Friday, October 28, 2011
People’s Leasing Company IPO – thoughts on the subject and predictions
The FT newspaper has a full page on the recommendation of the PLC shares by SC securities. I understand that they are issuing 390M shares at Rs18 ea to raise Rs7B for the expansion of the business valuing it at Rs28B as 25% of shares will be issued to the market. The Brokerage said the valuation of the issue at a recurring PER of 10 for FY2012 and PER of 7.4 for FY2013 justifies the value. There is no indication of future earnings in the prospectus, so they have been fed information that the general public has not been given by way of the prospectus which is the only document that bears any weight. This only shows the performance in the first Quarter of 2012 and NO other forecasts unless I missed something.
The net profit increase y on y from Rs1.2B to Rs2.6B is also very questionable, and is most likely due to a directive of the People’s Bank to put all their leasing through PLC instead of hitherto by the bank. Whilst the bank will own 72% of the post issue, if the bank disposes of its entire holding later, then what will happen to the IN branch windows? It is hardly likely that PB will want them and instead would like to compete for the Leasing business themselves. It is also a fact that if a customer goes to PB to make a deposit, he would be offered a higher rate of interest for his savings at PLC. This situation of competition within one location for deposits to two institutions is unprecedented and is unlikely to continue to the detriment of PLC. Much of the assumed benefits to be expected are not likely to materialize. So the forecast profits are unreliable, bearing in mind the net profit of the organization in the year end 31st March 2010 was a post tax profit of Rs1.2B.
I would further highlight that the leasing business is in for hard times as the expected growth is absent, and it is likely that it will fall due to the increase in non performing leases. Having given over 1,500 Dimo Battas for example in the past year, it will take another year and a half for those vehicles to stop working leaving the lessors high and dry! They will be unable to make the payment to PLC.
Further there is agitation amongst the Unions to call off the whole thing saying it is an indirect privatization of State property, that has not received cabinet approval and further giving free shares to the employees of PLC is irregular and illegal in terms of the authorizations used for this grant to a state body.
I believe the shares will drop to about Rs13 by the year-end and cause some sort of panic amongst the shareholders. The least they should have done was to price these shares at Rs13 ea and NOT at Rs18 to permit new shareholders some satisfaction.