 "Should you click on Infibeam IPO?")
In an investor-friendly move, the Securities and Exchange Board of India (Sebi) has asked companies heading for an Initial Public Offer (IPO) of equity to declare the risk factors upfront, and in print size big enough to make these difficult to miss.
The practice, started earlier in the year, has now caught the eye of many as Infibeam Incorporation has splashed full front-page advertisements (known as jacket ads in industry parlance) across leading dailies twice within a week. However, some of the risk factors highlighted in the ads of its Rs 450-crore IPO are hardly so. For instance:
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Not so great a track record of merchant bankers: Of the two book running lead managers of the IPO, one has not done any public issue in the past three financial years; the second has brought five issues in the past three years, of which three are trading below issue price. There is not much to read into this, especially when the broader market itself has been volatile over the past year or so. As a result, several IPOs are trading below issue price. Does that mean the merchant bankers concerned should be banned from future IPOs?
EPS, return on net worth, negative: The company operates in the e-commerce space, where deep discount is the name of the game. Every company in the space is trying to build a loyal customer base and network that could be potential cash-spinners. It might be futile to look at earning per share and return on net worth for such companies. Private investors in these are comfortable with valuing them on non-conventional metrics such as gross merchandise value (GMV). Stock market investors should familiarise themselves with these new concepts, now common terms in the private investment world, and look for opportunities. Even the regulator had come up with separate listing norms for the start-up space and relaxed the profitability criteria.
Lack of peers: The company does not have a listed peer involved exclusively in e-commerce for comparison. So, investors must rely on their own examination of accounting ratios, the ad said. As discussed earlier, conventional metrics and accounting ratios might not be the right methods to look at the business of e-commerce companies. In fact, looking at these could lead you to a completely wrong conclusion, as these companies are wired differently. In any case, not having a listed peer cannot be held against the company.
Cost of acquisition of promoters: For two promoters, Ajit Mehta and Jayshree Mehta, the shares being offered at between Rs 360 to Rs 432 cost less than three paise apiece. For Vishal Mehta, the shares cost Rs 4.99 and Malav Mehta acquired these for Rs 2.17 per share. This is not so different from several IPOs that have hit the market in the past. Due to bonuses and splits in the run-up to IPOs, most promoters see their costs going down significantly.
These risk factors would all have submerged quietly in the enthusiasm of being part of the first e-commerce IPO in India, had this been March 2015 instead of March 2016. A lot of e-commerce start-ups have bungled in the past few months and the news of biggies like Flipkart having faced a valuation mark-down has dampened enthusiasm.
However, according to a note by Reliance Securities on Saturday, “The e-tail industry is expected to grow at 45 per cent CAGR (compounded annual rate) over CY (calendar years) 2015-20, from $7 billion to $44 bn.” Investors in the Infibeam IPO, that closes on Wednesday, would hope their horse rides this boom.
