Brief IPOs & Placements: Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown and more

In this briefing:

1. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown
2. RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal
3. Nio (蔚来) Lock-Up Expiry – Scattered Pre-IPO Investors to Be the Sellers
4. LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing
5. Lyft IPO Preview

1. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown

• Polycab India (POLY IN) is the largest wires and cables manufacturer in India almost 2x the size of its next largest competitor. It is also present in electrical consumer durables and EPC projects.
• Company’s 14% revenue Cagr over FY14-18 was aided by government’s increased capex in rural and railway electrification.
• Despite large B2B exposure, company managed to defend gross margins over FY15-18 by passing on input cost variations to its customers. Operating margins have also been steady on the back of improving margins in the key wires and cables segment.
• High B2B nature of business results in 90+days of working capital cycle. Business is capex heavy (annual run rate Rs2.4bn over FY15-18). Company has the lowest asset turnover among its listed peers. It also generates the lowest amount of free cashflows among its peers.
• Investing most of the operating cash in the business would have been great if company was generating healthy ROE. But company’s ROE is in the sub 15% range and it would fall further after the planned Rs5bn primary issue.
• The asset-heavy and low ROE model makes Polycab more dependent on earnings growth to drive stock performance. This, in turn, makes it more vulnerable to any slowdown in government capex in electrification compared to peers.

2. RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal

Aabar Investments, plans to sell US$250m worth of its RHB Bank Bhd (RHBBANK MK) or about 4.76% of company to reduce its holding to just under 10%. 

This is the second sell-down by Aabar in less than a year. The earlier selldown in August 2018, RHB Bank Placement – Probably More Selldown in the Coming Months, was priced at the low-end and didn’t do much in the first week. That was a smaller and less well flagged selldown. 

Although, the stock has done well since then and is trading 12.5% above the last selldown price. The deal scores well on our framework given its strong earnings and price momentum. However, the overhang risk from the remaining 9.9% stake held by Aabar remains. 

3. Nio (蔚来) Lock-Up Expiry – Scattered Pre-IPO Investors to Be the Sellers

NIO Inc (NIO US)‘s lock-up will expire next week on the 11th of March. Shareholding breakdown suggests that there will be overhang upon lock-up expiry due to the large number of scattered pre-IPO shareholders. 

In this insight, we will look at the principal and pre-IPO investors and analyze who and how many shares would likely be sold upon lock-up expiry.

4. LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing

Lyft Inc (0812823D US) plans to list in the US at a valuation of US$20-25bn, as per media reports. 

Overall growth numbers have been great but some of the numbers are missing like the quarterly driver numbers, the number of shared riders versus single riders, organic growth in major cities, and progress of Canada operations, to name a few.

In my view, without the quarterly active driver numbers and the full picture of the extent of shared rides, one can’t develop an accurate picture of the business.

5. Lyft IPO Preview

Lyft Inc (LYFT US), a leading US based ride-hailing company, is getting ready for an IPO in the US in the next several weeks. One of the major positives of the Lyft IPO is the timing – Lyft should be able to complete its IPO ahead of its chief rival Uber which is expected to file its IPO later in 2019. 

The financials for Lyft will likely to change significantly in the next five to ten years, mainly due to the increased adoption of autonomous vehicles, which would reduce the need for Lyft to pay for the drivers. This cost can be eventually eliminated with full scale autonomous driving. Although we do not have figures as to exactly how much Lyft pays for all its drivers, in five to ten years when the fully autonomous vehicles are allowed, this could significantly change the basic economics of operating its ridesharing business. 

Potential shares dilution risk from additional rights offering a few years after this IPO is a serious risk for the company. Once Lyft completes its IPO in a few weeks, depending on the institutional investors’ demand for the deal, the company is likely to be infused with several billions of dollars from IPO proceeds. However, the IPO proceeds may not be enough and the company may need to conduct another large scale rights offering in a few years (for example in 2021 or 2022) which may be prior to the fully autonomous vehicles acceptance and regulatory approval by major countries around the world such as the United States.