GalaTime

After the IPO boom of 2007 and early 2008, the pace & performance of IPOs has taken a cliff-dive. Here’s some statistics:

# IPOs at NSE in 2007: 95

# IPOs at NSE in 2008 (ytd): 35

But, # IPOs in past few months?

• October - 2 (Alkali Metals, in progress & 20 Microns, down 45% from Issue price)
• September - 2 (Resurgere, Austral; the former is down 65% from Issue price)
• August - 2 (Nu Tek, Vishal IT;  the former is down 73%  from Issue price)
• July - 6 (all of which are cut in half since Issue)
• June - 1
• May - 0

Ouch. I-Bankers musn’t be happy. Watch out for this quarter’s results.

• DNA: ACC, Ambuja to hike prices by 5%

Holcim, the Swiss cement major, would increase cement prices through its subsidiaries Ambuja Cements Ltd and ACC by 4.8% in the first half of this fiscal, a spokesperson from Holcim’s headquarters in Switzerland said.

Analysts feel the company will see further squeeze on its margins. A research analyst from an international brokerage said the coming quarter would bring greater erosion in its operating margin as the company won’t be able to pass on the rise in input costs.

I wasn’t expecting cement companies to increase prices, given weakening demand and new supply. It will be very interesting to see how the market absorbs this price hike. Note that cement stocks remain in a firm down-trend.

• Business Standard: 22 firms miss date with public offers

. . . only 25 small IPOs hit the market in the first seven months raising Rs 4,345 crore, while the same period last year saw 65 IPOs raising Rs 32,993 crore.

In recent months, as many as 22 companies planning to collectively raise Rs 16,539 crore have allowed their IPO approvals to lapse.

According to Prime Database, nearly 500 companies are planning to go for an IPO. This includes companies like Avesthagen, Bhilwara Energy, BPTP, Essar Power, GMR Energy, ICICI Securities, Indian Railway Catering, Lodha Builders among others.

500! Really?

• Bloomberg: Zell Opts for Debt Investing, Awaits Housing Rebound

Billionaire Sam Zell, founder of the largest publicly traded apartment landlord in the U.S., is investing in distressed debt instead of real estate stocks or property and expects a housing recovery next year.

“I think there is no question that the government’s responsibility must include protecting Fannie and Freddie debt,” Zell said. “It is extraordinarily important. They today represent 70 percent of the mortgage market in this country, and I think that percentage is growing as other lenders are moving away.”

Real estate timer extraordinaire.

• Bloomberg: Vietnam Dong Investors Use Black Market; Traders See 18% Drop

Vietnam’s currency controls are forcing foreign investors into the black market to obtain dollars, aggravating declines in the world’s worst-performing stock market and pushing benchmark bond yields above 20 percent. The dong dropped 5 percent to 16,846 per dollar, its biggest decline since 1998. Traders are pricing in an 18 percent drop in the coming year to 20,600, according to offshore 12- month non-deliverable forwards.

Vietnam may suffer a “currency crisis” similar to the slump in the Thai baht that triggered the regional collapse in 1997, Morgan Stanley analysts said in a report last month. “The central bank is not providing dollars, except to some importers and some working capital for exporters”. The risk is Vietnam exhausts its currency reserves of $22 billion supplying dollars or that “overkill” in cooling growth causes losses at state banks.

With Vietnam & India being thought of in similar (economic) terms, it’s worthwhile to pay attention to what the consequences can be.

• DNA: Sebi nod for big-ticket IPOs lapses

The proposed Rs 1,000 crore-plus initial public offerings by Acme Tele Power, Jaiprakash Hydro Venture and UTI Asset Management Company are shelved for now as these companies have allowed the regulatory approval to lapse. The big three are among the 20 IPOs that have been put on hold owing to the negative sentiment in the stock market.

. . . the lengthened stock market volatility has forced 83 global companies to withdraw their listing plans in the first quarter of 2008. In addition, 24 companies postponed their listings. But some smaller domestic issues of Rs 30-40 crore are still hitting the market.

Note also that most of the IPOs issued in the last 12 months are underwater.

• Mint: Sensex can go below 10,000: Sharma

It was an easy call. In this bull run, India was termed an asset class. We were starting to think of ourselves as very special. I started getting worried when such rubbish started going around. India is not any asset class; it is only one of the markets. This kind of euphoric situation can last only for a while. In 2007, every Tom, Dick and Harry could think of making a billion-dollar personal fortune. Employees across industries were getting salaries which were not justified even at the peak of any cycle in the US. It was getting ridiculous—wage inflation, asset inflation. If one had stepped back and viewed it dispassionately, it was quiet easy to figure out.

