capability with a timeline that can be counted/ leveraged on bidding. Has

    completed two of its BOT projects in Andhra Pradesh well ahead of schedule and

    earned a bonus of around Rs 16 crore from the National Highway Authority of

    India for early completion.



  • Two multipurpose berths developed by Vizag Seaport (VSPL) have long-term

    take or pay clause with Sail covering the entire concession period. However, as

    Vizag Port is a major port covered under the Major Port Act, there is only limited

    freedom for fixing tariff as the Tariff Authority for Major Ports (TAMP) caps the

    tariff for private operators. Similarly, the offshore container berth and terminal

    project and Ballard Pier Container Terminal will also come under TAMP, leaving

    little pricing freedom for port operations. VSPL is in the red, with a loss of Rs

    5.84 crore in the half year ended September 2007 and Rs 15.06 crore in the fiscal

    ended March 2007.

    Though has the backing of a strong parent with long operational experience in the

    construction sector, the group has little experience in development and operation

    of power projects. Also, the long gestation of hydel-power projects with attendant

    issues ranging from rehabilitation, acquisition of forest land, and other

    environment factors are also a concern. Further, due to intense competition, the

    ability to win bids in consortium in verticals such as Mass Rapid Transit System

    (MRTS) and airports remains to be seen.

    The Securities and Exchange Board of India (Sebi) conducted an investigation

    into certain alleged irregularities in the rights issue of GIL in 2001. It was alleged

    funds of promoter GIL were used by Chairman and Managing Director Abhijit

    Rajan, the promoter of GIL, for subscription to the rights issue. Based on the

    findings, Sebi passed an order prohibiting GIL and Abhijit Rajan along with two

    other companies controlled by Rajan from accessing the capital markets directly

    or indirectly. As a result, this IPO has already suffered a delay of over a year.

    The Mumbai offshore container berth and terminal project and biomass project in

    Patiala and the cogeneration power project in Maharashtra are yet to achieve

    financial closure. Similarly, SHPVL has not achieved financial closure. The

    deadline for achieving financial closure has expired and this could land the project

    in rough weather as the government of Sikkim or any other nodal agency has the

    option to terminate the agreement.


  • As GIL is the parent company and the construction contracts of the SPVs are

    handled by GIL, the collapse of a flyover constructed by GIL in Hyderabad in

    September 2007 has the potential to damage credibility during future biding.

    Fundamental Analysis


    Rising Demand for steel pipes is expected to be higher in the medium term on account of

    increased exploration activities and thrust on setting up infrastructure to transport oil and

    gas. In India, rapid economic growth faces an urgent need to develop and improve water

    supply, which would also increase demand for SAW pipes. Depleting oil reserves have

    led to increased exploration efforts, resulting in more wells in the exploratory rig.

    Demand for seamless pipes is directly proportional to the increase in digging of wells

    which is also expected to remain high.

    India is expected to see a spurt in construction of pipeline infrastructure as the countrys

    spending on exploration and production (E&P) and gas related pipeline capex increases.

    It is expected that water and irrigation offer a very strong business opportunity in India,

    which will benefit Indian HSAW, ERW and DI pipe manufacturers, in addition to the

    opportunity from the energy sector.


    The Company follows a multi-product approach to pipes - offering a full product

    portfolio of LSAW (longitudinal submerged are welded), HSAW (helical submerged are

    welded), seamless, DI pipes, anti-corrosion coatings, connector casings and Hot reduction

    Bends. Its product portfolio allows it to comfortably straddle between value-driven

    products (DI and seamless pipes, which are high-margin segments) and volume-driven

    ones (SAW pipe business).


  • Besides LSAW and HSAW, It is increasing its focus on the water infrastructure sector in

    India. Your Company is currently one of the very few pipe manufacturers capable of

    offering a complete pipe solution to the water sector (ie, spiral pipes, ductile pipes and

    accessories). The DI pipe business gives your Company an opportunity to take advantage

    of the strong domestic capital expenditure cycle seen in the water transportation segment

    in India. A combination of increasing government focus to build water infrastructure and

    rising support from multilateral agencies (such as the World Bank and the Asian

    Development Bank) is likely to result in a strong demand for the DI pipes. Your

    Company is implementing capacity expansion in all the three key segments with

    expectation and targets for overall margin expansions.


