IPO Money: Use & Misuse

They came in all shapes and sizes and asked for nothing but your savings and you happily parted with your hard-earned money. In fact, some of you even took one more step and borrowed money on high rate of interest with high hopes and trust, hoping that your investment will grow in due course of time. Yes, we are talking about investors who subscribed to the IPOs.In the last few years, the businesses of companies which have succeeded in raising funds through IPOs varied from weighing machines to telecom to banking and myriad other sectors. Even the size of IPOs varied widely from as low as Rs 40 crore to more than Rs 10,000 crore. While investing in these IPOs, investors believed that the companies would be spending the money for the purpose for which they were raising the money.

Now, do you think that the funds were utilized for the purpose for which the companies raised them? Or, do you think that due to economic slowdown, the companies may have  shelved the project and parked the money in fixed deposits of some banks or some mutual fund schemes (which are not giving any great returns)? To find the answers, we compiled information on all companies that had tapped the market since January 2007 till date. There were a total of 124 IPOs that tapped the market. But we chose eight companies from among these based on the amount they had raised. The reason for choosing these companies was simple: more investors’ money was at stake and hence more investors would like to know what was happening with these companies. Our study reveals that many of the companies have diverted the money for purposes other than they had proposed to utilize in their prospectuses. In some of the cases, the companies had ignored the impending economic situation and accelerated the investment process and deployed the funds ahead of schedule. Before we look at how each of the eight companies deployed the IPO funds, we’ll find out how investors have lost their money from investing in the IPOs. [PAGE BREAK]

Loss of Rs 31,000 crore
Most of the companies that raised the money through IPOs since January 2007 are down, irrespective of the Sensex level at which they had tapped the market. One of the reasons could be the weak market sentiments which adversely impacted the valuations of companies.

Our study suggests that the median fall for all companies which came out with IPOs since January 2007 was 62 per cent. The Sensex is down from its peak by 55 per cent, suggesting that the fall in the prices of IPOs post-listing was sharper. But the picture gets scarier as not all IPOs made their offerings at the Sensex peak. Secondly, the median fall of 62 per cent is from the issue price and not from their all-time highs. If one con-siders the fall from the peak level, then the median fall would be substantially high. In other words, most of IPOs have underperformed vis-a-vis Sensex. Just to cite an example of wealth ero-sion, let’s take the example of DLF. The company, which is part of Sensex, came with its IPO in July 2007, issuing shares at Rs 525 when the Sensex was at 14,861 level. The company’s share price touched high of Rs 1,205 in January 2008, when the Sensex too posted its all-time high. Now, from its January peak, DLF is down by 81.4 per cent, much steeper than Sensex’s 55 per cent.

Our study suggests that the amount raised by all companies since January 2007 stands at Rs 52,000 crore and, at current valuations, the same stands at Rs 21,000 crore. In other words, investors have lost Rs 31,000 crore! [PAGE BREAK]

IPO Pipeline Dries Up
No wonder, this kind of loss made the IPO market less attractive from the investors’ point of view, and when issues began devolving, slowly but steadily the IPO pipeline got down to a trickle and ultimately dried up. In this regard, some revealing statistics would make interesting reading. In 2007, 95 companies tapped the market. 

This number tumbled down to only 36 in 2008 and the year 2009 has seen just one IPO till date! In fact, there were two IPOs in 2009, but the IPO of Gemini Engi Fab was withdrawn due to bad market conditions. 2009’s only IPO of Edserv is anyway down by 64 per cent from its offer price, despite the fact that the market has not taken a beating of that magnitude since the scrip got listed.

This brings us to the next question: Did the companies and merchant bankers gang up to make a fool of the common investor? Or did the market conditions land the investors into a soup? Going by the facts and figures and also by the kind of fall the companies have seen from their offer price, we are inclined to believe that it was purely greediness on the part of promoters and merchant bankers for such sorry state of affairs. One must note that despite bad market conditions, some of the PSUs are still trading above the offer price as they made the offer at the appropriate price, leaving something on the table for the investors. Some of the PSUs that are still quoting above their offer prices are Power Grid, Indian Bank, Power Finance Corporation, to name a few. So it would not be right to blame the market conditions for such drastic fall in the fortunes of companies which came out with IPOs. [PAGE BREAK]