The maximum downside one had seen in India was about 35% in a year in 2000. We have breached that already by the middle of the year. Now we are entering a situation where long-held theories can be thrown out of the window. We could be down another 30-40% from here. I would not be surprised at all to find Sensex below 10,000. When we made an initial target (for the index) it was based on other factors and the run-away inflation was not in sight. If we factor it in that, the trouble gets compounded.

When the Sensex was at 21000, we saw people predicting 25000, 27000 and so on. Now, we are talking 10000 and below. Linear extrapolation can lead to sub-par results.

And saying that this big drop was obvious is a bit of 20/20 hindsight - coz the key is timing. Even at 5000, the Nifty could be considered over-valued by historical measures, but it went to 6300!

• Business Standard: FCCB shadow looms over corporate profits

Several companies that have issued foreign currency convertible bonds (FCCBs) face the prospect of not having these bonds converted into equity unless the stock markets stage a strong comeback. This implies that these corporations may have to pay back the amounts they borrowed together with the interest.

What could compound the problem is that many of these firms do not account for the debt. In other words, they are not providing for the borrowings on an annual basis over the life of the instrument. According to a study by a leading brokerage, accounting for the loan and the interest would, on an average, knock off at least 12% of the profits in FY09 and about 10% in FY10.

It was less than 6 months ago that FCCBs were helping these fine folks make a bunch of moolah. So, make profits on the way up, and dont account for it on the way down. Nice deal if you can get it!

• Mint: Companies shelve capital market plans

The meltdown in the equity markets has taken its toll on the capital raising plans of Indian firms. Investment bankers estimate that at least 13 Indian companies have stalled plans of raising nearly Rs25,000 crore from the equity markets and say this could just be the beginning of the trend.”

Most of the Indian firms that have scrapped their plans were planning qualified institutional placement (QIP)—a kind of private placement that listed companies can make to a set of institutional buyers such as banks, mutual funds, insurance companies, foreign investors and venture capital funds.

The cost of borrowing for Indian firms has gone up from 100 basis points over the six-month London inter-bank offered rate (Libor) to 400-500 basis points over Libor over the past six months.

• Economic Times: Nifty at 6950, Sensex 22880 by July 2008

There is a clear-cut demarcation in the earlier bull phases of 1992 and 2000 and the current bull phase. The earlier bull phases were more or less driven by a handful of market operators who eventually got crushed under their huge outstanding positions.

The age-old concepts of stock valuation have become more or less redundant in view of the structural changes in the market mechanism. As long as the flow of funds remains intact and the settlement in derivative segment continues to be “cash settled”, there is no threat whatsoever to the ongoing bull phase.

This time, its different. Cash flows don’t matter. Valuations dont matter. Common sense is useless!

This would be a good time to do a reality check on stock market predictions. As of market open, the Sensex is at 15200 and the Nifty is at 4550. What is the probability of them meeting these July ‘08 targets?

• Bloomberg: Reliance Power to Give Free Shares to Investors

Reliance Power Ltd., the company that raised $3 billion last month in India’s biggest initial public offering, will issue free shares to compensate investors for the slump in the stock price after listing. The Mumbai-based company will issue 3 shares for every 5 . . .

The bonus issue will reduce the cost of acquiring Reliance Power shares to 269 rupees for individual investors, 40% lower than the IPO price.

‘Seven Mauritius-based investors went on selling within four minutes of the listing even when the market was falling,’

• Economic Times: Value of investments takes a tumble in stock mkt reversals

Virtually every big PE from Citigroup, Temasek, 3i, UTI Venture Funds, CLSA and Warburg Pincus to JP Morgan have been left licking their wounds in the wake of the sudden market reversal. The situation is so bad that the value of investment in some deals of 2008 is down by 21%.

The average loss on investment for all private equity deals done in 2007 is 30%. And if you think that is bad, then private equity investors who did deals in 2006 stand to lose two-fifth of their investment at 43%.

All valuation tools have been savaged at the altar of market volatility.

Love that last line! But where were these valuation tools on the way up to 21k?

• Mint: Sugar back on a winning roll as surpluses shrink

Comparatively cheap sugar may have been a late-starter in the global commodities boom, which started at the beginning of 2007, but it has been among the strongest of commodities in 2008, outpaced only by soaring platinum.

May white sugar futures on the IntercontinentalExchange rose to an 18-month peak of 14 cents (about Rs5.60) a pound on Thursday, up 30% this year and more than 40% since December.