    As on 31-Mar-07 31-Mar-06 31-Dec-04

    OPBIT/Prod.cap.empl.(%) 15.23 6.53 554.23

    PBIT/Cap. Employed (%) 5.44 2.78 5.14

    PAT/Networth (%) 3.94 1.41 2.76

    Tax/PBT (%) 27.45 45.34 46.49

    Total Debt/Networth (x) 0.00 0.00 0.06

    Long Term Debt/Networth (x) 0.00 0.00 0.00

    PBDIT/Finance Charges (x) 472.53 14.31 18.67

    Current Ratio (x) 4.14 7.49 1.29

    RM Inventory (days consumption) 0.00 0.00 0.00

    FG inventory (days cost of sales) 0.00 0.00 0.00

    Receivables (days gross sales) 89.23 116.73 144.14

    Creditors (days cost of sales) 79.57 186.00 33.79

    Op. curr. assets (days OI) 1105.00 2563.00 200.00


  • The ideal current ratio is 2:1 and the current ratio of both the years exceeds the

    ideal ratio which indicates that the funds are not utilized efficiently.

    Inventory is one area where management has achieved constant success. It has

    tried to reduce operating cycle of the division for which it was imperative to

    reduce the inventory storage periods consisting of the three components --- raw

    material, work in progress, and finished goods. The inventory turnover ratio is

    very high i.e70.2 which indicates overtrading and it may lead to working capital


    The ideal quick ratio is 1:1. But the quick ratio of both the years increases than

    the ideal ratio. Higher quick ratio means excessive amount of liquid assets have

    been invested.

    Fixed Assets Turnover ratio has very low in the year 2007-08 i.e. 0.74 which

    indicates that fixed assets remained idle and therefore management should

    investigate and determine the reason for decline.

    Gross profit has increased which is plus point for the company. This ratio should

    be adequate to cover the administrative and marketing expenses and to provide for

    fixed charges, dividends and building up reserves.

    Similarly net profit ratio also increases which is a good sign for the company.

    Valuation of IPO In Gammon Infrastructure projects one fails to understand the logic of valuing the

    company at an expected market capitalization of Rs 2,500 crore even at the lower

    price band of Rs 167 per share and at Rs 2900 crore at the upper price band of Rs

    200 per share. This is despite the fact that the books of the company show a debt

    of Rs 700 crore on completed projects and would be assuming a debt of Rs 1,886


  • crore for two road projects of 132 kms, one 66MW hydro power project and one

    bridge on river Kosi. Of these, a 100 kms road project has got just a 70% stake of

    the company.

    The company is now going in for 10 more projects of which seven are in

    development phase and three are in pre-development phase. Of these 10 projects,

    financial closure has been made for four projects only. This implies that the

    balance sheet of the company, on consolidated basis, would keep ballooning with


    If we go by the comparative peers IRB Infrastructure, a company recently having

    gone public, have 512 kms of road, on toll basis in operation, including Mumbai

    Pune Expressway of 206 kms. Even this company has market capitalisation of just

    Rs 6,200 crore. Apart from this, IRB has 66% interest in a 1,400 acre realty

    project being developed near Pune. GVK Power, a player developing the Mumbai

    Airport, as also having interest in various road and power projects has a market

    capitalization of Rs 5,300 crore. Even the promoter of the company, Gammon

    India market capitalization is Rs 4,100 crore. So, on all the parameters, the

    valuation of the company looks quite stretched and over valued.

    The expanded equity base of the company would be Rs 144.55 crore, which also

    looks quite high considering its level of activity. Even performance is not good

    enough to attract investors. Total income was at Rs 84 crore with PAT of Rs

    10.95 crore. During FY07, total income was at Rs 109 crore with a PAT of Rs

    29.85 crore.

    Hence it is recommended to avoid to the issue





  • Industry: Infrastructure Development

    Price Band: Rs.167-200

    Recommendation: Avoid



  • Issue DetailsIssue Opens January 11.2008Issue Closes January 16,2008Price Band Rs. 700-765Face Value Rs. 10Issue Size 491.3 croresListing NSE, BSE

    Company BackgroundFCH is the financial services arm of the Future Group; whic h is a business group

    focusing on consumption-led businesses in India and is also one of India's leading

    organized multi-format retailers. It was established in the year 2005 and is promoted by

    Pantaloon Retail India Ltd (PRIL) (the flagship company of the Future Group),

    Mr.Kishore Biyani (CEO and MD of PRIL) and Mr.Sameer Sain (a former MD of

    Goldman Sachs International). Och-Ziff, an international hedge fund, has invested in

    FCHL in June 2007. FCHL has three primary lines of business; investment advisory

    services, retail financial services and research.

