Thursday, April 29, 2010

Jaypee Infratech IPO: Why the Dull Response?

At 5:45 PM on 29th April, the first day of Jaypee Infratech’s IPO, the issue was subscribed only 0.84 times. This was in stark contrast to the bullishness of several brokerages and analysts, and the heavyweight nature of Jaypee Infratech’s main promoter Jaiprakash Associates. Many were expecting oversubscription by at least a few times.

There are several probable reasons for the dull investor response on the first day, and why it may continue.

Firstly, though Jaypee Infratech was presented as an infrastructure company in its name and core activity, investors seem to have realized that it is not a pure play on the lucrative infrastructure sector, but heavily dependent on real estate development. The more than half contribution expected from the real estate segment is probably weighing down this IPO, as most of the recent realty IPOs have ended up in loss for the investors.

Secondly, investors seem to be worried over the business environment of Uttar Pradesh (UP), the Indian state in which the Jaypee Infratech’s core project, the Yamuna Expressway is coming up. Not regarded as an industrially progressive state like Maharashtra, Gujarat, or Tamil Nadu, this also seems to have weighed down on this IPO. Even worse, while some of the UP locations where Jaypee Infratech will get to develop real estate are having an oversupply of residential space, some others have not much demand for branded housing, and almost nil demand for commercial space.

The longer gestation period of the project also means that Jaypee Infratech will continue to have negative cash flow for many more quarters, if not years.

Still, of the 2500 crore of IPO proceeds, nearly 1650 crore wouldn’t come to Jaypee Infratech, as it will go directly to Jaiprakash Associates which is diluting its stake in the smaller firm.

At the same time, such factors have not prevented the company from fully pricing the IPO. Some analysts point that at the upper end of the price band, that is at Rs. 117, Jaypee Infratech will have a P/E of 24, which is more than fair for the company, and doesn’t leave much money on the table for retail investors.

Another major concern of investors seems to be that Jaypee Infratech is a one-project company and as such any socio-political or economic delays can not only stall the project, but stall the entire company. One such probable high-risk is the public’s aversion towards toll collection by build-operate-transfer (BOT) projects, which will be the mainstay of Jaypee Infratech.

Though the Yamuna Expressway project is now ahead of schedule, mainly due to the Group’s good execution capabilities, the fact that it will be a money earner only on full completion and commencement of the toll is a bit worrying.

However, the track-record of the promoters is a plus for this IPO as Jaypee Infratech’s main promoter Jaiprakash Associates is a major listed company that is a constituent of the country’s major stock indices like Sensex and Nifty. Jaypee Infratech is the subsidiary of another listed group entity, Jaiprakash Power Ventures.

For those looking only at price-performance, however, these Jaypee Group scrips haven’t been of much benefit as they have lagged both their peer group stocks as well as the indices, for the past several months. Investors might be fearing that Jaypee Infratech too may enter the same lacklustre trajectory once it is listed.

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