Sarbottam Cement First Company To Break Ice In Book Building IPO Process

Thu, Nov 23, 2023 3:39 PM on IPO/FPO News, Company Analysis, Exclusive,

What might be the IPO price of Sarbottam Cement set by 'book building'?

Sarbottam Cement Limited has been issuing its primary shares through the book-building process since Wednesday, 6th Mangsir, 2080 for the first time in Nepal. In the first phase of the IPO, only institutional investors will be allowed to apply, not the general public.

Sarbottam Cement is about to issue 12.9033% of the issued capital of Rs 4.65 Arba, i.e. a total of 60 lakh shares equal to 60 crore. Out of which 40% i.e. 24 lakh shares will be given to Qualified Institutional Investors (QIIs) first, while the remaining 60% i.e. 36 lakh shares will be issued to the general public later. For the company's shares, organizations have been provided with a minimum price of Rs 401 to a maximum of Rs 601.50 per share. Institutional investors can apply for the IPO till the 10th Mangsir.

A cut-off price has been decided on the basis of the application given by the institutional investor within the price range set by the secret seal. 36 lakh shares will be issued to the general public at a price 10% lower than the cut-off price. The number of Qualified Institutional Investors for book building has reached 117 so far. But the number of organizations registered and renewed in NEPSE till 5 pm on Monday stood at 79. However, there might be a few more companies which have renewed their license and are eligible now to participate in the Cement’s company book-building process.

According to Tej Prasad Devkota, the spokesperson of the Securities Board of Nepal (SEBON), currently the institutional investors will physically participate in the bidding process. He added that "NEPSE has not yet developed an electronic system to participate electronically, as stated in the guidelines, until the electronic system is developed, institutional investors will participate in book building by applying physically."

How is the share price determined in the book building?

Institutional investors have skilled manpower to oversee the company's financial situation and they apply for shares up to a particular amount based on the company's financial standing, prospective market, and risk profile; book building is the process by which the price is set based on the application.

The book-building process starts by asking qualified institutional investors for recommendations. Within five working days following the conclusion of the discussion program, eligible institutional investors provide feedback on the preliminary prospectus, including the minimum quantity of securities they intend to buy, the purchase intention price, and the assessment basis.

Since Sarbottam Cement is issuing shares through the book-building mechanism for the first time, it has become a firm of great interest. The company is operating in Sunwal municipality of Nawalparasi. It is mentioned in the offer letter that the company has a production capacity of 3000 tons of cement and 3000 tons of clinker per day.

A minimum of 10 eligible institutional investors must purchase all of the shares from the Book Building Directory while maintaining the target price. In this manner, the selling price restriction is established following the achievement of the target price. Following the analysis of the target price, the lower limit is the price to be maintained after a 20% reduction, and the fixed price is added to the base price by 20%. As a result, Rs 401 is the lower limit and Rs 601.50 is the highest price limit of the company.

Since the board has approved the IPO's auction method of distribution to qualified institutional investors, these investors must indicate in their application the number of shares they wish to purchase and the price per share they are willing to pay, both within the same price range.

As to the Book Building Directory 2077, an entity is not permitted to request for above 20% of the total shares that have been issued. Through a secret seal, institutional investors suggest how many shares they would want to purchase. Organizations have 4 days to submit these kinds of requests. During the initial stage of proposal review for the auction involving qualified institutional investors, the selection is based on their applications. The cut-off price remains constant until the total shares are allocated to institutions. Organizations bidding above the cut-off or fixed price are chosen to receive shares, while those offering prices below the cut-off are excluded.

According to the Book Building guidelines, organizations applying at the cut-off price will receive shares proportionate to their demands. However, there may be situations where they receive fewer shares than requested. For instance, if a company's cut-off price is Rs. 420 and 5 organizations apply at that price, they will be allotted shares proportionally if the requested quantity cannot be fulfilled. Institutional investors bidding above the cut-off price will obtain their desired shares at that cut-off price. Shares are only made available to the general public after determining the cut-off price for organizations, which is reduced by 10%. Despite the minimum selling price of Sarbottam Cement being Rs. 401, the cut-off price for its IPO to the public is expected to be no lower than Rs. 361, even if maintained at Rs. 401.

