Assignment : Granitifiandre S.p.

Q1. Do a Thorough SWOT analysis of Granitifiandre S.p.A

About the company:

Granitifiandre is a manufacturer of vitrified porcelain stoneware. The company pursues

aggressive growth strategy by focussing on improvement in product lines, intensive
research and development, through innovative sales network and network integration.

The company was formed as a joint venture of two vitrified stoneware producing
companies. The company merged with Genova Ceramiche in 1985 following which it
has become a leading player in the ceramics industry.

Strengths:

 Leading player in ceramics industry

 Premium products producer in the industry
 Strengths pertaining to Geologica
o These products’ production has minimal impact on environment
compared to natural quarry materials
o Low absorbency rate
o High standard alternative to quarried marble, stone and granite with
aesthetic features
o Three times higher deep abrasion resistance
o Higher resistance to acidity
o Low processing waste
o Present in world-famous sites
 Remarkable sales growth (54%)
 Reputed companies such as Mercedes, Mc Donalds, Carrefour as clients

Weaknesses:

 The company operates in only two main product lines

  Global presence is very low

Opportunities:

 Vitrified products industry is growing at 10% rate in last two years

 Flooring market is expected to grow at 120% in the next decade
 Shift in the market from naturally quarried materials to vitrified products
 The global market is shifting away from naturally quarried materials due to
quarrying restrictions and environmental factors

Threats:

 Issue of IPO is based on the market perception and it may be adverse as the
company as of now is very small
Q2. Do a detailed study of the company’s IPO. What alternatives did it have?
Why did it prefer the IPO route?

Need:

Granitifiandre, in recent years has adopted a growth strategy in which it intends to

provide “turnkey” services to its clients. The company has set a turnover growth of
10% per annum. Continuous improvement of its product range, expansion in the
residential segment, increased worldwide output (The company wanted to increase its
world-wide market share from 1% to 2% in the next 5 years. ), strengthening of its
distribution network, improve its ability to provide turnkey services have been
mentioned as key factors to achieve the aspired growth rate. This growth would require
huge investments.

Environment:

Industry: The vitrified stoneware industry has increased by 10% in the last two years.
The flooring market is expected to increase by 120% in the next decade. The
availability of traditional quarried marble and granite used in construction would
become scarce as they are perishable and also because of quarrying restrictions
because of environmental concerns. The industry is expected to continue its growth
as the there is a shift towards Geologica products from traditional quarried marble and
granite in the market.

Financial Markets: There has been a growth in financial market in the recent years.
The stock exchanges have opened the market for new and small companies which
would enable the company to issue an IPO.
Options:

Finance through Banks:

Granitifiandre had a prestigious name in the market as a top end manufacturer of high-
quality substitutes for marble and other quarried products. The company also had
good relationships with banks. The company traditionally used Bank finance to raise
funds. The financial performance of the company was commendable over the years
1998-2000. There was a low interest rate environment which would have enabled the
company to raise funds with minimal cost. These factors would ensure the company
to easily raise the capital required through bank finance. But banks would demand for
appropriate collateral for the money lent.

Finance through Corporate Bonds:

Raising funds through corporate bonds would mean that the company is raising money
through debt. The main reason the company would not want to take this route is that
the company has zero expertise in this field. Also, there was no proper market
established for corporate bonds at the time.

Finance through Equity:

The company would have to follow stringent procedures and strict transparency laws
would be applicable if the company were to list its stocks at STAR division. The
company needs to publish six reports per year in addition to having two independent
members on its board. The major share holding companies, Finanziaria Ceraica
Castellarano S.p.A and Finanziaria CeramicaLe Fiandre S.p.A would have to reduce
its stakes in the company. If the company raises money by issuing IPO, then it would
acquire the status of a listed company. This would elevate the company’s corporate
image and prestige. This would also ensure greater visibility and also send the sense
of reliability in the minds of people. The company’s management was of the opinion
that it is better to raise capital with low cost of equity. The company was small and
reputable. Hence, the perception among the market about the stock of the company
is low risk stock.

Conclusion:

The above analysis shows that, the company needs huge capital and requires to raise
funds to enable its growth strategy. The company has presented itself with three
options to raise money through debt or equity. Owing to the environmental factors and
pros and cons of various options available, the company has opted to issue an IPO to
raise capital.

Implications:

 As a result of the public offering, the company’s remuneration policy has

changed.
 A performance-based remuneration has been put in place.
 A remuneration policy committee has been created.
 Competent teams have been appointed for timely delivery of reports
 The organization structure of the organization has been changed. This
increased accountability in individuals.
 Stakeholder relationships have improved
 The business performance has been improved due to the above changes in the
company.
Q3) Write a detailed note on public offering, IPOs, FPOs and preferential issues

Public Offering

Public Offering is the act of offering the equity shares or other financial instruments of
a company to raise capital on a public stock exchange. The different types of financial
instruments include equity stake like preferred or common shares and assets which
can be traded like bonds.

The company opts for public offering for various reasons primarily to raise the capital.
Going public also ensures that the risk of ownership is spread across large number of
shareholders. This also ensures that the debts for company and cost of capital is
reduced. This provides company a good ground to negotiate the interest rates with
banks. The company gets future opportunities to raise more capital by issuance of
more stocks in future once it is listed on public exchange. Being listed on public
exchange also provides market exposure to the company. It helps in increasing the
credibility of the company in public and acts as a form of indirect advertising.

