Float shock

Patni Computer's drab opening raises the risks for public issues

Patni's listing on Wednesday was one of the most lacklustre in recent times. The stock ended the day at Rs 232.5, just 1 per cent higher than the issue price of Rs 230.

For the small retail investors who use the bank financing route to fund the acquisition, the dull listing comes as a rude shock - at current prices, even the financing cost will not be recovered.

What's worse is that the experience with Patni could dampen sentiment for the string of public offers that are set to the market. The buzz in the market is that some corporates may even postpone their issues due to current market sentiment.

Coming back to the Patni listing, it must be noted that the issue was priced at around 17 times estimated FY04 earnings, which was lower than the other top five players in the country.

At the time of the Patni issue, Infosys traded at 29 times FY04 earnings, while HCL Tech and Satyam Computers had valuations of 25 times and 19 times respectively.

But since then, stock prices of these companies have fallen between 10 and 16 per cent. Infy now trades at 26 times FY04 earnings, while the valuation of HCL Tech and Satyam has come down to 21 times and 17 times respectively.

At current prices, Patni gets a valuation almost exactly that of Satyam, which is the cheapest available stock among the top rung of the IT sector. But there are good reasons Patni may be valued even cheaper going forward.

For starters, it gets over 40 per cent of its revenues from one client, GE, which is known to be a hard bargainer. Besides, fixed-price contracts account for almost 50 per cent of revenues, which may hurt in case of a cost overrun.

Also, these two factors will lead to volatility in quarterly results, which certainly doesn't help valuations. If tech stocks continue to decline, Patni, with its high client concentration and other risk factors, could decline at a faster pace.

This could prove disastrous for the forthcoming public offers, especially in terms of retail interest.

Commodity prices

It's not only steel and iron ore prices that are going through the roof "" World Bank data show that commodity prices have risen across the board, from metals and minerals to energy to grains and fertiliser. Here are a few examples of how international commodity prices have moved in the last two months.

Energy: Australian coal prices have moved up by 24.7 per cent between November and January, while Brent crude rose by 8.4 per cent over the period.

Minerals and metals: aluminium prices moved up 6.5 per cent between November and January; copper by 18 per cent; iron ore by 18.6 per cent; the steel products index by 6.4 per cent; tin by 20.9 per cent. Among fertilisers, DAP prices rose by 17.5 per cent.

Among grains, the price of rice from Thailand has risen, as has the price of maize. In the fats and oils category, the price of coconut oil has increased by 13.3 per cent in these two months, while the price of soybeans has moved up 7 per cent.

Among beverages, the price of robusta coffee moved up 16.7 per cent between November and January. Part of the phenomenal rise, however, is due to the fall in the value of the dollar.

In China, which is largely responsible for the spurt in commodity prices, producer prices rose 3.5 per cent y-o-y in January, their highest rise in nine months, while consumer prices inflation, at 3.2 per cent, was at a six and a half year high.

While rocketing raw material prices pushed up inflation, consumer durable prices dropped 4.6 per cent in January, illustrating how China is responsible both for inflation in the prices of raw materials and for the deflationary trend in finished goods prices.

The trend in India is similar, with the WPI index of basic metals and alloys rising by 25 per cent y-o-y, that for motor vehicles, scooters etc rising by a mere 1 per cent, and that of machinery and machine tools going up by 1.8 per cent.

With contributions from Mobis Philipose