Microsec Fin

Microsec Financial Services is entering the capital market on 17^th September 2010 with a fresh issue of 1.25 crore equity shares of Rs. 10 each, in the price band of Rs. 113 to Rs. 118 per share. The company will raise Rs. 141 to Rs. 148 crore via the public issue, depending on the price discovered. The issue, constituting 39.3% of post-issue paid-up capital of the company, will close on 21^st September 2010.

Microsec, a non-deposit taking NBFC, is a financing and investment company, providing services such as investment banking, brokerage (equity, commodity and currency), wealth management, insurance broking, financial planning and loan against shares. It has a dominant presence in East India (where 89% of its 239 branches are located) with strong focus on West Bengal (accounting for 74% of branch network) and more particularly in Kolkata with 99 branches (which accounts for 41% of total branch network).

As of 30^th June 2010, the company had 26,000 broking clients and 459 clients registered for its loan against shares service. The fund deployed towards loan against shares facility, as on 31^st March 2010, was Rs. 41 crore for 72 clients, leading to an average ticket size of Rs. 42 lakh per client with no NPAs, as of that date. Going forward, the company plans to increase its focus on this line of financing activity.

Of the total funds to be raised in the IPO, the company plans to use Rs. 113 crore for expanding the financing business and Rs. 8 crore each for setting-up new facilities (30 branches and 4 regional offices) and upgrading present technology.

For FY10, on a consolidated basis, the company had a topline of Rs. 57 crore, of which, brokerage and investment banking accounted for 37% and 26% respectively.  The net profit for the year was Rs. 25 crore, implying a net margin of 43%. The company's net margins remain strong due to significant contribution of investment banking (debt syndication) income, which almost entirely gets added to the company's bottomline.

As on 31^st March 2010, the company's networth was Rs. 92 crore with BVPS of Rs. 47.4. Its cash / bank balance (net of debt) stood at Rs. 15 crore, as on that date. EPS for FY10 was Rs. 12.6 on equity of Rs. 19.3 crore.

Post IPO, the equity will expand to Rs. 31.8, which is considered high for the nature and scale of the business operations. Post-issue, the promoter holding will reduce to 54.78% from the present 90.25%.

The narrow price band of 4%, between 113 to 118, is a refreshing positive, wherein the company will be valued in the range of Rs. 359 to 375 crore, at the lower and upper price bands, respectively. This seems to be quite stretched for a broking company, whose fortunes are so closely linked with the performance of secondary markets, thereby leading to uncertainty on future profitability.

Broking firms having made their IPOs in the boom time of 2007, viz. Motilal Oswal, Edelweiss and Religare Enterprises, have not all rewarded their shareholders in the long term. Except for Religare Enterprises, both Motilal Oswal and Edelweiss have underperformed, either the markets or in absolute terms, from their IPOs till date. Edelweiss's market cap has reduced by one-third from Rs. 6,200 crore at the time of its IPO in Nov 2007, to less than Rs. 4,000 at present. On the other hand, market cap of Motilal Oswal increased by just 1% since its IPO in Aug 2007, as against Sensex's return of 29% during the same period.

This company can be compared more with Emkay Global, having present market cap of Rs. 212 crore, with annualised topline of Rs. 115 crore and high promoter stake at close to 72%. This share is ruling at Rs. 87 on the hopes of promoters' wanting to sell their stake in the company. This company, having gone public in March 2006, is still ruling way below its issue price of Rs. 120 per share. Microsec, being a regional player and that too in the Eastern part of the country, will have its disadvantage.

At 113 and 118, the issue is being priced at a revenue multiple of 6.3 and 6.6 times respectively. Bigger listed peers (both in terms of presence and turnover) are presently ruling at revenue multiple of around 3 times. On a PE based multiple, against the average of 16 for listed brokerages, the issue is priced cheaper at 9.0 and 9.4 times respectively, the higher net margins probably coming to the company's rescue. However, Microsec stands at the disadvantage due to the smaller scale of its operations vis-a-vis the other listed players.

Given the sentiments around are very positive, the issue may give prospective investors some listing gains, but may not be able to reward investors having horizon of 12 months, on a sustainable basis. It would have been better, had the issue been priced at around Rs. 100 per share, which would have left higher margin of safety and returns on the table for the prospective investors. Investors can go for the issue only for listing and short term gains.