Friday, November 16, 2007

IPO Review: Edelweiss issue seems to be attractive

Mumbai-based leading financial services provider, Edelweiss Capital (ECL) is set to tap capital market with an initial public offering (IPO) of 8,386,147 equity shares of Rs 5 each for cash, at a price to be decided through a 100% book building process. Issue will open on November 15 and will close on November 20. The price band has been fixed between Rs 725 to Rs 825 a share.

The issue would constitute 11.19% of the post issue paid-up capital of the company. Shares of the company, offered through this IPO, are proposed to be listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Kotak Mahindra Capital, Citigroup Global Markets India and Lehman Brothers Securities will help the company to raise maximum of Rs 6,918.57 million via this equity issue.

CRISIL assigned a CRISIL IPO Grade`4/5` (pronounced `four on five`) to the proposed initial public offer of Edelweiss Capital (Q, N,C,F)* (ECL). This grade indicates that the fundamentals of the issue are above average, relative to other listed equity securities in India.

Company Profile:
Incorporated in 1995, ECL is a diversified financial services company in India, promoted by Rashesh Shah and Venkatchalam Ramaswamy. The company is predominantly engaged in institutional equities broking, investment banking and proprietary arbitrage trading activities. It also has a small presence in insurance broking, asset management and investment advisory services, wealth management and wholesale financing activities. As of September 2007, the company had over 150 institutional investors actively doing business. It had more than 5,000 active accounts under private client brokerage, which offers brokerage and advisory services to high networth and other individuals through 38 offices in 19 cities as of September 2007.

Objects of the Issue:
ECL intends to deploy Rs 4,332 million to expand its business activities, which will be funded entirely by this equity issue. It decided to enhance margin maintenance with stock exchanges at an estimated cost of Rs 3,000 million; establish additional offices & acquire office infrastructure at projected cost of Rs 251.45 million; enhance existing technological capacity by investing Rs 30.93 million and prepayment of loans at an estimated cost of Rs 1,050 million.

Financial Performance:
ECL registered phenomenal growth of 2.69 times in earnings in fiscal 2007 compared with a year ago, helped by robust revenue growth coupled with improvement in operating margins. During fiscal 2007, earnings of the company climbed to Rs 1,090.08 million from Rs 405.49 million in fiscal 2006.
The company generated Rs 3,712.53 in revenues during fiscal 2007, an increase of 2.35 times over fiscal 2006. The company enjoys excellent operating margins. In fiscal 2007, the operating margin of the company was 50.86%, a rise of 338 basis points over fiscal 2006.

During the first five months this fiscal, ECL reported consolidated revenues of Rs 2,848.62 million and consolidated earnings of Rs 809.29 million.

Valuation:

Shares of ECL are available at price to earnings (P/E) multiple of 30.42x at the floor price and 34.62x at the cap price (based on consolidated annualised earnings per share (EPS) for FY 2008 on post issue capital of the company). On the other hand shares of its peers, India Infoline, Indiabulls Financial and IL&FS Investsmart were trading at P/E multiple of 112.71x, 22.48x and 25.56x (based on consolidated annualised earnings per share (EPS) for FY 2008 and market price as on Nov. 12, 2007) as against industry average of 30.9x.

Considering above valuation together with ECL`s strong management, an integrated financial services platform, diversified and balanced mix of businesses, proven ability to capitalise on emerging capital market trends, research driven approach, strong track record of high growth and profitability, strong corporate and institutional relationships, strong investor relationships, established and respected brand, and strong internal controls and risk management systems, the public issue of the company seems to be attractive.

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