IPO( Penna Cements)
By,
Vishnu Murali
FM-1708
MBA 16-A
Initial Public Offer
Initial public offering (IPO) or stock market launch is a type of public offering in
which shares of a company are sold to institutional investors and usually also retail
(individual) investors; an IPO is underwritten by one or more investment banks,
who also arrange for the shares to be listed on one or more stock exchanges.
Through this process, colloquially known as floating, or going public, a privately
held company is transformed into a public company. Initial public offerings can be
used to raise new equity capital for the company concerned to monetize the
investments of private shareholders such as company founders or private equity
investors; and to enable easy trading of existing holdings or future capital raising
by becoming publicly traded.
After the IPO, shares are traded freely in the open market at what is known as the
free float. Stock exchanges stipulate a minimum free float both in absolute terms
(the total value as determined by the share price multiplied by the number of shares
sold to the public) and as a proportion of the total share capital (i.e., the number of
shares sold to the public divided by the total shares outstanding). Although IPO
offers many benefits, there are also significant costs involved, chiefly those
associated with the process such as banking and legal fees, and the ongoing
requirement to disclose important and sometimes sensitive information.
IPO Process
Step 1: Select an investment bank
The first step in the IPO process is for the issuing company to choose
an investment bank to advise the company on its IPO and to provide underwriting
services.
Step 2: Due diligence and regulatory filings
Underwriting is the process through which an investment bank (the underwriter)
acts a broker between the issuing company and the investing public to help the
issuing company sell its initial set of shares. The following underwriting
arrangements are available to the issuing company:
Firm Commitment: Under such an agreement, the underwriter purchases the
whole offer and resells the shares to the investing public. The firm
commitment underwriting arrangement guarantees the issuing company that
a particular sum of money will be raised.
Best Efforts Agreement: Under such an agreement, the underwriter does not
guarantee the amount that they will raise for the issuing company. It only
sells the securities on the behalf of the company.
Syndicate of Underwriters: Public offerings can be managed by one
underwriter (sole managed) or by multiple managers. When there are
multiple managers, one investment bank is selected as the lead or book-
running manager. Under such an agreement, the lead investment bank forms
a syndicate of underwriters by forming strategic alliances with other banks,
each of which then sells a part of the IPO. Such an agreement arises when
the lead investment bank wants to diversify the risk of an IPO among
multiple banks.
Step 3: Pricing
After the IPO is approved by the SEC, the effective date is decided. On the
day before the effective date, the issuing company and the underwriter
decide the offer price (i.e. the price at which the shares will be sold by the
issuing company) and the precise number of shares to be sold. Deciding the
offer price is important because it is the price at which the issuing company
raises capital for itself. However, after the stock starts trading on the
secondary market, money raised through the sale of shares the company, not
the underwriter.
Step 4: Stabilization
After the issue has been brought to the market, the underwriter has to
provide analyst recommendations, after-market stabilization and create a
market for the stock issued.
The underwriter carries out after-market stabilization in the event of order
imbalances by purchasing shares at the offering price or below it.
Step 5: Transition to Market Competition
The final stage of the IPO process, the transition to market competition,
starts 25 days after the initial public offering, once the “quiet period”
mandated by the SEC ends.
Role Of Merchant Banker In IPO Issue
Merchant bankers play an important role in public issue process. While acting as a
banker to an issue, a merchant banker has to disclose full details to the Securities
Exchange Board of India (SEBI). The details submitted by merchant banker about
the public issue should contain the following.
Educating the applicant company
To inform and educate the applicant about capital market rules &
regulations, the IPO process and post listing requirements.
Due diligence & DRHP Preparation
The merchant banker would be closely associated in preparing the new
applicant's prospectus and other related listing documents. The Merchant
Banker shall conduct a due diligence on the applicant and provide due
diligence certificate as per Form A of Schedule VI of the ICDR including
additional confirmations as provided in Form H of Schedule VI along with
the offer document to the exchange. The other certifications as mentioned in
ICDR, Schedule VI will be provided, if applicable.
Display of offer document on website.
The merchant banker shall display the offer document on its website after
the final approval is obtained and the RHP is filed with RoC and SEBI.
Market Making arrangement
The Merchant banker shall ensure compulsory market making through the
stock brokers of SME exchange in the manner specified by the Board in
chapter XB, for a minimum period of three years from the date of listing of
specified securities on SME exchange.
Underwriting arrangement
The merchant banker shall ensure that the issue is 100% underwritten and
15% of the underwriting should be by the merchant banker in own books.