“A lot of the funds’ analysis suggests that this thing called ag-flation is here for a while.”

• Bloomberg: Reliance Power Drops on Bombay Stock Exchange Debut

Reliance Power Ltd., which raised $3 billion in India’s biggest initial public offering, fell as much as 14 percent on debut as a global equities sell-off dried up appetite for new share offerings.

The Mumbai-based company sold 260 million shares at 405 rupees to 450 rupees apiece to raise as much as 117 billion rupees ($3 billion). Ambani plans to set up 13 plants with 28,200 megawatts of generating capacity over five years, a third of India’s planned new projects.

Not quite a ’sure thing’.

• Business Standard: MCX to file revised IPO papers in mid-Feb

Financial Technologies India (FTIL), the country�s leading technology solutions provider to exchanges and brokerage firms, is in the process of filing a revised draft red herring prospectus (DRHP) in the second fortnight of February to dilute another 5.5 per cent stake in the Multi Commodity Exchange (MCX) through an initial public offering (IPO).

MCX is the world�s third biggest gold bourse and accounts for more than four-fifths of gold futures traded in India.

The exchange currently offers futures trading in 56 commodities and is a leader in commodity derivatives with a total daily average turnover of $3.5 billion.

• Yahoo Finance: As Asia food prices bite, analysts warn of worse to come

The agency’s figures show food prices globally soared nearly 40 percent in 2007, helping stoke protests in Myanmar, Pakistan, Indonesia and Malaysia.

Apart from overall higher food demand, changes in taste favouring meat are said to be pushing up prices, since farmed animals feed heavily on grain.

Drought and bad weather, high oil prices stoking transport costs, spiking biofuel demand and low reserves have also played their part, experts say.

• Wall Street Journal: Farmers Wonder if Boom In Grain Prices Is a Bubble

With corn, wheat, soybeans, barley, sunflowers and other grains selling at or near record prices, U.S. farmers are preparing for a potentially historic planting season. A rush to make biofuels from crops and soaring demand for grains in China, India and other emerging markets have pushed up grain prices world-wide, helping drive food prices higher.

Farmland prices have climbed more than 20% over the past year in many Midwestern states, so the many growers who lease land are shelling out higher rents. Some seed prices have jumped 30%, and fertilizer prices have doubled nearly across the board.

Kip Tom, who farms 12,000 acres in Leesburg, Ind . . . decided to sell 80% of his 2008 corn crop on the futures market — locking in a price at more than $5 a bushel — even though he hasn’t planted a seed yet. Normally, he says, he might have sold only about half of his crop this early in the year. “We just think this rally is too good to be true.”

• Business Standard: Volatile mkts put new issues in troubled waters

Volatility in the secondary markets has forced some initial public offers (IPOs) to revise their price bands as markets continue to be plagued by liquidity problems.

The most recent casualty has been the mega-IPO of Emaar MGF, which has reduced the price band by 9-11%, from Rs 610 to Rs 690 a share to Rs 540 to Rs 630 a share.

Wockhardt Hospitals announced that the company would revise the price band for its IPO to Rs 225 to Rs 260 a share against Rs 280 to Rs 310 a share.

• Economic Times: Brokers saddled with huge NPAs, post-crash

. . . armed with legal notices to recover their dues, known in broking parlance as ‘uncovered debits’. The term is used to denote outstandings on which brokers do not have any collateral that they can seize or liquidate to recover the dues from clients. The legal departments of these brokerages are said to be working overtime since last week as they figure out ways to retrieve the outstanding amount from clients.

Trading terminals at many brokerages were shut on Wednesday as the firms were unable to meet margin requirements to exchanges, even after having liquidated a sizeable chunk of their clients’ outstanding positions. As a result, many clients were unable to trade when the markets rebounded on Wednesday. These clients are citing this as a reason to not pay up their obligations, as they claim to have been denied a chance to recover some of their losses.

• Bloomberg: Stock Market Decline Delays Highest Number of IPOs in 10 Years

Tumbling equity markets prompted 24 companies this month to halt plans for initial public offerings, the most in at least a decade.

The Bloomberg IPO Index, which tracks new stocks in their first year of trading, dropped 9% in the past year, while the Standard & Poor’s 500 Index declined 6.4%.

• TraderFeed: From Trader to Hedge Fund

. . . few traders end up making the leap to funds, even when they have talent. The reason is that most hedge funds are looking for multifaceted portfolio managers, not directional traders of single asset classes.

. . . being a successful trader and being a successful portfolio manager are different skill sets. A trader knows his or her market in depth–particularly at a short time frame–and masters particular strategies or setups. A portfolio manager has to know multiple markets and trade multiple strategies often across multiple time frames.