Must apply for at least 50 shares

Direct applications for 10 units of shares by the general public are restricted due to the premium nature of the issuance. As per the guidelines, a minimum application of 50 units is mandatory, and the corresponding funds for these 50 units of shares must be present in the applicant's bank account. Failure to meet this requirement will result in the cancellation of the application. During the distribution process, individuals will be allocated a minimum of 50 units of shares. This establishes a form of underwriting before the public issue. Individuals who do not receive the allotted shares are required to return the funds along with accrued interest within a specified period of 3 days.

How much risk to the general public?

The general public faces a certain level of risk in the current market scenario. Ghorahi Cement, previously issued at Rs 435 per share, has seen its market price decline to around Rs 400, falling below the IPO price. Sonapur Cement also experienced a similar drop below the IPO price for a brief period, leading to losses for many who sold their shares. Concerns among investors are growing, with fears that the upcoming Sarbottam Cement might follow the same trend. Additionally, as 50 units of shares are available through book building, the risk increases compared to 10 units of shares, especially in a market downturn.

The book-building method, widely used in global stock markets, involves qualified institutional investors with expertise in assessing a company's assets, liabilities, products, potential markets, and risks. Their on-site studies and access to hidden information contribute to a comprehensive evaluation before applying for a fixed price. The belief is that skilled professionals' scientific determination of prices reduces the risk for shares issued to the general public. Issuing shares to the public at a minimum price of 10% above the cut-off price aims to secure some profit for them. While the risk associated with shares issued through book building is considered somewhat lower than those issued directly at a premium, there remains a possibility of distortions, such as collusion between institutional investors or between investors and companies, leading to higher prices. This introduces a risk of potential market share price declines, affecting the general public.

Insights on Sarbottam Cement

Sarbottam Cement's financial standing is outlined in its prospectus, indicating total current liabilities of Rs 5.11 Arba, with Rs 3.35 Arba categorized as a working capital loan. In comparison to recently listed companies like Ghorahi and Sonapur Minerals, Sarbottam Cement appears to have lower debt obligations.

Notably, Sarbottam Cement has garnered attention as it ventures into share issuance through the book-building system for the first time. Operating in the Sunwal municipality of Nawalparasi, the cement industry boasts a production capacity of 3000 tons of cement and 3000 tons of clinker per day. The company has secured permission for limestone mining in Nisdi Municipality of Tanahu, Palpa, and its subsidiary entities include Sarbottam Holdings and Sarbottam Investment Company.

The economic slowdown has impacted the construction industry, evident in Sarbottam Cement's financial statement for the last fiscal year (2079/80), reflecting a decline in sales income. As of the end of June, the company's net worth per share is Rs 185.19, with an income per share of Rs 5.13. The reserve fund stands at Rs 3.45 Arba.

The company's operating income, which reached Rs 8.93 Arba in the fiscal year 2077/78, has gradually decreased to Rs 7.88 Arba in the fiscal year 2078/79. As per last fiscal year, the operating income has declined to Rs 5.38 Arba. This decline has affected the company's net profit, dropping from Rs 1.31 Arba in 2077/78 to Rs 20.75 Crore in 2079/80, as indicated in the prospectus.

Sarbottam Cement has a normal investment return period of 3 years and 9 months, with a discount investment return period of 4 years and 7 months. The company has received a triple B rating from ICRA Nepal, signifying a moderate ability to meet financial obligations on time. As of Ashadh, the company's total liability, including long-term debt, is Rs 65.54 crore.

The president, Bishnu Prasad Neupane, holds 28.97% of the shares, and the executive team includes Bimal Sawarthia, Tikaram Neupane, Diwas Neupane, and Tenzing Lakden Tamang. The company has 7 directors, including one from the general public and one independent business representative. Santosh KC serves as the Head Executive Officer.