Valuation jolt hits VIP stock

Writing down of Samsonite IPO pricing in Hong Kong causes anxiety among investors here.

The share price of suitcase maker VIP Industries crashed on Friday, after the Initial Public Offer (IPO) in Hong Kong of one of its strongest competitors, Samsonite, was priced at the low end of the earlier notified price band, pushing down valuations, including that of VIP.

VIP had witnessed an over two-fold rise in share price over the past year. The rise came mainly in recent months, when talk of Samsonite’s IPO was doing the rounds. VIP rose from Rs 244 in June 2010 to a lifetime high of Rs 824 on the Bombay Stock Exchange (BSE) this week.

On Friday, however, it fell 7.4 per cent on the National Stock Exchange (NSE) and 6.35 per cent on the BSE, on concern that it was overvalued. The stock on Friday closed at Rs 752 on BSE and Rs 746 on NSE.

Samsonite initially started the IPO sales process (it ended last week) with a guidance of HK$13.50-17.50, the upper level of which would have been 22 times its projected earnings.

Now, however, these are to be sold at HK$14.50 a share, the bottom of a revised HK$14.50-15.50 range, representing 18.3 times its projected 2011 earnings. At this price, Samsonite would raise $1.25 billion.

“The IPO was subscribed four times, yet the company priced it at the lower end. It shows the VIP stock, too, is expensive. It trades at 25 times of financial year 2011 earnings, which is not sustainable. The book value is Rs 77 per share and to trade at 10 times of this is not justified. VIP is facing stiff competition from Chinese products, which are 50 per cent cheaper,” said Kishor Ostwal, managing director at CNI Global Research.

Samsonite was under pressure, as Australian mining startup Resourcehouse pulled a $3.6-billion IPO in Hong Kong last week, citing market conditions.

Nanning Baling Technology became the first company in the 20-year history of the Chinese stock market to scrap an IPO on lacklustre demand.

Analysts in Hong Kong are pointing that Samsonite’s price is still higher, considering a five per cent correction in the Hang Seng index last week.

The stock price of another suitcase maker, Safari Industries, fell 1.6 per cent to close at Rs 94 on the BSE. Safari had risen three-fold in just three months last year, from Rs 54 in June to a high of Rs 115 in August 2010.