MONEY MATTERS CLUB Presents… December 2019, Edition The Financial Bulletin
FROM THE EDITORS
The Financial Bulletin Money Matters Club IBS, Hyderabad Est..—2005
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Dear Readers, It gives us immense pleasure to come up with the December 2019 issue of Finance Bulletin successfully. In this issue, we present to you a vivid description of some successful and failure IPOs around the world. We hope to deliver useful insights to the readers. Happy reading!
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Bhavesh Gandhi Prathyusha Reddy Rajat Jain Mahima Kumari Newsletter Coordinators
Facebook Inc. IPO: It refers to the process of offering shares of a private corporation to the public in a new stock exchange. It allows a company to raise capital from public investors. An IPO can be done either through a fresh issue of shares by the company or through an offer for sale of existing shares to investors. Key objectives: ●To comply with RBI’s licensing conditions. ●To build up the growth capital for Bank’s Tier1 capital base. ●To improve capital adequacy ratio (ratio of a bank's capital to its risk) ●To receive the benefits of listing Equity shares on stock exchanges. Introduction to the company: Facebook Inc. is a US-based company that owns Facebook, a social networking site, which was started by Mark Zuckerberg and his accomplices Chris Huges, Eduardo Saverin, and Dustin Moskovitz. Its total earnings in the last quarter of 2018 was $16.9 billion and the revenue from advertisements was $16.6 billion. The remaining revenue is generated from online games and add-ons. In 2011, Facebook’s revenue was $3.7 billion as per the documents submitted to the Securities and Exchange Commission. Facebook Inc. filed for an Initial Public Offering (IPO) on 1st February 2012. Details of IPO: ● Facebook filed for an IPO on 1st May 2012. It aimed for a $5 billion IPO, one of the largest in the technology sector. ● It announced Morgan Stanley, JP Morgan, and Goldman Sachs & Co. as its underwriters (in the given order of responsibility). ● On 17th May 2012, Facebook Inc. was finally a part of NASDAQ (US Stock exchange). Just before Facebook went public, it increased its price range from $28-35 to $35-38 per share. Underwriters then valued its stock at the top of the range for $38 per share, thereby valuing the company for $104 billion. ● On 18th May 2012, the shares began trading in the stock exchange with an offering of $16.08 billion at $38 per share. ● After the IPO, Mark Zuckerberg holds 22% of ownership and 57% of voting rights.
Reasons for failure: ●The CEO, David Ebersman, was blamed for miscalculating the initial offer price and the market conditions and subsequently increasing the price range from $28-35 to $38. Just before the IPO, Facebook increased the number of shares by 25% to 421 million shares at $38 per share making a market capitalization of $16 billion. The investors were already skeptical about Facebook’s business model and therefore did not see how the company could manage to maintain the price of the stock. ●Facebook was one of the most hyped IPO. Investors were more than eager to buy the shares. Predictions were that Facebook’s share price would increase to $42 per share. Investors foresaw high profit and became “forced sellers”. In the next few days, Facebook Inc.’s stocks plummeted and struggled to even maintain the initial price level. Prices fell to $31 in the next week itself. The underwriters had to step in to stop the share prices from falling further. ●Moreover, there were technical glitches reported which hurdled the orders from passing through. Software delays from the NASDAQ market makers caused a delay of around 30 minutes. Within this time, as per CNBC reports, the investors lost $200 million from lost orders and unconfirmed sales. This undermined investors' confidence in the offering. ●Facebook’s revenue was growing slower than expected because of the transition from mobile phones to smartphones. The transition was faster than the company could manage on order to earn with mobile ads. Analysts doubted the stability of Facebook with this revenue model thereby affecting stability of the share price. On June 2012, the share prices fell to as low as $25 per share. ●3 months after the offering, the company lost around $50 million of its market share.
By Dhvani Kamdar
Saudi Aramco Oil Corp. Introduction to the company: Saudi Aramco is the world’s largest petroleum enterprise headquartered in Dhahran, Saudi Arabia. Out of the total oil reserves in the country, the company has around 260.8 billion barrels and natural gas reserves worth 298.7 trillion standard cubic feet. The company planned to sell 3 billion shares, or 1.5% of its total shares, at a price of 32 Saudi riyals ($8.53) per share out of which two-thirds of the shares were offered to institutional investors. The objective of Aramco to go public was to invest in nonenergy industries such as tourism and entertainment. This IPO gave Aramco a market valuation of $1.7 trillion. Details of IPO: On 11th December 2019, Saudi Aramco's shares began trading domestically priced at 32 riyals ($8.53) per share and its pre-market auction (the trading session which occurs before the regular trading session) shares were indicated at 35.2 riyals ($9.39) each, 10% above their IPO price which took its market capitalization close to $2 trillion. The kingdom banks were directed to double the leverage (using borrowed funds for expansion of the firm and generate returns on capital) limit for loans to investors looking to buy Aramco shares. The company will offer 33.3% of the available shares (0.5% of Aramco's total shares) to retail investors, while the remaining 66.7% have been allocated for institutional investors. The company said it could exercise “green shoe” option (a provision in an agreement which grants an underwriter the right to sell more shares than initially planned by the issuer) by selling shares to its employees, to bring the total raised capital upto $29.4 billion. Reasons for Success: The IPO was 4.65 times oversubscribed, with total bids of $119 billion, an additional 450 million shares could be sold under an over-allotment option (it refers to sale of additional shares that a company plans to issue in an IPO) for underwriters, which would bring the total amount to nearly $30 billion, by only focusing on Saudi and other gulf countries.
