Over-hyped IPO goes awry post lock-in!
Promoter’s networking may bring in mega subscriptions for an IPO but will it yield returns? Employees of the company know better!
FSN E-Commerce Ventures promoted by the high profile Nayar couple Falguni and Sanjay who operate their lifestyle business portfolio under the platform `Nykaa’, tapped the Indian capital market in October 2021 with a public issue of Rs 5,352 Cr. More than 475 lakh shares of Re 1 each were offered at an exorbitant price of Rs 1125 a piece.
For a predominantly trading company whose bottom line turned black only on the eve of public issue and accumulated deficit exceeded twice the equity capital the issue pricing indeed looked absurd. Yet, the issue was reportedly subscribed more than 45 times! Whereas the retail investors’ portion attracted around 11 times subscription, high net worth investors (HNIs) subscribed more than 111 times and Qualified Institutional Bidders (QIBs) subscribed 92 times of their quantity. Thus, the Rs 5,352 Cr issue attracted bidding for a whopping amount of Rs 2,44,495 Cr!
|
FSN NYKAA IPO SUBSCRIPTION |
|||||
| CATEGORY |
APPLICATIONS |
RESERVED QTY | APPLIED QTY | SUBS TIMES |
SUBS. AMOUNT |
| RETAIL INVESTORS |
30,95,862 |
47,32,532 | 5,11,59,144 | 10.81 |
57,58,01,25,200 |
| HNIs |
16,271 |
70,98,798 | 78,92,22,948 | 111.18 |
8,87,87,40,61,176 |
| EMPLOYEES |
9,041 |
2,50,000 | 4,67,304 | 1.87 |
47,92,71,756 |
| QIBs |
399 |
1,41,97,599 | 1,31,03,65,452 | 92.29 |
14,74,16,11,33,500 |
| ANCHOR INVESTORS |
174 |
2,12,96,397 | 2,20,95,348 | 1.04 |
24,85,72,66,500 |
| TOTAL |
31,21,747 |
4,75,75,326 | 2,17,33,10,196 | 45.68 |
24,44,95,18,58,132 |
However, a close scrutiny of the Basis of Allotment revealed that the quantum of shares reserved for the company’s employees, despite a discount of Rs 100 per share for the eligible employees, were subscribed to the extent of just 0.618 times. As against the offer of 2.5 lakh shares, eligible employees subscribed to only 1,54,500 shares. That was the testimony of faith that the permanent employees had in their employer!
When many an insider (employees) had discarded the offer, how come HNIs and QIBs overwhelmingly supported the issue? The promoters’ corporate connections obviously contributed to this. Falguni Nayar was earlier associated with Kotak Mahindra Capital for 18 years where she also served as a managing director. She had been on the boards of many large companies, including Tata Motors and Aviva Life Insurance. She has also been an independent director on the boards of Kotak Securities, ACC and Dabur India.
Co-promoter Sanjay Nayar had over 35 years of experience in banking and private equity circle. He was associated with Citibank for over 23 years, where he also served as the chief executive officer of the bank in India over six years. He was chief executive officer of KKR India Advisors from 2009 to 2020. He also served as a chairman of KKR India and has been on the board of various companies, including Indigrid Investment Managers, Max Healthcare Institute, J B Chemicals & Pharmaceuticals and Avendus Capital.
The promoters’ popularity and their elite network fetched investments from many a private equity funds and well known corporate chieftains S K Munjal, H S Banga, Narotam Sekhsaria and Rishabh Mariwala among others. Though funding would have been relatively easy for the Nayars because of their high profile corporate connections, they had struggled for long time on the performance front.
The 2012-registered company reported profit at the net level only in 2021 that is on the eve of the public issue! What’s more, by fiscal 2020, the company had accumulated losses to the tune of over Rs 156 Cr against a capital base of Rs 14.55 Cr. Though no profit was earned until 2020, the company could collect a whopping share premium of Rs 765 Cr. Through the IPO it collected another Rs 629 Cr as share premium.
