The small-sized company is dependent on stock-market-sensitive brokerage revenue
Emkay Shares and Stock Brokers (ESSB) was founded as a private limited company in January 1995. It converted into a public limited company in October 2005. The promoters and managing directors of the company, Krishna Kumar Karwa and Prakash Kacholia, are chartered accountants with more than 30 years of experience in the capital market operations between them. Kacholia leads Emkay's derivatives business and has served on BSE's governing board and on the advisory derivatives committee of Sebi when derivatives trading was launched in India.
ESSB's revenue predominantly comprises brokerage income from equities and derivatives on BSE and NSE. It also undertakes distribution of third-party products, portfolio management service (PMS) and demat services. However, their contribution to income is very small. The company now plans to become a full service brokerage outfit providing comprehensive advisory services to its clients.
The gross proceeds of Rs 75 crore from the higher price band of the fresh issue will be deployed for expansion of operations and branch network (both in India and overseas), from current 41 to 100, in the next two years. ESSB will upgrade its technology to support its increasing business volumes and scale up the online trading business. Investment in subsidiaries, involved in share financing (Rs 20 crore from IPO as long-term working capital for the subsidiary) and commodity trading (Rs 5 crore), are also on the cards. The company plans to augment its working capital base to meet the enhanced margin requirements after the increase in business volumes.
Strengths
*The primary focus of ESSB is on institutional broking, which generates almost 55% of its income. This part of the business provides a good base for the company.
*The company is virtually debt-free.
Weaknesses
*Almost 90% of the total income of ESSB is composed of equity brokerage income. Revenues from its depository, PMS and other segments are insignificant. The commodity broking business is yet to take off in a significant way. ESSB doesn't have a well-diversified revenue model and the risks of a pure stock market play are high
*Compared to its peers, the reach of ESSB is limited to 41 centers, mostly concentrated in the western and southern states of India. It has a few offices in the northern and eastern zones. Its peers are way ahead in the retail segment. We feel it would be quite a challenging task for the company to increase the retail business without any differentiation strategy from its peer group, as the product offerings are very homogenous in nature.
The company needs to optimally, and speedily utilize the IPO proceeds to overcome the above in a cut-throat competitive environment.
Valuation
The industry composite PE is about 18x. At the offer price band of Rs 100 – Rs 120, consolidated annualised EPS of Rs 5.8 based on post-issue equity (Rs 24.15 crore) is discounted 17.3 to 20.8 times. Only IL&FS Investsmart commands a higher PE of 22.6 times. The other comparable and larger listed players such as Geojit Financial trades at a PE of 14.5x, India Infoline at a PE of 20x and India Bulls at 15.9x. .
At the same time, it is noteworthy that Emkay, like Geojit, is a debt-free company, while Infoline had Rs. 36 cr debt (equivalent to its networth), at the time of its IPO. Also, the considerable weightage of institutional business in its portfolio will stand it in good stead if and when the markets tank. In our opinion, at a lower decibel level, Emkay stands for greater stability.