What the two most expensive IPOs of 2017 portend
Out of the multitude of new issues this year, none have caught the fancy of investors like Prataap Snacks and Avenue Supermarts
Jan 2, 2018
Prataap Snacks P/E: 285x
It really is a sign of the times we live in when a snack- and namkeen-selling company takes investor fancy and trades at a fantastic 285 times earnings. The issue was subscribed 47 times, with retail investors subscribing to it by an even higher 77 times. There have been a number of justifications for Prataap Snacks lofty valuations: from depressed previous-year earnings to high industry-level valuations. The shares listed at a 33 per cent premium and closed their first day on the bourses 26 per cent higher. But it was not the retail investors that made the real killing in the issue. Promoter group Sequoia Capital acquired the company's shares in between 2011 and 2014 at a price of a little above Rs 200 apiece and offloaded them at Rs 938.
Keep in mind that the fantastic valuations notwithstanding, Prataap reported a net profit of Rs 10 crore in FY17. For Prataap's good run to continue, earnings will need to go way up. Given the state of affairs of other more established FMCG players, who are struggling to make it through, there is no way current valuations appear sustainable. If you have any Prataap Snacks shares in your portfolio, sell them now and splurge on its snacks with the cool profits you make.
Avenue Supermarts P/E: 160x
One of the most anticipated and in-demand IPOs of the year was Avenue Supermarts, the parent of the food and grocery chain D-Mart. There were a number of factors that went behind the attractiveness of Avenue Supermarts' IPO. The company made more money than the much bigger Reliance Retail or the more established Future Retail of Kishore Biyani or the loss-making RPG Group's Spencer's Retail; it was headed by the famed investor Radhakishan Damani; the chain's focus only on food and grocery items, along with its everyday-low-price model made D-Mart's inventory turnover the highest in its industry; and it had a growth rate of 40-50 per cent to boot.
The IPO was subscribed over 100 times and listed at a premium of 100 per cent over the issue price. The company listed at a valuation of 125 times earnings and now trades even higher, at 160 times. The most recent quarter saw revenue growth at 31 per cent, while net profit was up 65 per cent on higher other income and lower interest costs. As its stores will mature, though, revenue growth is likely to taper down and the company may find it harder to maintain the current growth momentum in the years ahead. Investors holding the stock should sell when it is in such high demand. A bird in hand is always better than two in the bush. Sell.
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