Motilal Oswal Financial Services (MOFSL), a financial services company focused on wealth creation for all its customers, is open for subscription with an initial public offering (IPO) of 29,82,710 equity shares of Rs 5 each for cash at a price band between Rs 725 and Rs 825 per share with 100% book building process.

The issue will close for subscription on August 23, 2007.The company is going to raise Rs 216.25 crore in lower end of the price band and Rs 246 crore at higher band.

Prabhudas Lilladher report on Motilal Oswal IPO

Business

Motilal Oswal Financial Services (MOFSL) offers a range of products and services such as retail broking (equity and commodity), portfolio management services, institutional broking, venture capital and investment banking services.

It has presence in 377 cities & towns and operates through 1200 outlets, of which 80 are branches and rest 1120 are franchisees.

Investment Positives

Rising market share in the industry

As volumes in the industry have risen from Rs 1129 billion in FY03 to Rs 4253 billion in FY07, MOFSL with its strong hold in retail as well as institutional segment has been able to increase its market share from 1.44% in FY03 to 4.15% in FY07.

High growth in fee income

MOFSL has an established network of 1200 outlets spread across 377 cities and towns. The company plans to leverage this network for cross selling other financial products like mutual funds and life insurance. During FY07, it started investment banking business, where it handled 14 deals and currently has 30 mandates in hand; the company expects this business to grow phenomenally and will help them diversify their income streams.

Similarly the assets managed by them under PMS have grown by 10x to Rs 5088 million in FY07 from Rs 522 million in FY04. Growth in all three business segments shall increase the visibility of fee income in the future.

Strong Research and Sales team led by experienced management

The company has a strong research team of 25 analyst covering 221 companies and 9 analyst covering 26 commodities. The team is headed by dynamic promoters; Raamdeo Agrawal and Motilal Oswal. Both are well qualified and experienced professionals with a successful track record in the industry. Asiamoney broker’s poll has in the past recognised and rewarded the team as one of the best in the industry.

Investment Concerns

High dependence on the capital market

86% of the income accrues from equity broking business. Any downturn faced by the securities market would impact the volumes traded and thereby affect the profitability of the company.

Non-broking business at a start up phase

MOFSL has just started the venture capital business and has limited operating history, making it difficult to evaluate their performance. Distributing financial products and earning a fee income is a huge opportunity, though we need to evaluate how aggressive MOFSL’s strategy would be for the same.

Financial Overview and Valuation

During DY07, the total revenues for the company have increased by 39% yoy to Rs 358.7 million. 86% of the revenue accrues from broking segment, followed by the newly started investment banking business, which contributes 7%.

The employee base has increased from 1258 in FY06 to 2072 in FY07; similarly the employee expenses as a percentage of revenues have increased from 24% in FY06 to 28%. It operates at a 32% EBIDTA margin, which are sustainable as the company follows a mix of branch and franchisee model. The company has a clean balance sheet with zero debt. During the year it has booked an extra ordinary expense of Rs. 42m as employee compensation cost, which brings the adjusted PAT to Rs 712 million a growth of 17%yoy.

In the price band of Rs 725-825, the stock quotes at 28.9x and 32.9x FY07 diluted EPS of Rs 25.1. Compared to the peer companies MOFSL has higher return ratios and appears to be attractively priced.