Edelweiss will not fall significantly

CNBC-TV18's stocks editor, Udayan Mukherjee - Edelweiss Capital will be a big listing. Grey market suggesting Rs 1,600, so give or take a little bit, it will list around that price. Rich price - no question about that. Today everybody will talk about Edelweiss’ rich valuations. But it is a very good space to be in in the next 2-3 years because those businesses are going to explode. We have just seen retail getting into the stock market in a big way. That transition is happening, more and more people will do that. There is huge deal pipeline lying out there and people who have got some experience and foothold in the i-banking or the private equity space will do extremely well. Wealth management will explode in this country. So, in the next 3-4 years, this is a really good space to be in because it is one of those few spaces where penetration is still very low and it will just go up the curve like that.

Before one talks about lofty valuations, one needs to understand the backdrop of why people are so optimistic. After that one can almost justify the kind of valuations which some of these financial entities are getting. So, it is a very good space to be in over the next 3-4 years.

Rs 1,600 puts Edelweiss’ market cap at Rs 13,000 crore or USD 3.25 billion that is a little rich. It is not to say that the market will not take the stock higher because we saw with Mundra. It listed at a rich price but it has not gone down, rather gone up after that.

So, where people see visible growth now in a market like India, stocks don’t fall off even after listing at expensive valuations. They sometimes tend to go up. With that caveat, at Rs 13,000 crore, if they do about Rs 800 crore in sales in FY09, it is a 16 multiple on sales. If they do Rs 300 crore of profit on very healthy margins which we are assuming, it is about 43 PE multiple on FY09. On both these parameters, they appear far more expensive than the peers set.

PE multiples and price to sales etc tend to get lost. I will give a simple handy example. For the price of Edelweiss today, one can buy India Infoline and Motilal Oswal, both those brokerages. One is very strong institutional franchise, now with the CLSA team and one is very large retail brokerage. One can buy both for Edelweiss’ market cap. If one wants to look at it some other way; one can buy India Infoline, plus Religare, plus Geojit for Edelweiss’ market cap.

These are right ways to look at things. Edelweiss is a very high quality company with extremely good margin profile and presence in the right businesses. But once we look at it that way - that one can buy stocks in the same business and competitors for this one’s market cap and the sales of those three or two entities I mentioned would be number of times of Edelweiss’ sales expectations next year. Then, sometimes the penny tends to drop on how expensive it is.

So, with the caveat that the space is expensive, Edelweiss will probably not fall significantly because of the appetite post listing and it is a very quality financial play in a fantastic space. The valuations are a bit stretched, so one needs to keep that at the back of ones mind.

Thankfully, this was in futures and options. So, one can do a few Nifty things out there, which unfortunately one could not do with Mundra.