How to invest in 'unique' IPOs

While investors would have an understanding of business models for a majority of the issues, which include prominent ones such as Reliance Infratel, Emaar MGF, Sterlite Energy and Lodha Developers, they could face hurdles when it comes to investing in unconventional businesses.

In addition to the challenge of valuing a unique business, investors do not have a listed peer to compare the business, complicating matters further.

IININ THE PIPELINE
Companies	Business
SKS Microfinance*	Microfinance
Gujarat Pipavav Port*	Port developer
VA Tech Wabag*	Water treatment
Lavasa Corporation	Hill station
VLCC	Beauty/Fitness
Tops Security	Security Services
Kabirdass Motor Co.	Electric scooters
* Cleared by Sebi, Source: Prime Database

In demand

With the exception of Intrasoft Technologies, recent IPOs which fall into the category of unique business plays have delivered handsome gains compared to their offer price. Part of these gains is because investors tend to pay a 'scarcity premium' for such issues.

Says Ashok Kumar, promoter of ipoguru.com, "These businesses are unique because they are not easily replicable and, second, there is no competition or a limited number of players."

It is believed that such companies fetch higher margins and generate healthy cash flows. However, analysts say you should treat these IPOs like any other and understanding of the company's business and the initial price to be paid for owning the business is critical.

"It may make sense to wait for secondary market if you find that the premium is too high," says Kumar.

Valuation hurdles

To overcome some of the challenges such as a lack of comparison and track record, analysts say one can look at similar international players and the market response to the issue.

Gopal Agrawal, deputy CIO and Head of Equity of Mirae Asset, says that where a comparable listed peer is not available as in the case of Jubilant Foodworks, one can look at similar businesses such as international pizza delivery chains.

In addition, Kumar believes the businesses should be of similar size. "While Mahindra Holidays and Resorts had international listed peers such as RCI and an Indian competitor in Sterling, there was difference in scale, locations and offerings," he says.

RECENT RECENT DIFFICULTIES IN JUDGING IPOSJUDGING IPOS
In Rs crore	Business	Size	Subscription (x)	Issue price (Rs)	Listing gains (%)	CMP (Rs)	Chg * (%)
Mahindra Holidays & Resorts India	Time share holidays	278	10	300	6	493	64
Cox & Kings (India)	Tour operator	610	6	330	29	492	49
Jubiliant Foodworks	Domino's Pizza franchisee	329	31	145	66	333	130
Intrasoft Technologies	Online greeting cards	54	19	145	9	127	-12
Talwalkars Better Value Fitness	Fitness	77	27	128	—	—	—
Source: Prime Database, B S Research Bureau * % change is the difference between CMP and Issue price

Fundamentals

It goes without saying that fundamentals are the key to any business, whether traditional or unconventional. While the initial checks would include the background of promoters, the company's position in the industry and the longer term outlook for the sector are of utmost importance.

For instance, in the case of Mahindra Holidays, the company is a leader in the industry, consistently setting new benchmarks, even as there was limited competition in the sector.

In addition to this, analysing the growth drivers like the increasing affordability (disposable income) of Indians, where the population is very young as compared to global benchmarks, would indicate the company's growth potential.

That apart, the company's business plans (in terms of expansion) and the key risk factors (that could influence its fortunes) are things to watch for. Last, but not the least, financial ratios like return on capital employed, which indicate how efficiently the company is deploying its funds, and profitability margins, need scrutiny.