Motilal Oswal IPO Analysis

Motilal Oswal Financial's issue is attractively priced and provides scope for price appreciation.

Players engaged in equity broking business are having a party. Thanks to India’s fast-growing economy, foreign institutional investors (FIIs) registered with SEBI have almost doubled in the last six years pumping in billions of rupees in Indian equities.

Further, retail and corporate investors are getting more interested in stocks as their investible surplus is rising. Consequently, stock prices of equity broking players like Indiabulls, India Infoline and Geojit Financial services are soaring on the bourses.

This is encouraging players such as Motilal Oswal Financial Services (MOFS) to go public. Also, as the broking business gets more competitive, customers demand better services such as margin financing, which needs more capital for the broker.

The company, which is the holding company, offers equity broking, commodity broking, mutual fund investments, private equity, investment banking and portfolio management services (PMS) through its subsidiaries namely Motilal Oswal Securities (MOSL), Motilal Oswal Commodities Brokers (MOCB), Motilal Oswal Venture Capital Advisors and Motilal Oswal Investment Advisors.

The objects of the issue are to grow each of these businesses. The company is offering about 2.9 million shares in the price band of Rs 725-825 per share out of which around 0.14 million will be reserved for employees.

The issue will collect between Rs 216-246 crore, and constitute 10.5 per cent of the post issue equity capital. About 50 per cent of the issue proceeds will be used for margin financing for its clients. The rest of the money will be spent on expanding the broking business by meeting higher working capital requirements, office space and technology.

Worth investing

Market experts feel the pricing of the issue leaves enough money on the table due to reasonable valuations amid great opportunity. Besides valuations, the company’s issue looks attractive on various other business parameters and offers several triggers for the future.

It has a strong distribution network, research capabilities, experienced promoters and a wide basket of products, all of which are required for a successful broking operation.

MOFS has a wide distribution network spread across 1,200 business locations in 377 cities and towns through its own operations and 815 business associates. Besides pursuing inorganic growth strategies, the company is also tying up with leading banks (the recent tie-up with State Bank of India) for their online broking services.

MOFS acquired three companies in the past one year. As a result of these initiatives, the company’s clientele is increasing and its market share is rising. At the end of March 2007, the company’s retail client base in the equity broking business grew 50 per cent to 2.38 lakh, while the same in the commodity broking business tripled to 4,718 clients.

Further, the company was empanelled with 251 institutional clients including 165 FIIs. As a result, the company’s market share in the cash equity market has risen consistently over the last few years from 1.05 per cent in FY03 to 5.15 per cent in FY07.Similarly its market share in equity derivatives has jumped 322 basis points to 3.72 per cent in the same period.

But acquiring clients is not enough; providing them value added service is a bigger requirement, says the company management. And this is possible through its strong research focus to generate ideas (its research has won awards from Asiamoney. In March 2007, the company had 25 equity research analysts covering 221 companies in 26 sectors and nine analysts covering 26 commodities.

The company’s future strategies also instill confidence. MOFS plans to increase its market share further in retail and institutional broking businesses and offer new products and services.

The company is also open to inorganic expansion. It plans to boost its fee based income by growing its investment banking, portfolio management services, venture capital and entering distribution of insurance products in addition to mutual funds.

Some risks though

Investing in equities involves high risk. So does investing in the equity broking business. The most common risk is that equity broking business is susceptible to market volatility especially in a emerging market like India. Further, there is a risk in terms of delinquencies by customers if markets fall too fast.

Customers have to pay an initial margin for their investments, but if the value of the investments falls a lot quickly, and if the margin is not enough to defray the losses, then the broker has to cough up the balance in case the customer defaults. Further, in services-led industry, the ability to retain good talent especially for a research-focused organisation like Motilal Oswal is a challenge.

Relatively safe

However, MOFS is well-placed to survive and flourish even if the operating environment deteriorates. Its client base is hedged between institutional and retail business.

Besides, equity broking, it is also foraying in other areas such as wealth management, PMS, private equity and investment banking which are less cyclical and are fee-based businesses.

Plus, it has the India growth story to boot. According to Motilal Oswal, chairman and managing director, MOFS, “Indian equity markets will remain attractive as the GDP growth shows no signs of slowing down and for the next two years corporate profits are expected to grow at a robust 20-25 per cent.”

Further a low equity participation of about two-three per cent (including investing through mutual funds) means that opportunity will be huge. Based on this, the broking industry should do well.

Promoters Motilal Oswal and Raamdeo Agrawal are veterans in the equity broking business with two decades of experience each in the financial services industry and are qualified chartered accountants. The company is ranked first and second in some of Asiamoney

Moreover the company is not facing any problem on the employees front. Says Oswal, “Our strategy is to give promotions to the internal staff and recruit people more at the junior level, which takes care of attrition and employee costs.”

Growth ahead

Moreover, the company is debt-free, which gives it enough scope to leverage and grow in future. In FY07, the company’s consolidated revenues jumped 39 per cent to Rs 379 crore with equity broking business constituting about 80 per cent.

Even as the company grows its new businesses, equity broking will still form a significant portion of its revenues. Emkay Share expects 80 per cent growth in MOFS’ revenues in FY08, 60 per cent of which will be contributed by its retail broking business.

On the other hand, profits grew at a lower rate in FY07 as is the case with most broking companies due to competitive brokerage rates offered on the one hand and higher employee and other operational costs.

Reasonable valuations

At the given price band, MOFS’ market capitalisation stands third at Rs 2050-2340 crore after Indiabulls Financial Services and India Infoline in line with its revenues and profits. The issue is priced at 20.7-23.6 times its consolidated earnings for FY07.

While MOFS at both the lower and upper price band is cheaper than India Infoline, it is cheaper than Indiabulls Financial Services only at the lower end. Kashyap Jhaveri from Emkay Shares and Stock Brokers recommends subscribing to the issue as he expects investors money to double in less than a year.

Adds Kshitij Prasad of Anand Rathi Securities, “The issue looks attractive as there are few listed broking companies available in the market.” For investors, MOFS should be a good long-term bet.