At StockFundoo, we are never super-excited about IPOs. This is because investors in most of the recent IPOs are in deep red and have lost significant money. Please see our post on recent IPOs here.
From this post:
Out of the last twenty large/mid-sized IPO listing, only seven are in profit and thirteen stocks are in losses, six of which have lost more than 80% of their listing price. This phenomena is going on from quite some time, where promoters of companies go for IPOs listing at exorbitant prices and cash on quickly, thus leave investors holding worthless stocks which are down by 80% to 90%. The most common saying about IPO is rightly so: It's Probably Overpriced.
Lets look at available data for Tara Jewels IPO, which opens tomorrow 21st Nov:
Tara Jewels is in the business of the jewellery manufacturing business for over 10 years. The company has four manufacturing facilities, one of which is in China and rest three in India. Tara caters to retailers across the USA, UK, Europe, Australia, China, South Africa, UAE and Canada. The company is now looking at direct retail distribution in the growing economies i.e. India and China. Like other Jewellery manufacturing businesses in India, Tara is heavily export driven and hence is exposed to slowdown in international economies like US and Europe. I have recently done a post on Jewellery Industry Business Model here.
Tara is also planning heavy capex spend in opening new retail stores from tally of current 30 stores to additional 20 stores by March 2013. There are several issues with this rapid capex and retail investment strategy. Indian cities do not have low or affordable cost retail space and good quality retail infrastructure is not readily available for rapid expansion. Newly opened Retail Malls are overpriced with high exorbitant rentals and we have seen many retail stores in Malls going into losses or scaling down. Doing a fresh IPO and sinking the money into expensive Retail space to sell expensive Gold/Diamond Jewellery to Indian public, which is already reeling under local and global slowdown, doesn't seem very exciting strategy to me!
Lets look at the financial data: Tara is offering 7977778 equity share of Rs. 10 each with a price band of Rs. 225-230 to mobilize Rs. 179.50 crore. Issue opens for subscription on 21.11.12 and will close on 23.11.12.
This issue includes offer for sale from existing stakeholders to the tune of Rs. 70 crore. Thus out of 180 crores that public pays Tara, 70 crores goes to existing shareholders for their exit. Why are they exiting?
CARE has assigned IPO Grade 3 to this offer indicating at 'average fundamentals of the company".
The company has, on consolidated basis, posted an average EPS of Rs. 24.80 for last three years and has Book Value of Rs. 157.65. This translates the offer price to a P/E ratio of around 9 and at around 1.5 P/BV.
To summarize, there might be some small listing gains on this one, as this has come after many months of absolute poor quality IPOs, but long term large gains are a remote possibility.
There are many listed businesses in Jewellery industry that are already available with better fundamentals, such as Gitanjali Gems, Renaissance Jewellery and Shree Ganesh Jewellery. So, why bet on a new horse with average fundamentals?
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