The company plans to pay a base dividend of $75 billion in 2020. However, it has cautioned about investment risks that include fluctuating oil prices and the backlash faced by oil companies due to their role in climate change. Current scenario: ● Saudi Aramco’s share value has decreased to an amount of $200 billion since its post-IPO peak. ● The stock has dropped roughly by 2% since the killing of Quds Force commander, Qasem Soleimani, reflecting concerns that Iran could respond to the attack by targeting the oil infrastructure of Saudi Arabia. ● Shares of Saudi Aramco were priced at 34 riyals ($9.06) on 8th January 2020, their lowest level since the oil giant began trading on December 2019, after Iran launched missiles on US targets in Iraq.
By K Sai Sruthi
Uber Technologies Inc. Introduction to the company: Uber was started by two friends, Travis Kalanick and Garrett Camp, in 2009. Garrett Camp returned to San Francisco and thought upon the idea and came up with UberCab.com. Uber was started as limo service to be ordered via an application to provide ease of access. The service was first tested in New York in early 2010 using only three cars, and then the official launch took place in San Francisco in May 2010. The application became popular due to its simplicity. The service used GPS (Global Positioning System) to identify the location of the user and the cab. The cost of the ride was automatically charged to the account. In October 2010, the company received its first major funding of $1.25 million led by First Round Capital. Personal mobility remains Uber’s core business. Its ride-hailing services reach into 63 countries and more than 700 cities. Its ambitions and revenue streams have diversified into bike and scooter rentals, food delivery and freight. Uber is also developing air taxis and driverless car technology among other things. Details of IPO: The company made its initial filings on 10th April 2019. The IPO was predicted to be one of the largest in the tech world and was valued at $100 billion, but closed only at $82 billion. The company came to the market on 10th May 2019, with an initial price of $45 in the New York Stock Exchange. The ride-hailing giant raised $8.1 billion, giving the company a valuation of $82 billion. The company offered 180 million shares of common stock, with an option for underwriters to buy an additional 27 million shares. Reasons for failure: The company was unable to achieve its targeted value of $100 billion due to the following reasons. ● Drivers Protest: Uber was one of the most generous companies to provide high commissions to its drivers. This was also one of the reasons for Uber being a lossmaking tech start-up (with an estimated loss of $1 billion in the first quarter of 2019). Uber’s revenue growth fell from 106% in 2017 to 42.5% in 2018 which was even lowered to 39% after adjusting driver’s compensation.
● Before going public, Uber announced large cuts in driver incentives. This led to the drivers’ protests that subsequently led to the #DeleteUber campaign, shifting both riders and drivers to other platforms, like Lyft. Uber countered this point saying that the drivers are not employees and mere contractors. This made the drivers ineligible for the compensations. This protest was staged on 8th May 2019, 2 days before the company’s market debut. ● Lyft IPO: Lyft is a small ride-hailing start-up in the USA. Lyft is the rival of Uber and there have always been turbulent situations between the companies. The company went public in March 2017. Lyft’s IPO was priced at $72 per share. But soon after the IPO, the shares traded 14% lower at $62 due to doubts on the viability of its profits. This impacted the IPO made by Uber later in that year. Investors were confused about the consistency of profits from Uber. Both Lyft and Uber gave hefty commissions to their drivers for retaining them which led to heavy losses. ● Turmoil at the top: The co-founder and CEO of Uber, Travis Kalanick was alleged of having a toxic work culture in the organization. Many of the other senior managers and members were also charged with various complaints. In 2017, a former employee of Uber, in her blog, alleged one of the supervisors for sexually harassing her. In another incident, the CEO was caught on a dashboard cam swearing the Uber drivers. The resignations and removals of many top executives at Uber tarnished the image of the company. On 14th June 2017, the CEO took an indefinite leave of absence and finally resigned on 20th June due to rising pressure from investors.
