The Invictus

The last few months have seen an increased activity in the IPO markets with many IPOs hitting the market (including several mid-cap MFs); and in the last couple of days, the mercury levels have really shot up, what with Provogue coming out with its IPO. As it usually happens, renewed activity in the capital markets only act as a boost of viagra for the old men who call themselves analysts. Predictably, you must have been forced to read atleast one analyst's take on how good or bad the provogue IPO really is.

And to support their views, naturally, all kinds of numbers are thrown at you (EPS, PE multiple, DE ratio etc etc). Numbers which, to financial ignoramuses like you and I, look more out of algebra text books that we left behind in high school.

This isn't one more "analyst's" analysis. As i said earlier, am no warren buffet. This isn't even a pitch to promote Provogue - Provogue is just an example I am using to explain my point. The purpose of this post is to help you look beyond plain financial numbers, and understand the worth of an IPO from a retail investor's POV.

Here's what one analyst wrote about Provogue IPO:
"...a price band of 130 to 150 against an EPS of 6.67 looks pretty expensive..."

From a pure finance angle, yes, he's right. But he's wrong. And possibly myopic.

EPS = Earnings (ie. Net Profit) / No. of Shares.

This ratio is expected to be high, to be considered as good. In other words, you earn more for every share you own. right? simple. So far so good.

But the problem with using EPS as the sole measure to value an IPO (or a firm) becomes apparent when you realise that EPS is a backward looking measure - it tells you how good or bad the firm has performed in the past. It doesn't tell you how it will perform in the future!

One of the most important deficiencies in using EPS as a sole measure is the fact that the brand value gets discounted. Let me explain this. Suppose the brand 'Provogue' were to be sold, how much would it earn?. Let us divide this number (Brand Value) by the no. of shares..For a powerful brand like Provogue, this ratio (Brand value per share) would be far higher than its EPS...this difference is really the Brand premium, which most financial analysts conveniently ignore.

"How is this capital utilized?" - very few analysts would ask this paramount question. The fresh capital from the IPO can be used in either of the 2 ways:

(a)to build capacity - in other words ploughed back into the business so that business can grow, Or

(b)to bail out the promoters stake from the business - in other words, the promoters can chose to sell their stake, take their money and wash their hands off the business.

Interestingly, using EPS would not differentiate between the two! Neither do most analysts. Sadly.

Disclaimer: This post is only meant to present the author's views on the general topic of assessing IPOs without making any specific reference to Provogue or any other IPO; the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information). Readers are advised to cross-verify the information and to also seek professional and expert advice before taking any decision based on the content provided above or acting on any recommendations made herein. The information or opinions provided herein are not a substitute for professional advice.