    Investment Advisory Services

    It provides private equity and real estate investment advisory services to onshore and

    offshore clients. These investment advisory services include investment analysis,

    research and recommendations

    Retail Financial Services

    Its retail financial services Future Money, as a retailer offers financial products and

    services in India. It holds rights to provide financial products and services through the

    retail outlets which are owned, controlled or managed by PRIL and its subsidiaries. Its

    primary credit products currently include consumption loans, which are loans to finance

    the purchase of durables, furniture and other consumer goods, and personal loans.


  • Research

    Future Capital Research conducts and publishes economic research on India with the

    objective of enhancing value creation across other businesses.

    Purpose of the Issue

    To expand its retail financial services business, in particular, the growth of loan


    To meet the long term working capital requirements of the company.

    To meet issue related expenses and general corporate purpose.


    FCHL is promoted by Pantaloon Retail (India) Ltd.(PRIL), the flagship company

    of the Future Group which is a business group focusing on consumption led

    businesses in India.

    Within two years of operation the companys operating income stood at Rs.38.96

    crores in FY07. Till 30th September, 2007 (half-year) its operating income stood

    at Rs.31.2 crores...


    Two of its subsidiaries had a negative net worth in the past three years. In division

    Investment Advisors Ltd. had a negative net worth of Rs.2.14 crores in FY06.

    Myra Mall Management Co. Ltd. had a negative net worth of Rs.0.65 crores as of

    September 30, 2007 and Rs.0.29 crores in FY07.

    FCHL is having negative cash flow from operations amounting to Rs.9.74 crores

    for FY07.


  • Fundamental Analysis

    Strong background of Indian retail sector

    One of the pioneering groups to participate in the early stage of Indias retail story,

    Future group has over a decade experience and has developed understanding of the retail

    and consumption-led sectors. FCHL launched Future Money in June 2007, which offers

    financial products and services to individuals. Currently, it has a presence in 26 cities

    through 95 outlets across India. Its two main retail financial services products are

    consumption loans and personal loans. It also intends to distribute life and non-life

    insurance products in near future.

    Strong research division covering macro factors

    Companys research business, Future Capital Research (FCR), conducts and publishes

    research on macro-economic trends in India. It has also developed proprietary indices to

    highlight trends in consumer behavior. Its reports are also utilized by its advisory

    division. In their recent publication XX Factor: The Impact of Working Women on

    Indias Growth, Incomes and Consumption, it analyzed the recent rise in womens

    participation in the work force and the impact of this phenomenon on growth and

    consumption trends. Other publication included Is Urban Growth Good for Rural India?

    studying the urban demand could be an important engine, which would help to drive a

    shift from farm to non-farm employment in rural India. Its in-house research business

    would help FCHL to invest in the right segment and right locations.

    Dual role of advisory and managing real estate fund

    Currently, FCHL is the investment manager of the Rs3.5bn Kshitij Fund and also advisor

    to the investment managers of Rs13.7bn Horizon Fund and Rs7.8bn Indus Fund. It has


  • also recently entered into a joint venture to create expertise in warehousing logistics.

    Their real estate investment activities are in two separate areas of retail/ mixed use and



    Posted a net loss of Rs124mn in FY08.

    Any downturn in Indian retail and consumption-led sectors would affect their




  • The ideal current ratio is 2:1 and the current ratio of both the years is almost near

    to the ideal ratio which indicates that the funds are utilized efficiently.

    An ideal debt equity ratio is 2:1.but the debt equity ratio of both the years is low

    which implies the use of more equity than debt, which means a larger safety

    margin for creditors since owners equity is considered as a margin of safety by

    creditors and vice-versa.

    Return on Capital Employed shows a negative in the current year which is not a

    satisfactory one.

    Operating Profit Margin also decreases in the current year.

    Valuation of IPO


  • FCH is demanding for huge premium on its shares, when compared with

    companies such as Reliance Capital, India bulls Financial Services, and IL&FS

    Investment Managers, based on price to earnings (P/E) multiple.