By Saisadwik Chodavarapu
IRCTC Ltd Introduction to the company: The Indian Railway Catering and Tourism Corporation Limited (IRCTC) was incorporated under the Ministry of Railways to handle the catering, tourism and online ticketing operations. On 30th September 2019, it raised Rs. 645 crores through its Initial Public Offer (IPO). It is the fourth Railway undertaking after RITES, Rail Vikas and Ircon which came up with an IPO. The objectives behind the IPO were; to meet the disinvestment target of the government and to avail the benefits of listing its equity shares on the Stock Exchanges. Details of IPO: The issue was open for 3 days i.e., from 30th September 2019 to 3rd October 2019 with a price band of Rs 315-320. Retail investors and employees of the company got a discount of Rs 10 on the issue price. The IPO was to be applied in lot sizes of 40 shares. So the minimum amount of investment required to apply for the IPO was (40*320) Rs. 12,800. The finalization of the basis of allotment was done on 9th October. The initiation of refunds was done on October 10. The credit of shares to the Demat account took place on October 11 and the listing date was October 14. IRCTC shares are listed on both NSE and BSE. Half of the shares under the IPO were reserved for institutional investors while 15% were reserved for non-institutional or HNI (High Net worth Individuals). 1.60 lakh shares were reserved for employees of the company. 35% or 70,000 shares of the IRCTC IPO were allocated for the retail investors and were allowed to bid up to Rs 2 lakh shares. The IPO was overall subscribed to 111.92 times. The qualified institutional buyers (QIB) quota were subscribed 108.8 times, non-institutional investors (NII) 354 times and retail investors 14 times.
Reasons for Success: The IPO which was subscribed 112 times which means the company got bids worth Rs 72,200 crores while it set out to raise Rs 645 crores. The shares that were reserved for the employees were subscribed 6 times. It had some really strong factors working in its favor such as the high brand recall, benefits of being a monopoly. However, though the IPO was a huge success, Indian Railways expressed its dissent over the under-pricing of the share prices. Current Scenario: Now the government's stake in IRCTC is around 87.4%. The current market price of the IRCTC share is Rs 915.45 in NSE (as of 9th Jan).
By Kritika Gupta
Ujjivan Small Finance Bank Ltd Small Finance Bank (SFB): It caters to financially unserved and under-served segments and is committed to building financial inclusion in the country. The biggest advantage of SFBs is that the net interest margin is high as compared to retail and corporate banks as they lend a small amount of money. Also, the interest amount which seems to be low is actually at a high rate and hence the margin is more. They are also called risk-averse investments as they maintain a diversified portfolio. Introduction to the Company: Ujjivan Financial Services Limited (UFSL) commenced operations as an NBFC in 2005. On 7th October, USFL received RBI’s in-principle approval to set up a Small Finance Bank (SFB), following which it incorporated Ujjivan Small Finance Bank (USFB) Limited as a wholly-owned subsidiary. USFB has a diversified portfolio with branches spread across 24 states and union territories and a customer base of 4.9 million as of 30th September 2019. The latest net interest margin for Q2 FY20 of USFB was 10.8%. Its Price to Earning Ratio is 30 as compared to the average PE ratio of 29.64 of a listed industry peer company.
Details of IPO: USFB launched its three-day IPO on 2nd December 2019 with a minimum order quantity of 400 shares per application and offer type- Book Built Issue, where the bids are collected from investors at various prices which are above or equal to the floor price. It got listed on 12th December 2019 with an issue price of ₹37 per equity share and face value of ₹10 per equity share. The small finance bank raised ₹750 crores by issuing 20.27-20.83 crore new shares at a price band of ₹36-37 a piece. It was subscribed to165.68 times on the final day of bidding,i.e., 4th December 2019. Its pre-IPO placement was of ₹250 crores. The issue has received bids for around ₹76,000 crores worth of shares.
This is the sixth public issue until now where the retail demand remained strong in double digits. The portion set aside for retail investors, which is 10% of the total issue size, has been subscribed 49.09 times.
Risks and Concerns: â—? Higher dependence on microfinance business acts as a concentration risk (dependence on a single business). â—? The introduction of new products poses a risk of turning into nonperforming assets. â—? Competition from other small finance banks, non-bank lenders and cooperative banks.
By Mamta Saraf
CBI Involvement CBI after filing the case against Vikram Kothari, his wife and son, and also on some bank officials started its investigation and carried a raid on the home and offices of Our monthly Newsletter– The Financial Vikram Kothari and then arrested Vikram Kothari. Enforcement DirectorateBulletin (ED) has also filed criminal charges onisVikram Kothari under of Money Business Laundering circulated and readPrevention by all prestigious Act.
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