Microsec Financial Services IPO Review

Investors with a low-to-medium risk appetite can give the initial public offering of Microsec Financial Services a miss. Concentrated regional exposure, high competition in each of its business verticals and risks pertaining to execution of its expansion plans underscore our recommendation.



At the price band of Rs 113- Rs 118, the offer is priced at about 12-13 times its likely FY-11 per share earnings on a post-offer equity base.

While this is lower than Sensex valuations, it compares poorly with that of well-established peers such as Motilal Oswal Financial Services and India Infoline. With markets and with it the business prospects of brokerages beginning to look up now, investors may be better off considering secondary market options in this space.

Business verticals

Microsec Financial Services, the group holding company of Microsec Group, has business operations straddling financing, investments and advisory services.

Through its many subsidiaries, Microsec has presence in equity broking, investment banking, wealth management and financial planning and distribution too. The group has a network of 239 branches in all, with about 26,000 registered clients in the equity broking business. It also has about 460 clients registered for its loan against shares service.

The company has also filed applications for empanelment to several institutions for its institutional broking business. Of the nine that have been granted empanelment so far, operations have commenced in five.

Microsec caters to a clientele with a strong regional concentration in eastern India. Of a total of 239 branches, 178 are in West Bengal (of which 99 are in Kolkata) alone.

The company has only 26 branches in other regions. While such a dominant regional presence affords it a position of strength in East India, growth opportunities may tend to be limited to that extent.

Microsec plans to increase the network of its branches to other regions, with a focus on Tier-II cities for growth. While the growth strategy is in the right direction, it may be a while before it begins to pay. Most other regions are already crowded with regional, national and even MNC players offering similar services. Besides, procuring new business and establishing a brand presence usually takes time in the financial services space.

But to the company's credit, it is only new to the regions and not to the business. That it has managed to grow its revenues and profits at a compounded rate of about 69 per cent and 60 per cent in the last four years are factors in its favour. Nonetheless, it remains to be seen how Microsec plays its cards to gain a pan-India foothold.

Loan against shares

Microsec has earmarked a substantial portion of the IPO proceeds (about Rs 113 crore) for its loan against shares business (LAS). This is expected to help the company extend the service to more clients. However, of the 460 clients registered for this service, only 72 had availed of such loans as on March end this year.

Their outstanding loan amount was pegged at Rs 40.5 crore. Moreover, the growth of the LAS business largely depends on the market conditions is, therefore, highly cyclical. To that extent, the segment income could be very lumpy. The company has, however, managed to grow its interest income on loans at 26 per cent CAGR in the last two years despite the inherent volatility, and without adding to non-performing assets. This does reflect positively on the efficacy of the company's risk management techniques.

While broking business (equity, commodity and currency), which made up about 37 per cent of the consolidated FY10 revenues, is likely to be its key growth driver, Microsec does not enjoy a significant volume share in both the cash and derivatives segment.

Competition

The company's revenues from its investment banking operations have grown at a compounded 25 per cent rate over the last three years, albeit on a low base. It has managed equity offerings aggregating Rs 39 crore, undertaken two rights issues, four delisting and ten takeover assignments (as on June 30, 2010).

While the potential for growth in this business is high, prospects are largely pegged to the group's ability to bag new mandates.

Considering the high competition in this space and the constant churn of talent, pressure on margins cannot be ruled out. The company nonetheless has sufficient cushion to handle such pressure. It reported an operating profit margin of about 59 per cent last fiscal.

via BL