Indiabulls demerger could unlock value

The demerger of the stock broking arm, Indiabulls Securities (ISL) from the parent Indiabulls Financial Services (IBFSL) could unlock significant value for the shareholders, similar to what the demerger of Reliance Group did for the Mukesh and Anil Ambani-owned companies, according to analysts tracking the group.

IBFSL has a market cap of around Rs 20,000 crore, with financing and the stock broking business as subsidiaries. With the demerger, ISL will list independently and house the stock broking business, while IBFSL will represent the group's financing business.

The stock broking business contributed a quarter of IBFSL's revenues, reporting net profits of around Rs 140 crore, in FY07. ISL, focused on the retail segment with 300 branches, should report profits of Rs 260 crore in FY 08.

IBFSL is likely to disburse more than Rs 12,000 crore by the end of FY08. After the demerger of ISL, IBFSL will have a net worth of Rs 3500 crore.

It will count among the top five private sector BFSI players, in terms of net worth, after ICICI Bank, HDFC, Axis Bank and Reliance Capital. The company is expected to report profits exceeding Rs 500 crore for the year ended March 2008, said sources.

IBFSL had demerged its real estate business in February. It subsequently listed as a separate entity called Indiabulls Real Estate (IBREL) and the combined stock price has since doubled. The price of IBFSL was around Rs 700 when the demerger took place. The combined price of IBREL and IBFSL now exceeds Rs 1600.

The recently listed brokerages have been quoting at hefty premiums. Companies smaller than ISL such as Edelweiss and Motilal Oswal have market caps of around Rs 11,000 crore and Rs 8000 crore respectively. Edelweiss is quoting at a price-to-earnings multiple of over 40 times its FY 09 earnings.

ISL is likely to grow at 40 per cent and report profits of 350 crore in FY09. ''At a similar multiple to Edelweiss, ISL should be valued at Rs 14,000 crore on a stand-alone basis,'' said an analyst who tracks the brokerages.

''There's a potential of 50 per cent upside from here on, due to this value-unlocking exercise,'' added the analyst, citing the example of Reliance Group companies which have seen their market cap zoom 4 times after the brothers parted ways.

IBFSL will drive the group's growth in financial services. It is eyeing new businesses such as insurance and commodity trading. It has announced a joint venture with the public sector MMTC to set up a multi-commodity exchange and has applied to the Forward Markets Commission in this regard.