Of the company’s pre-IPO equity capital of Rs 46.73 cr, the Nayars held 54.22%. The non-promoter stake of 45.78% was held by 186 shareholders. The major shareholders were H S Banga family ( 40,679,790 shares or 8.6% at an average cost of Rs 7.32 a share), Sunil Kant Munjal (21,189,300 shares or 4.48% at Rs 56.54 a share), Narotam Sekhsaria (17,085,150 shares or 3.61% at Rs 9.86 a share), Steadview Capital Mauritius (16,384,440 shares or 3.46%), TPG Growth IV SF (16,264,560 shares or 3.44% at Rs 117.67 each), Lighthouse India Fund III (14,533,860 shares or 3.07% at Rs 76.65 each), Mala Gaonkar (11,390,190 shares or 2.41%), Fidelity Blue Chip Growth Fund (6,140,430 shares or 1.3%), Rishabh Mariwala (5,571,810 shares or 1.18% at Rs 33.56 each), Yogesh Agencies & Investments (5,538,450 shares or 1.17% at Rs 21.67 each) and Kravis Investment Partners LLC (5,384,220 shares or 1.14%). Other non-promoter shareholders were holding less than 1% each.
In the offer for sale, promoters offloaded 48 lakh shares while non-promoter shareholders offered 371.72 lakh shares. Most of the selling shareholders continued to hold significant stake even after the offer for sale. Since their cost of acquisition is extremely low as compared to the offer price, their cost of residual holding became negative which made the stock vulnerable post lock-in period.
Even while highly rated multinational consumer brands owners like P&G and Colgate, who had a proven track record of profitability and dividend distribution in this country for many decades, were commanding a lesser market capitalization of about Rs 47,000 Cr and Rs 42,500 Cr respectively, Nykaa, which was just a decade old and yet to earn consistent profits, leave alone distributing dividends, asked for a market cap of Rs 53200 Cr. The hype created around the Nykaa IPO produced the desired result and the public float was a grand success.
However, the gullible investing public did not realize that 2,12,96,397 shares allotted to the Anchor Investors were locked-in only for 30 days (up to 7th December, 2021); 20,48,370 shares held by Faering Capital India Evolving Fund II and 11,69,820 shares held by Faering Capital India Evolving Fund III, being Alternative Investment Funds (AIF), will not be under lock-in; and 80,49,360 shares allotted under various ESOP Schemes of the company will not be under lock-in.
Come post public offer. On the first day of trading (November 10, 2021) the stock opened at a premium of 78% over the offer price (Rs 1125) and scaled Rs 2248 yielding 99.8% return. For few days the stock was buoyant. At the end of 30 days from allotment the so called anchor investors turned sellers and the course of the stock completely changed and all the hype around the stock simply vanished. At end of the one year lock-in period, as more sellers flocked the counter, the stock price went below the IPO rate inflicting 13% capital loss on the IPO investors.
Sensing deep trouble, the management quickly declared a bumper 5 for 1 bonus issue which could temporarily arrest the price slide. The stock became ex-bonus on the listing anniversary day. Normally the bonus shares of any high profile or fundamentally sound company would have commanded a premium on listing. But, in Nykaa’s case, it was lower than the adjusted cum-bonus price. As the unexpected bonus increased the liquidity six-folds, the stock price started receding further and hit a bottom of Rs 120.50 on March 31, 2023 as against the adjusted IPO price of Rs 187.50.
Of course the stock price is not in the control of the management. But, have they lived up to their IPO promises? It was a loss-making company until fiscal 2020 and accumulated losses amounted to over Rs 156 Cr as against its equity capital of less than Rs 15 Cr. For fiscal 2021 that is on the eve of the IPO the company posted increasing OPM of 6.6% (4.6% in the previous year) and record net profit of Rs 62 Cr (Rs 16 Cr loss in 2020). This gave a lot of hope to the IPO investors.
Come next fiscal. Revenue handsomely surged but, operating margin shrunk to 4.3% and net profit slumped to Rs 38 Cr. In the first nine months of fiscal 2023, top line has surged further and operating margin seems to have improved but, the company has posted a much lower profit (Rs 19 Cr) at the net level as compared to the corresponding period of previous year (Rs 34 Cr).
Against its large equity capital base of Rs 285 Cr, the company’s current profitability is too small to adequately service. No wonder, the promoters are gradually diluting their stake quarter after quarter. In December 2021, the promoters were holding 52.56% which was reduce to 52.43% in March 2022, 52.41% in June 2022, 52.38% in September 2022 and 52.34% in December 2022.