• Business Standard: The ultimate crisis machine - Sebi`s risk management

Our concern is with index futures — for the US markets, the margin to contract value ratio is around 6 to 7%; for India, 10 to 15% and on January 24, it was a whopping 17.3% for Nifty futures.

. . . the increasing frequency of sharp moves in a few minutes of opening (the P-notes crisis in October 2007, and other crises in May 2006, May 2004, and so on) is not due to the market being too far up, or excessive speculation, or even the erroneous assumption of low margins required for trading. It is due primarily to the dud system of margining that we in India have adopted. As always, we have instituted a policy “in the name of the aam aadmi”; and as always, the policy hurts them the most.

. . . margins for a Nifty futures contract rose by 50 per cent between January 18 (Rs 29,955) and January 24 (Rs 45,000).

• Wall Street Journal: Trader Made Billions on Subprime

On Wall Street, the losers in the collapse of the housing market are legion. The biggest winner looks to be John Paulson, a little-known hedge fund manager who smelled trouble two years ago.

Funds he runs were up $15 billion in 2007 on a spectacularly successful bet against the housing market. Mr. Paulson has reaped an estimated $3 billion to $4 billion for himself — believed to be the largest one-year payday in Wall Street history.

. . . lenders were getting less and less rigorous about making sure borrowers could pay their mortgages. Mr. Paulson’s research told him home prices were flattening. Suspecting that rating agencies were too generous in assessing complex securities built out of mortgages, he had his team begin tracking tens of thousands of mortgages. They concluded it was getting harder for lenders to collect.

• Economist: R-word index - Warning lights

The Economist’s informal R-word index is also sounding alarms. Our gauge counts how many stories in the Washington Post and the New York Times use the word “recession” in a quarter. This simple formula pinpointed the start of recession in 1981 and 1990 and 2001. In the past few years the R-word index has been extremely low. It began to rise in the second half of 2007 and, measured at a quarterly rate, has soared in early 2008 (see chart).

Today’s mega-drops in the BSE Sensex-30 & CNX Nifty-50 indices seem driven by similar concerns.

• Economic Times: Broking houses advise caution on Reliance Power issue

Notwithstanding the bonhomie evident at the company’s brokers’ meet, brokerages appear to have dug their heels in, crying “caution” on the ongoing Reliance Power issue. A far cry from when ‘mere papa ka sapna,’ and every mention of the word ‘Reliance’ was met with applause.

The reports on REL Power come with a caveat, with one even recommending an “avoid”. The bottomline being “subscribe for listing gains”. Most brokerages have identified absence of operating history, implementation delays, long gestation period, fuel availability and expensive valuation as the key concerns.

• Business Standard: Brokers go all-out to woo IPO investors

Stock brokers are providing incentives to the retail investors to subscribe to Reliance Power’s (RPL) initial public offer (IPO) on their behalf. For every application where shares are allotted, brokers will pay Rs 7,000 to the retail investor. The amount would be paid over and above the cost of shares allotted.

But, what has induced stock brokers to extend such an incentive to retail investors? According to one school of thought, apart from creating a strong demand for the IPO, brokers stand to make handsome profits without making any investments.

Consider this: estimates by stock brokers, determined by the grey market premium of Rs 500 a share, indicate that RPL stock would list above Rs 950 against the issue price (upper band) of Rs 450 on the bourses.

• Economic Times: Alternate investments turn attractive

. . . there are a quite a few investors who are increasingly looking at alternate investments such as art, art funds, gold Exchange Traded Funds (ETFs), agri and non-agri commodities, vintage cars, rare stamps, antiques, wine, photography, sculptures, and private equity.

The ET Art Index has fallen 12% in the year from 2615.7 in July 2006 to 2295.1 in July 2007, though from January 2007 (ET Art Index = 2998.2) the fall is more than 40% annualised. Year on Year (YoY), the index is down 7.9%, currently quoting at 2777.22. One of the reasons for art under-performing is that the guidelines and regulations are still being strengthened in these new investment avenues.

• Business Standard: Sugar barons ramping up shareholding

With their stocks struggling, the country’s top sugar barons are ramping up their shareholding in their companies. Companies such as Balrampur Chini, Dhampur Sugars, Simbhaoli Sugars and Dwarikesh Sugar are all issuing warrants to their promoters which, on conversion, will give them a higher stake.

Though share prices of sugar companies have started rising in the last month or so, these had crashed almost 50% in the previous 12 months thanks to the fall in sugar prices resulting from record sugar production.