Ratings: No Panacea
SEBI introduced ratings of IPOs to make life easy for the investors by having a better understanding of the companies tapping the market. But this experiment has failed miserably. Our study suggests that there is no direct correlation between ratings given by rating agencies and the performance of the scrip on the bourses after listing. For example, Gammon Infrastructure Projects, which was given rating of 4 indicating ‘good fundamentals’ is down by 59 per cent from its offer price; whereas a the lesser known Alkali Metals, which got a rating of just 2 indicating ‘not good fundamentals’, is up by 153 per cent over its issue price! We have been maintaining for quite sometime that ratings are no good indicators for investors to take investment decisions as the ratings do not take into consideration the valuation of the scrip as these are assigned before the issue price is decided.

Misuse of IPO Proceeds
Our study also reveals that there was change in the utilisation of IPO proceeds by the management of some of the companies. Since investors had suffered losses due to the change in utilization, we feel that regulatory authorities and government should step in to protect the interests of the common investors. We have analysed eight IPOs which had raised maximum money from investors and tried to find out where they have parked the funds. Our study throws up some interesting findings.

Reliance Power
Reliance Power which entered with the highest issue ever in the Indian equity market has really let down the investors’ sentiment in terms of its returns. The total amount raised was to the tune of Rs 11,563 crore, to be utilised for different projects till FY12. But it seems that the company has slowed down its investment plan. Till FY09 the company was suppose to utilise Rs 3,185.53 crore but they have announced an investment of only Rs 1,625.56 crore.

Even if we assume that company will invest as per its projections, it is still short of 49 per cent from its commitment stated in the prospectus. We tried to get a response from the company about the unutilised funds have been parked but the reply was that the details could be provided only after the company’s board meeting scheduled this week. The company along with its subsidiaries is developing 14 large and medium-sized power projects with a total installed capacity of 32 GW. As such, there is nothing to talk about in terms of the company’s financials as it has yet to start its operations. [PAGE BREAK]

The revenue for the company will start flowing from FY11, when its first project from the Rosa Ph 1 will start generating an income. According to the latest financials of the company, it is sitting on cash of Rs 12,000 crore which can fund at least 21 GW of the projects. Moreover, the equity support, fuel linkage, clearances and land acquisition in most of the cases makes the case of financial closure for the projects very viable. Except for the Dadri and Tilaiya projects, the company already has its fuel linkages in place. Therefore, we think that apart from the project risk the prospects of the company look good enough though in the short-term it may face some glitches. As such, our optimism is also backed by some wariness and caution. We ask our readers not to enter the scrip as it is not going to give bumper returns.

DLF
In one of the largest issues by any real estate developer in India, DLF raised funds to the tune of Rs 9,187.5 crore in July 2007. According to the prospectus, Rs 3,500 crore was to be used for acquisition of land and development rights and the rest in construction of its ongoing projects in FY08 and FY09. In actual terms, Rs 5,669 crore was used for the acquisition of land that meant funds slated for development and construction were diverted. The effect of this diversion can be seen from the latest results of the company indicating that they have stalled 26 per cent of the total planned development area under the retail, commercial and mall categories due to lack of funds. This is despite the fact that the company’s debt has increased from Rs 9,930 crore at the end of March 31, 2007 to Rs 14,670 crore in September 2008 with its cur-rent debt equity at 0.6 times. DLF is currently developing 62 million sq feet of area out of which it plans to complete 57 million sq feet by FY10. However, in view of the current market condition this looks like an uphill task to complete. All this stress is reflected in the company’s recent (31/12/2008) financial performance report wherein the company’s topline has declined by more than 60 per cent, both yearly and sequentially. We feel that the company’s balance sheet and the P&L account are stressed and it might take a few years before it can reach its earlier high there-fore stay away from the scrip.