Example: If a company ABC wants to sell some of its shares. In order to sell their
shares, they need buyer i.e. the general people in public whom they could offer the
shares to. To proceed with this, company ABC hires an underwriter who determines
the value of shares of the company and makes offering memorandum that discloses
the important details about the company to its potential buyers. Thereafter, the
underwriter displays the offering to facilitate the sale process of shares to the public
on the stock exchange.

In the case of Granitifiandre, the company decided to go public in June 2001 in the
STAR division of the Italian Stock Market and traded 14.2 million shares.

IPOs

Initial Public Offering referred as IPO is the issuance of new stocks wherein shares of
private corporation are offered to the public. This allows the company to raise capital
from the public investors. The company planning for IPO selects the underwriters to
be associated and chooses the exchange it wants to be listed on. Once listed, the
shares are traded on the exchange.
The company is considered as private prior to an IPO. Generally, the business of
private companies is limited to friends, family and professional investors like angel
investors or venture capitalists. When the company grows and reaches a stage where
it feels it is mature enough to get through rigors of SEC regulations and at the same
time can benefit the public and fulfill its needs, its starts advertising its interest to go
public. Typically, this happens when the company has reached a stage of unicorn
status wherein its valuation generally (not necessarily) reaches $ 1 billion.

Underwriting is done to price the IPO shares of the company. The privately-owned
shares held previously are converted to public and an opportunity is given to private
investors to cash in. At the same time, millions of investors in public are provide with
opportunity to buy shares of company and raise its capital. One of the largest IPO is
of Alibaba Group in 2014 which raised $25 billion.

FPOs

FPO referred as Follow-on Public Offer is the issuance of shares by the company
which is already listed on the stock exchange. In FPO, the company which is publicly
listed and has gone through the process of IPO issues additional shares to raise
capital.

There are two types of FPOs namely dilutive and non-dilutive. The first type is dilutive
in which the number of outstanding shares is increased by the company. This is done
to raise money to expand its business or to reduce the debts. The second type is non-
dilutive in which the privately held shares are sold which are already in existence. This
is also referred to as secondary market offering and company or current shareholders
don’t get any profit out of it. Shareholders generally react negatively to the secondary
market offerings. FPO is a very common practice among the companies listed on stock
exchange.

Preferential issues

Preferential issue is offering shares to a particular group but not public by a company
listed on stock exchange. These group of people are generally High Net-Worth
Individuals or Qualified Institutional Buyers (like Insurance companies, Mutual funds,
etc.) who can buy shares in larger lot. This gives the company an opportunity to
surpass the procedure which is followed in case of IPO/FPO related to SEBI
regulations and at the same time forego uncertainty of sale of shares in public.
Preferential issue is a faster way of raising equity capital for the company.

Q4) What are the pros and cons of a Rights Issue?

Rights issue:

A rights issue is a right offered to the existing shareholders to purchase additional

shares in quantities proportional to their current shareholdings (at a lower price than
the company share’s current market price, 10-15% lower). It is like a 2nd IPO and the
main idea is to raise fresh capital but instead of going public, they are offered to the
existing shareholders. The existing shareholders are free to subscribe for all the
eligible or few of the eligible shares or none.

For example, a 1:5 right issue essentially means that for every 5 shares owned by a
shareholder, he is eligible to subscribe for 1 additional share.

Pros:

 The company can get funds from the existing shareholders itself and without
the intervention of banks and loans.
 Beneficial when companies want to raise funds during economic slowdowns
 The shareholders can get the shares at a lower price than the market price.
 The underwriting fee can be bypassed by the company.
 Shareholders confidence is increased when rights are issued

Cons:

 It creates new shares and so dilutes the value of previous shares held.
 If the fundamentals are negative, then the stock price may fall below issue price.
 Generally, the stock price falls after the rights issue as now there are more
shares for same earnings.
  The earnings per share (EPS) and return on equity (ROE) will reduce because
there are more shares for the same earnings.
 If the market price is below the right issue price/subscription price on the last
day, it’s cheaper to buy from the market.

Q5) write a detailed note on Greenshoe options.

Greenshoe Option:

It is a part of the underwriting agreement, which allows the underwriter to authorize

buy additional shares (maximum 15%) in the event of oversubscription. This is also
known as “Overallotment option”.

It basically allows companies to intervene (Buy/Sell) in the market to stabilise the share
prices during the 30-day stabilization period immediately after listing. If this is
exercised in case of oversubscription, there will be dilution of the shareholding.

The Origin of the name green shoe options is because a company named Green Shoe
Manufacturing Company implemented this kind of clause into their underwriting
agreement and so this method is named after it.

The Greenshoe option can be exercised in two situations

1. IPO is a success, and the share prices rises, then the underwriter exercises the
greenshoe option and buys the shares from the company at the predetermined
prices and issue those shares at a profit to their clients.

2. If the IPO is not a success, and the share prices falls below the issue price,
then buy the shares back from the market instead of the company and so more
buying volumes, so the stock prices stabilize.
For example,

If a company has a total of 1000 shares. Now the company went for an IPO to allot
200 shares to public, it will actually issue 230 shares (+15%). These 15% shares are
borrowed from the promotors or the reserves.

Now when the IPO is oversubscribed, i.e. the demand is too high, the, 30 more shares
can be bought by underwriter at the issue price and he can sell them to his clients.

If the share prices fall, the underwriters start buying the shares from the market, while
other retail investors are selling. Now this will rise the price create stability in the price
because of the newly created demand for the shares by the underwriters. The shares
so bought will be returned back to the promotes or the reserves.

Benefits:

 Green shoe option ensures that the stock price rises after the shares are listed
on the exchanges and ensures that the successful opening price.