    The company offers shares at P/E multiple of 137.79 at the floor price and 150.59

    at the cap price (based on annualized earnings per share for first half of FY08, on

    pre issue capital of the company).

    On the other hand, shares of its peers, Reliance Capital, India bulls Financial

    Services, and IL&FS Investment Managers were trading at P/E multiple of 64.72,

    27.02 and 41.41(based on annualized earnings per share for first half of FY08 and

    share price as on Jan. 10, 2007) while the industry average is 42.8.

    In addition, the limited financial history, together with losses of Rs 124 million in

    its books for first half of FY08 is cause of concern.

    The business undoubtedly offers huge room for scalability; earnings visibility is

    extremely low at this juncture.

    At Rs 765, the higher end of the price band, the offer values the entire business at

    a price-book value (P/BV) of about 6.6 times and Entrenched peers in

    banking/financial services with similar opportunities for growth India bulls

    Financial, ICICI Bank and IDFC are available at comparable valuations.

    Considering the above factors, it is recommended to avoid the Issue.




  • Industry: Financial

    Price Band: Rs. 700-765

    Recommendation: Avoid





    The pro-rata system of allotment favors investors who bid for relatively large

    numbers of shares. Perhaps, the process should be changed such that those

    applying up to 1,000 shares are allotted in full and beyond this number on pro-rata


    Book-building is preferred because the allotment of shares is generally done at a

    price determined by the lead merchant banker and issuer within the price band.

    Since QIBs are the dominant players and bid at somewhat higher prices within the

    band, the issuer and merchant banker fix the price at the higher end such that

    retail investors have to accept it. Thus, investors chipping in 35 per cent of the

    capital have little role in price discovery. As a matter of fact, the IPO demand

    curve is skewed by differing demands at different prices by various bidders. This

    indicates the need to use multiple pricing for allotment.

    There is considerable amount of difficulties for an investor today in the IPO

    market starting from sourcing the application to filling it and submitting it along

    with cheques. When we have one of the world's best trading and settlement

    infrastructure available why can't we use that infrastructure rather than insisting

    on a parallel market for IPOs? This will be a good time to provide a direction to

    the IPO market as well to attract new investors into the market.

    The grading process will not take into account price valuation, a key parameter in

    any stock investment decision. Said Prime Database MD Prithvi Haldea, The

    market does not work on fundamentals. A good company is a bad investment at a

    high price. The small investors, for whom the grading exercise is basically meant,

    would despite disclaimers expect a high graded IPO to quote above the offer

    price. The whole purpose of grading an IPO would be defeated if it cannot help an

    investor decide what stock to choose and at what price.



    Keys to a Successful IPO: At the end to make its IPO effective, some important

    considerations that should be kept are:

    Obviously, having a successful company to offer to the public marketplace is essential.

    Beyond that, it is important to recognize this in not a place for do-it-yourselfers. While

    the road show represents the formal coming out of the firm, its success will partially

    depend on the groups selected for the audience, and this, in turn, depends upon the lead

    investment banker/underwriter in the IPO. Choosing the right underwriter is probably

    second in importance to choosing the right time to go public. The essential elements to

    look for in the ideal lead underwriter are as follows:

    1. The underwriter is focused on your industry: The IPO marketplace is a crowded

    marketplace and the significant sums you are spending for professional advice to go

    public need to be targeted to a firm with real expertise in your industry. Partial evidence

    of appropriate expertise would be having an analyst devoted to your industry.

    2. The market relies heavily on analyst projections and recommendations: Specifically,

    the underwriting firm's analyst in your industry must:

    Have the capacity to cover your company with sufficient attention.

    Understand your company, customers, and competition.

    Indicate sincere commitment to covering your company.

    3. Due to the importance of a successful road show, the underwriter must have the ability

    and contacts to identify the right investor groups for your presentation and get them

    committed to attend. References from previous IPO successes are essential.

    4. There must be sufficient evidence of being able to build a quality "book" of potential

    orders for your stock.

    5. There should be a history regarding the ability to identify the right offer price and size.

    6. Finally, but rarely understood by many companies, there must be significant

    aftermarket support in terms of maintaining and supporting trading in the stock,

    providing subsequent research reports on the company, and continuing institutional

    exposure to the company.




    1. Khan M. Y .and Jain. P.K (2005). Financial management. Pearson publications


    www. icra


    1. Economic Times