Idea Cellular
Idea cellular an Aditya Birla Group company holds the distinction of deploying more funds than what was mentioned in the prospectus. It means that they have diverted funds meant for corporate purpose. There is no harm in doing this. The company raised Rs 2,125 crore in March 2007 to strengthen and expand services in new circles, roll out services in the Mumbai circle etc. [PAGE BREAK]

Other than the entry fee for NLD operations where Rs 80.8 crore was invested, the company exceeded investments by 18 per cent and 11 per cent in building new circles and rolling out services in the Mumbai circle respectively. It has about 43 million subscribers and has a 15 per cent market share in the GSM user base. In the December 2008 quarter, the company's average revenue per user (ARPU) it has declined by 4.7 per cent to Rs 266. Bharti Airtel’s ARPU declined by 9 per cent to Rs 324. The company even owns 41.09 per cent of the total equity in Spice Communications which offers GSM mobile services in the Punjab and Karnataka. For the December 2008 quarter, the company has posted sales growth of 60 per cent on YoY basis.

However, the profit declined by 7 per cent during the same period. This was mainly because of an increase in networking operating expenses and depreciation charges due to launch of services in the Mumbai and Bihar cir cles. We feel that telecom is no more a sunrise sector and in coming times the competition will intensify with the entrance of new players. This will drive down the margins and therefore as of now we would like our investors not to dial Idea Cellular.

Mundra Port And Special Economic Zone
Mundra Port and SEZ has to its credit of being the first private sector port in India going public to raise funds for its expansion plans. The company raised money through IPO in November 2007 at higher valuation compared to its peer in international market (there is no comparative case in India), it was justified on the basis of company being an integrated player and long-term growth story of India which will lead to growth of the ports. But from the schedule of deployment of funds by the company against what was mentioned in prospectus, it looks like the company management itself does not buy the story and has gone slow in the deployment of the funds. For 2008, it was scheduled to deploy Rs 471 crore, but utilized just Rs 79.9 crore, (excluding issue expenses and general corporate purpose). The company has utilized Rs 824.8 crore till Dec. 31, 2008, as against the stated expenditure of Rs 1,110.94 crore (as per prospectus). The project which saw steepest fall in deployment of funds was SEZ, This may greatly hamper the valuation of the company as it was expected that SEZ business will start generating revenue post-FY10. We tried to find the reasons for such low deployment of funds from the company management but it failed to respond despite our persistent efforts. The unutilized funds of Rs 946.1 crore have been kept with banks and liquid scheme of mutual funds. The company has posted good results for the quarter ending December 2008, the company has exhibited sales growth of 47 per cent and profit grew by 92 per cent Y-o-Y basis. We feel that although the company was short in spending the IPO money in FY08, it has picked up in FY09 and the long term prospects remains intact hence can make exposure. [PAGE BREAK]

HDIL
The management of HDIL has the distinction of doing bizarre things. Last year, the company spon-sored a fashion week. Nothing wrong with that if the purpose was to increase its brand value and recognition (i.e. if you can find a connection between infrastructure development and fash-ion) but offering money to designers to participate in the event was something unheard of. Thus, when the company changed its schedule of investment and proportion of use, it didn’t really take one by surprise. The company raised Rs 1,698.6 crore (including the green shoe option) through IPO during mid-2007 to use it for acquisition of land, development rights and construction of ongoing projects. According to the prospectus, a major part of the funds i.e. more than 80 per cent was to be deployed in the construction of ongoing projects over three years and the remaining for the acquisition of land. However, they reversed the use and most of the funds went into the acquisition of land. This has had its side-effects because there are certain projects that have now been stalled due to paucity of funds. Our repeated efforts to know the exact reasons for such a change of mind of the management were futile since no one responded from the company. As of now the company has total land reserves of 195 million sq feet (as on December 31, 2008) out of which only one-third is under construction. Most of the land bank is in the Mumbai Metropolitan Region which has taken a huge beat-ing in the prices. As far as the financial performance is concerned, in the latest quarter the company’s sales have taken a beating of 36.6 per cent and profit by 32 per cent year-on-year basis. The debt to equity ratio currently stands at 0.9 times which does not look too alarm-ing. However, we doubt if the stock can reach its former glory since the land has been purchased at very high prices and therefore recommend investors to stay from the scrip.