Even though the top line is attractively growing, the company’s current bottom line (annualized) gives an abysmal EPS of 9 paise on Re 1 paid-up share. The current market price of the stock (Rs 138) discounts the earnings at an absurd multiple of more than 1500 times while long standing strong consumer brands line Colgate, Godrej, Hind Uni and P&G are currently discounted between 40 times and 90 times their earnings. To get a P/E multiple of less than 100 on the current price, the Nykaa’s bottom line should be at least Rs 400 Cr. This will remain only a pipe dream if Nykaa were to compete with newly launched heavyweights like Reliance’s Tira!
|
FSN Nykaa Consolidated Financials (Amt in Cr) |
|||||
|
POST-IPO REPORTING |
PRE-IPO |
||||
| Period Ended |
Dec-22 |
Dec-21 | Mar-22 |
Mar-21 |
|
| Months |
9 |
9 | 12 |
12 |
|
| Revenue |
3842 |
2801 | 3774 |
2441 |
|
| Operating Profit |
185 |
125 | 163 |
161 |
|
| OPM% |
4.8 |
4.5 | 4.3 |
6.6 |
|
| Other Income |
20 |
16 | 27 |
12 |
|
| EBIDTA |
206 |
141 | 190 |
173 |
|
| EBIDTA % |
5.3 |
5.0 | 5.0 |
7.1 |
|
| Interest |
56 |
33 | 47 |
31 |
|
| Depreciation |
120 |
66 | 96 |
67 |
|
| Tax |
60 |
28 | 42 |
40 |
|
| Net Profit |
19 |
34 | 38 |
62 |
|
| Equity Capital |
285 |
47 | 47 |
15 |
|
| Reserves |
1055 |
1406 | 1292 |
569 |
|
| Accumulated Loss |
38 |
91 | 57 |
95 |
|
| Promoter Stake % |
52.34 |
52.56 | 52.43 |
54.22 |
|
| IPO Price Rs 1150 adjusted to 5:1 bonus = Rs 187.50 | |||||
| Mkt Price – High |
315 |
429 |
429 |
||
| – Low |
121 |
314 |
203 |
||
| – Close |
155 |
350 |
281 |
||
| – Current |
138 |
||||
| EPS (annualized) |
0.09 |
0.95 |
1.06 |
||
| Price/Earnings (x) |
1574 |
||||
Future Course
If earnings are not going to support the stock price in the foreseeable future how long will the price sustain? Of the company’s Rs 285 Cr equity capital, 52.34% (Rs 149.14 Cr) is held by the promoters of which 20% (Rs 57 Cr) is under lock-in till the first week of November 2024. This leaves a liquidity of 228 crore shares of which about 92 crore shares will be controlled by the promoters.
The company has more than 5.66 lakh public shareholders, holding 47.66% (135.8 crore shares). Of this, just five shareholders control 16.51% (47 crore shares). The five who can influence the stock’s future course are well known non-resident corporate executive H S Banga (6.42% or 18.29 crore shares), Sunil Kant Munjal of Hero Group (2.76% or 7.86 crore shares), Narotam Sekhsaria of Ambuja Cement fame (2.59% or 7.37 crore shares), Steadview Capital Mauritius (3.45% or 9.83 crore shares) and Fidelity Group (1.29% or 3.68 crore shares).
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MAJOR SHAREHOLDING IN FSN NYKAA UNDER PUBLIC CATEGORY |
||||
|
Nov-21 |
Dec-22 |
|||
| Mutual Funds |
86,41,626 |
1.83 | 11,57,16,420 |
4.06 |
| Foreign Portfolio Investors |
2,14,82,964 |
4.54 | 31,51,88,689 |
11.1 |
| Insurance Companies |
7,20,573 |
0.15 | 5,53,14,839 |
1.94 |
| Individuals holding share capital up to Rs 2 Lac |
1,29,14,238 |
2.73 | 10,16,20,589 |
3.57 |
| Narotam Sekhsaria |
1,47,45,150 |
3.12 | 7,37,25,750 |
2.59 |
| Sunil Kant Munjal |
1,41,39,300 |
2.99 | 7,85,71,079 |
2.76 |
| Steadview Capital Mauritius |
1,63,84,440 |
3.46 | 9,83,06,640 |
3.45 |
| Tpg Growth Iv Sf Pte. |
1,08,43,050 |
2.29 |
– |
|
| Lighthouse India Fund Iii |
96,89,240 |
2.05 |
– |
|
| Harindarpal Singh Banga |
3,04,79,790 |
6.44 | 18,28,78,740 |
6.42 |
| Mala Gaonkar |
1,13,90,190 |
2.41 |
– | |
| TOTAL |
22,43,61,859 |
47.44 | 1,35,79,80,288 |
47.70 |
| Note: December 2022 holding is post-bonus 5:1 issued in November 2022 | ||||