With Vishal Retail Ltd’s IPO book getting oversubscribed by about 70 times, it’s not surprising that its shares have listed at a spectacular premium. The listing premium of 180% was higher than most estimates and the grey market premium for the stock had suggested a premium of about 115%. Vishal Retail happens to be the most successful IPO in terms of listing day returns since last April, when Tantia Construction had listed at a premium of 340%.
But the majority of the bidders in the Vishal IPO haven’t made money from the issue. Because of the high oversubscription, more than 75% of the bids in the HNI (high net-worth individuals) category were rejected. These bids, which ranged between Rs1 lakh and Rs5.4 lakh, are typically financed and the related interest cost actually led to minor losses for investors. For a majority of successful bidders in the HNI category, the allotment ratio was roughly 32 shares for every 10,000 shares bid.
For those who borrowed to fund the bid, the interest cost per share would have worked out to roughly Rs530 per share, assuming a 15% interest cost for a period of 15 days (the time it takes for a refund). But Vishal traded at an average premium of Rs480 on Wednesday, implying that such investors didn’t even break even.
Among retail bidders, 85% of the 304,000 bids were rejected because of oversubscription. But the balance 15% bidders who got lucky would have made returns ranging from 160% to 180% even after accounting for financing cost.
Coming to Vishal’s valuations—at current levels, it trades at 56 times trailing earnings and 42 times forward earnings. The company had issued shares at a valuation of 20 times trailing earnings. While Pantaloon Retail trades at similar high levels, Shoppers’ Stop trades at a much lower 32 times forward earnings.
As the market moves to new highs, some sectors that had moved out of favour are back in the limelight.
That’s especially true of construction stocks, with companies such as IVRCL, Nagarjuna Construction and HCC moving up sharply.
The Patel Engineering Ltd stock too rallied on Tuesday, a day before the company announced that it had won a large order for constructing a dam in Algeria.
Rumours about the order have been in the air for at least a month, but a technical trading call by ABN Amro issued on 29 June to the effect that the stock was on the verge of a break-out has been bang on target.
One of the reasons for the downgrading of construction stocks was their exposure to the interest-rate sensitive real estate sector. It was also argued that their bulging order books would increase their need for capital, which would either dilute equity or lead to higher borrowing. The withdrawal of tax benefits would further impact their cash flows.
Patel Engineering is in the same infrastructure and real estate space and, like other players in the sector, it has a large order backlog. Also, like several others, it has ventured into real estate and analysts have incorporated the value of its land bank while arriving at their target price for the stock. But it also has several features that set it apart from the rest.
One of them is technology, with the company having considerable expertise in tunnelling and hydropower projects. Add to this the fact that around half of its projects are hydro projects, which have the highest margins in the business, and Patel Engineering will be one of the few companies in the business that will see margin expansion. As Emkay Securities’ Manish Balwani says, “The opportunity for Patel Engineering lies in its high margins, the prospects for hydro power projects and no dilution of equity in the immediate future.”