Tuesday, June 28, 2005

IPO - ERA Constructions

I'm definitely not going in for ERA Constructions. Looks like a major risk for at best moderate returns. Read on...

Litigation

I'm sure litigation is a way of life in the construction sector but even a brief look at the number and seriousness of the cases pending against ERA (check the prospectus) should make any would-be investor tread warily.

Most of the cases are such that an adverse ruling could lead to the arrest of the promoters / senior management.

A couple of biggies:

  • Indian Oil has claimed damages to the extent of Rs 4.44 crores + 18% interest. The proceedings have been completed and a decision is awaited. As per the prospectus, the arbitrator "may award the entire amount along with interest and costs" in favour of Indian Oil. Yet it seems no provision has been made at all in the financial statements. This despite the fact that an award of this magnitude would almost wipe out the entire FY 05 profit of the company
  • A counter-claim by the PWD (Public Works Department) in an arbitration case works out to Rs 1.54 crores, for which again no provision has been made

As per the prospectus, the company has not acknowledged claims amounting to Rs. 6.5 crores as debts as in the opinion of the management, these claims are frivolous.

Inadequate provisioning as indicated above has led to a healthy-looking balance sheet but it looks to me like an axe waiting to fall!

Poor Record on Regulatory Compliance

SEBI has served notice on the company for regulatory violations (probably poor financial reporting) in the period 1998 to 2002 and the company is paying a penalty of 1.75 lakhs to SEBI for the same. I fact, ERA Constructions has even waived its right to a hearing, thereby making it evident that it has no defence.

Or perhaps it was in such a hurry to push through the IPO that it wanted to get such matters out of the way, hmm...?

Inadequate Track Record of Promoters

Of the three promoters, only one (Mr. HS Bharana) has experience in the field. The others have little / no experience or knowledge of the business. Imagine what would happen if HS were to be booked even for a short while in connection with any one of the myriad cases against the company and its promoters!

Unusual Accounting Policies

Investments are stated at the cost of acquisition. Provisions for diminution in the value of investments are made only if such decline is other than temporary in management's opinion. Usually investments are stated at cost or market value, whichever is lower.

No Great Shakes Expected on Long-Term Returns

The issue is not significantly under-priced compared to its peer group, implying that any major gains would need to come from earnings growth. As evident from the discussions on litigation above, the earnings themselves are a little suspect.

In a nutshell, the investment is not worth the risk.

3 comments:

adarsh adarsh said...

One thing I realized in a bull market is everything goes up in the short run. Short run is the key here, most IPO's pop, I mean have a significant jump in the first few days/weeks and then reality sets in.
Now there is short term investing and long term investing, doesnt it make sense to just take part in the IPO, and even if shares go up marginally sell them immediately and take the small profit. Bunch of small profits add up you know.

This was a lesson I learnt from my initialy foray into investing, I would do research, pour over prospectuses, monitor news groups about those companies , read forcasts etc when in the end everyhting would just go up and come right down.

Again I understand youa re coming more from a long term investment point of view, but I for one am a disillusioned long term invester.

Amit said...

Actually, your assessment of the 'pop' applies to the majority of IPOs but not to all.

In fact, what usually happens in the case of companies coming out with a second issue (like ERA) is that their listed shares move up sharply during the IPO, thereby misleading small investors who subscribe in large numbers. However, they come down around the time of the fresh issue listing and people actually make losses. Check out Jindal Poly-Films for a good example of this phenomenon. The same thing happened for Punjab National Bank as well.

I'd always subscribe based on sound fundamentals rather than on hopes of listing gains. Plus there is the tax implication of selling after listing.

cvrk said...

Well said! It is these critical comments would help the mass subscriptions! Adarsh, if you are looking at short term gainsm do not lock up your money in IPOs. Instead get into derivatives!