IRB Infrastructure
IRB Infrastructure, which came up with its IPO at the dawn of 2008 managed to garner 4.3 times its offerings. The company earns its revenue essentially from toll collection. This is one of the few companies that has not played with the trust of common investors and has invested money where it intended to and as was mentioned in the prospectus. IRB Infrastructure raised Rs 944 odd crore of funds last year and used it for the projects which required equity infusion from the com-pany and debt repayment. [PAGE BREAK]

Out of the total proceeds, the company has utilised almost 85 per cent and the rest of the amount is parked with public sector banks or in liquid mutual funds which will be utilised as and when the projects get started. According to V D Mhaiskar, CMD, IRB Infrastructure, “The projects will start in the next six months and the funds will be deployed at that point of time.”

The company posted sales of Rs 239.1 crore in the quarter ended December 2008 and profit of Rs 38.23 crore. The figures for last year are not available for comparison. The company’s consolidated debt equity as of now stands at 0.8 times which is comfort-able. As regard to its different projects, they are on schedule. We feel that as and when the economic conditions improve, the traffic will increase and this will lead to improving the toll collection. Therefore our recommendation is that readers should skip the counter as of now but can enter once the financials improve.

Puravankara Projects
Puravankara Projects, which accessed the primary market during the month of August 2007 when the first shock of the sub-prime crisis was being felt in the US, had to take the extra effort of extending the issue’s closing date by five days and revising the price band from Rs 500-Rs 525 to Rs 400-Rs 450 to get it fully subscribed. The company raised Rs 858.7 crore for land acquisition and repayment of debts. According to the prospectus, the funds for acquisition of land were to be utilised over a span of two years i.e. FY08 and FY09, but the company used the entire amount in FY08 itself. When asked about the reason for such devia-tion of funds, Ravi Ramu, Director, Puravankara Projects, said, “We have purchased fantastic properties in different cities in the southern region at very good rates.” As for the current rates as compared to the purchase prices, Ramu said, “For some of the properties the prices have gone up while for some they are down at the moment but it has all eventually balanced out.” As of now the average cost of the land bank that the company possesses can be worked out to be Rs 100 per sq feet. [PAGE BREAK]

The company has not started any project in the land that it acquired through the IPO proceeds and it has now frozen any new project launch since July 31, 2008.

But the company’s subsidiary which is into affordable housing is doing well and has already sold 600 apartments in Chennai till date (the project was launched this year). The effect of not launching any new projects has been reflected in the results of the company. On a stand-alone basis, the company posted sales of Rs 79.37 crore against Rs 150.5 crore last year during the same quarter. Its profit declined from Rs 56.5 crore to Rs 14.69 crore in the same time period. We feel that it will take some time for its subsidiary to contribute in a meaningful way to the company’s result. Therefore our recommendation is that you should stay away from the scrip right now.

KSK Energy Ventures
KSK Energy Ventures, a Hyderabad-based company came up with an IPO when the sentiments of the common investors had already turned from greed to fear. The issue was subscribed by 1.5 times, thanks to qualified institutional buyers who subscribed it by 2.21 times. Retail participation was as low as 0.22 times and hence the total number of shareholders of the company is a mere 6,000.

The fund was raised to be utilised in the Wardha Power, a subsidiary of the company, to finance the equity component of the 1,800 MW coal-based power plant. No separate detail was given in the prospectus about the schedule of the utilisation of funds or how much of the IPO funds proceeds would be utilised in what time. The company’s total investment in the project is Rs 6,874 crore, out of which Rs 5,156 crore was to be financed through debt and Rs 415 crore through pre-IPO placements. The rest was to be through the IPO and internal accruals. The company was able to garner Rs 830 crore through the issue of 3.46 crore shares.  The total investment in the project in FY09 was projected at Rs 1,555.61 crore. Even if we take this investment on a pro-rata basis it comes out to be around Rs 295 crore, but as of now (31/12/2008) the company has only invested Rs 79 crore while the rest of the money has been parked with some liquid mutual fund. When asked for an explanation of this under-deployment of funds when the rest of the crucial elements such as fuel linkage and committed power off-take are already in place, the management failed to respond, stating that the CEO of the company is out of the country. As far as the financials are concerned, the company posted sales of Rs 66.6 crore and profit of Rs 8.7 crore for the quarter ending December 2008 thanks to its other income of Rs 18.79 crore. We do not believe that the company can provide investors with good returns therefore stay away from the scrip.