Arrangement with nominated investors
In terms of provisions of Chapert XB of the ICDR, merchant bankers could
enter into arrangements with nominated investors (PE funds & QIBs as
defined therein) for facilitating market making and underwriting. The
merchant banker shall disclose their arrangements with Nominated investors
to the exchange in the Final Offer document.
IPO of Penna Cements
Hyderabad-based Penna Cement Industries Ltd has received approval from the
Securities and Exchange Board of India (SEBI) to float an initial public offering
(IPO).
The capital markets regulator issued its final observations on Penna Cements’ IPO
proposal on 31 May, according to information available on the SEBI website.
Fourteen companies, including Penna, have now received SEBI’s nods so far this
year, to float IPOs. Last year, SEBI had approved 72 IPO proposals. The regulator
had cleared 46 IPO plans in 2017.
Penna filed its draft prospectus with SEBI on 5 November. Its proposed IPO size is
Rs 1,550 crore. The offer comprises fresh shares worth Rs 1,300 crore and shares
worth Rs 250 crore of promoter PR Cement Holdings Ltd.
Penna will join peer Emami Cement Ltd, part of the diversified Emami Group, in
going public.
Emami Cement had filed for an IPO in October last year.
Nearly three dozen small and big cement firms are listed on Indian stock
exchanges. Aditya Birla Group firm UltraTech Cement Ltd is India’s largest
cement maker by installed capacity as well as by market capitalisation.
India’s cement sector has witnessed heightened deal activity owing to
consolidation in the space. The sector had been going through a slowdown over the
past few years because of oversupply.
That may change as incremental demand is likely to outpace incremental supply
over the next three years owing to the government’s focus on housing and
infrastructure as well as the waning impact of demonetisation, goods and services
tax and the Real Estate Regulation Act, ratings firm CRISIL said in a recent report.
Penna will use Rs 1,000 crore of the fresh net proceeds to repay or make advance
payment of its debt besides using an undisclosed amount towards general corporate
purposes.
Edelweiss Financial Services, IIFL Holdings, JM Financial and Yes Securities
(India) are the merchant bankers arranging the share sale.
Incorporated in October 1991, Penna is one of the largest privately-held cement
firms and is among the leading players in south India.
The company has four manufacturing facilities and two grinding units in states
including Andhra Pradesh, Telangana, and Maharashtra. It boasted an aggregate
production capacity of 10 million tonnes per annum (MPTA) as on June-end 2018.
Penna is looking to increase its capacity to 16.5 MPTA.
Penna had a distribution network of 3,492 dealers and distributors across India as
on 30 September 2018.
Some of the company’s key clients include large infrastructure and real estate
companies Larsen & Toubro, Aparna Enterprises, JMC Projects (India), Brigade
Enterprises, Gannon Dunkerley and Co., Visaka Industries and Puravankara.
From FY 2013-14 to FY 2016-2017, as per the Restated Financial Statements,
The EBITDA and restated profit for the period/year have grown at a CAGR
of 22.20% and 47.34%, respectively, from Fiscal 2014 to Fiscal 2018 and
were Rs. 674.87 million and Rs. 120.97 million, respectively, in the three
months ended June 30, 2018.
The net asset value per Equity Share was Rs. 70.64 and Rs. 69.80 as of June
30, 2018 and March 31, 2018, respectively, as per the Restated Standalone
Financial Statements and Rs. 77.14 and Rs. 76.19 as of June 30, 2018 and
March 31, 2018, respectively, as per the Restated Consolidated Financial
Statements.
The net worth, including non-controlling interests, as of June 30, 2018 and
March 31, 2018 was Rs. 9,451.02 million, and Rs. 9,339.00 million,
respectively, as per the Restated Standalone Financial Statements and Rs.
10,320.73 million Rs. 10,194.08 million, respectively, as per the Restated
Consolidated Financial Statements.
The cement sales have grown at a CAGR of 3.08% from 3.75 million MT in
Fiscal 2014 to 4.24 million MT in Fiscal 2018 and was 1.14 million MT in
the three months ended June 30, 2018.
The Promoters of this company are P. Prathap Reddy, Pioneer Builders and P R
Cement Holdings Limited. The lead manager to the issue are Edelweiss Financial
Services Limited, IIFL Holdings Limited, JM Financial Limited, YES Securities
(India) Limited and the Registrar to this issue is Karvy Computershare
Private Limited.