The recent fall may have skimmed a lot of froth off the secondary market but the primary market remains as frothy as ever. That’s the next correction waiting to happen. The three initial public offers open this week, only highlight this.
Take IRB Infrastructure, priced in the 185-220 band. Engaged in BOT road projects, this company will probably clock Rs 1,000 crore in revenues and Rs 110 crore of profit in 2009. At 220, it is asking for a market value of Rs 7,300 crore, a price-earning (PE) multiple of 70 times. IVRCL and Nagarjuna constructions, 5 times the size of IRB, have market values of around Rs 6000 crore. It beats me why anyone would want to buy a much smaller company at three times the valuation of existing listed peers. But then, one looks at Wockhardt Hospitals and almost spots a trend there. Of course, the management has quickly lowered it’s price band by Rs 50 to Rs 225-260 after the market selloff. I guess we should infer that the management's assesment of the value of Wockhardt hospitals is directly connected to the value of the sensex. Is this a scalping game by investment bankers or serious promoters trying to bring in a new set of investors, you often wonder. Yet, even after the market induced price cut, the stock appears expensive. If all goes well, Wockhardt may generate EPS of Rs 3 in 2009-10. It wants a 90 PE multiple today for that from primary market investors. It wants a market value of Rs 2,700 crore when you can buy Apollo hospitals, a much larger peer for Rs 2,500 crore. And I always thought IPOs need to offer a discount to secondary market valuations to attract investors. Tut tut. Finally, there is Emaar MGF around which there is considerable excitement. Here too, a futuristic leap is required. You have to believe a land bank and “NAV” story as cashflows, even till 2009-10, won’t remotely justify a price of Rs 690. You could buy DLF and Unitech, which churn out thousands of crores of cash every year at PE multiples of 15-20 times 2008-09 earnings, while for Emaar the PE, even for 2010, is closer to 100.
Yes, Emaar has big plans but those will all fructify over "years" with attendant risks of oversupply and pricing pressure in it's key markets by then. Maybe the "bird in hand" principle works against this IPO. The more I see these IPOs, the more I marvel at how effortlessly investors pay up these valuations even as they ignore much cheaper, well established, larger stocks from their peer sets. I marvel at the imprudence of managements and the audacity of investment bankers who collude to rip investors off. Many of the IPOs of 2007 are well under their issue prices today and I suspect some of the big ones of 2008 will follow suit. Nothing like hard losses to cure a market of it's euphoria.