Case study- Analysis of an IPO

In the previous chapter, we looked at the process of applying for an IPO through ASBA, making it easy for you to understand. Now, let’s take it a step further and understand the process of IPO analysis.

To truly understand how to evaluate an IPO, we'll look at two real-life examples: the IPO of DMart and the IPO of SBI Cards. Through these case studies, you will learn about the key factors to consider and the insights that can guide your investment decisions.

Let us learn about the intricacies of IPO analysis, turning theoretical knowledge into practical understanding.

About DMart

Avenue Supermarts Limited, also known as DMart, is an Indian retail corporation that owns and operates a chain of supermarkets and hypermarkets. Radhakishan Damani is the founder of the company and has its headquarters in Mumbai. As of March 2024, DMart operated 365 stores in India's 12 states and union territories.

About DMart IPO

The DMart IPO was a book-built issue worth Rs 1,870.00 crore. Its bidding began on March 8, 2017, and ended on March 10, 2017. The price band was set at ₹295 to ₹299 per share. The minimum lot size for an application was 50 shares. The minimum investment for retail investors was ₹14,950.

On the final day of bidding, the IPO was oversubscribed 104.5 times, with 463 crore in total bids against 4.43 crore shares issued for bidding. The shares issued to qualified institutional buyers were oversubscribed 144 times, while non-institutional investors were oversubscribed 277 times. Retail investors' shares were oversubscribed seven times.

Not only that, on the day of listing, the stock opened at 600, more than doubling the issue price of 299. DMmart's shares doubled on day one during the pre-open call auction, which is a 45-minute window before actual trading to allow for price discovery. The listing day gain was 114.30%, and the gain till July 2024 was 1,578.03%

The success of DMart's IPO and its stellar stock performance can be attributed to its unique strategy of focusing solely on food and grocery, unlike competitors such as Reliance Fresh and Future Retail. By focusing on value retailing and maintaining everyday low prices, DMart ensures customer loyalty. Its strong supplier network allows for the procurement of high-quality goods at lower costs. DMart's selective expansion and ownership model, along with a no-discount policy, have led to high profitability and efficiency. This strategic approach has resulted in a high PAT, inventory ratio, and return on assets, making DMart a standout in the retail sector.

Now, let’s turn our attention to another IPO in the Indian market: the IPO of SBI Cards. This case study will offer a different perspective on IPO analysis, focusing on the financial services sector.

About SBI Cards

The State Bank of India and GE Capital jointly launched the SBI Card in 1998. SBI Card became the first pure-play credit card company to list on India's stock exchanges in March 2020. SBI Cards and Payment Services Limited is a systemically important non-banking financial company that does not accept deposits and is registered with the RBI. The company issues credit cards to consumers in India. It is headquartered in Gurgaon, Haryana. It is a subsidiary of India's largest commercial bank, State Bank of India.

About SBI Cards IPO

SBI Cards IPO was a book-built issue of Rs 10,354.77 crores. The issue was a combination of a fresh issue of 0.66 crore shares aggregating to Rs 500.00 crores and an offer for sale of 13.05 crore shares aggregating to Rs 9,854.77 crores. SBI Cards IPO bidding started on March 2, 2020 and ended on March 5, 2020. SBI Cards IPO price band was set at ₹750 to ₹755 per share. The minimum lot size for an application is 19 Shares. The minimum amount of investment required by retail investors was ₹14,345. The issue included a reservation of up to 1,864,669 shares for employees offered at a discount of Rs 75 to the issue price.

SBI Cards made its market debut during a turbulent period, listing at a 13% discount to its issue price due to the widespread panic caused by the coronavirus pandemic. The IPO, held from March 2 to March 5, 2020, was heavily subscribed despite weak market conditions. However, the pandemic-induced uncertainty in global markets led to a subdued listing, with shares opening at Rs 658 on the BSE, well below the issue price of Rs 755. Although the stock initially recovered some of its losses, the broader market environment remained challenging.

As the year progressed, SBI Cards faced further difficulties, particularly after the release of its Q2 2020 results. The company’s asset quality deteriorated significantly, with gross non-performing assets (NPAs) surging to 4.29% from 1.4% in the previous quarter. This sharp increase in bad loans was primarily driven by stress in the self-employed segment, which was increased by the economic impact of the pandemic. To mitigate the risks, SBI Cards had to increase its provisions for bad loans, leading to a 46% drop in net profit for the September quarter. The provisioning more than doubled compared to the June quarter, reflecting the heightened risk in its loan book.

Adding to investor concerns, the true extent of bad loans was partially obscured by a standstill on bad loan recognition mandated by the Supreme Court, which prevented lenders from labelling loans as non-performing despite defaults. Without this forbearance, SBI Cards' gross NPAs would have risen even further to 7.46%. This significant deterioration in asset quality and the ongoing uncertainty about future credit costs prompted investors to sell off the stock, leading to a decline of over 7% after the results were announced.

While retail spending showed signs of recovery, with card spending bouncing back to 90% of pre-pandemic levels, the rise in high-risk revolving credit, which constituted 34% of total receivables in Q2, underscored the financial strain on consumers. As a result, despite some positive indicators, the lingering concerns about asset quality and elevated credit costs weighed heavily on the stock’s performance, making investors cautious about the company's near-term outlook.

Conclusion

In conclusion, while DMart's IPO success showcases strategic focus and operational efficiency, SBI Cards' experience highlights the importance of timing and market conditions in an IPO's performance. These case studies are a reminder of the need for careful analysis of both the company's fundamentals and external factors when you evaluate an IPO for investment.

Happy Learning!