Microsec Financial Services IPO Analysis

Multiple services provider

Operates in competitive market with regional presence

Microsec Financial Services, a non-banking financial company registered with the Reserve Bank of India, is into financing and investment, investment banking, broking and wealth management, insurance broking, financial planning and related services. Incorporated as Satyam Fiscal Services on 6 June 1989, the name was changed to Microsec Financial Services (MFSL) from 21 October 2005. The Microsec group operates through the issuer, MFSL, and its subsidiaries, Microsec Capital, Microsec Resources, Microsec Technologies, Microsec Insurance Brokers, Microsec Commerze, and PRP Technologies.



Financing and investment primarily consists of giving loans against shares and making investments. Investment banking services involve capital market transactions, debt syndication, mergers and acquisitions, and corporate advisory services. Broking and related services comprise equity broking, retail broking, priority client broking, institutional broking, online equity portal, depository participant services and commodity and currency broking. Wealth management focuses on insurance broking, distribution of mutual fund and other financial products, portfolio management services, and personal resource planning.

Club Kautilya is an initiative of the Microsec group to provide financial planning services to individual clients including corporate executives, government employees, self-employed professionals, and self-employed entrepreneurs. The group plans to set up 200 exclusive outlets of Club Kautilya in two years.

Broking revenue constituted 36% of the total revenue in the fiscal ended March 2010 (FY 2010), followed by 26% each by the financing and investment and investment banking businesses. Wealth management contributed 9% of the total revenue, while other income formed 2%. The share of wealth management in total revenue rose sharply from 2% in FY 2009 to 9% in FY 2010.

MFSL had 75 clients in the loan against shares business and an outstanding loan amount of Rs 40.53 crore end March 2010. The company had no non-performing assets (NPAs) end March 2010. The mandate book size of the investment banking business was Rs 18.26 crore end June 2010. The company had a market share of 0.19% in the cash segment of the NSE and the BSE in FY 2010, while the market share in the futures and options (F&O) segment was 0.04%.

The Microsec group operates in 16 states through a network of 239 branches. Out of these, 99 branches are in Kolkata. These are in addition to 79 branches in West Bengal.

MFSL is coming with an IPO to raise around Rs 141 crore at the lower band of Rs 113 per share and Rs 148 crore at the upper band of Rs 118 per share consisting of a fresh issue of 1.25 crore equity shares. The company intends to utilize the net proceeds to expand its financing business and network of branches (30 branches), enhance technological capacity, and for general corporate purposes.

Strengths

Operating as an integrated service provider of various financial products and services including financing and investment, broking, investment banking and wealth management) to retail investors, high net worth individuals, companies and institutions.

No NPAs end March 2010.

Weaknesses

Regional concentration and predominant presence in eastern India, mostly in West Bengal. Of the total 239 branches, 178 are in West Bengal.

Working in the highly competitive broking and investment banking businesses. Had a market share of just 0.19% in the cash segment of the NSE and the BSE in FY 2010, while the market share in the F&O segment was 0.04%.

Present in services related to the securities market, which is very volatile, thus increasing the risk of volatile financial performance.

Valuation

Microsec Financial Services consolidated EPS on post-issue equity works out to Rs 7.7 for FY 2010. At the price band of Rs 113 to Rs 118, P/E works out to 14.7 to 15.4 times. Listed players like Motilal Oswal Financial services, Indiabulls financial services, Emkay Global Financial Services, India Infoline, and Edelweiss Capital having all-India presence, comparatively higher revenue and PAT, and are trading at PE of 14.2, 12.3, 10.8, 15.0, 15.3, respectively.

Post-issue consolidated Book Value (BV) comes out to Rs 73.2 and Rs 75.2 at the issue price of Rs 113 and Rs 118, respectively. P/BV at both ends of the band works out to 1.5 and 1.6 times, respectively.

Pre-issue consolidated BV is Rs 47.2. P/BV at the lower band of Rs 113 works is Rs 2.4, while at the higher band of Rs 118 is Rs 2.5.

Motilal Oswal Financial Services, Indiabulls Financial Services, Emkay Global Financial Services, India Infoline, Edelweiss Capital, and Religare Enterprises are trading at P/BV of 2.4, 1.1, 1.6, 1.8, 1.7 and 2.4, respectively.

via CM