Bull market stories

SPECIAL REPORT

Foreign broking firms are acquiring stakes in domestic broking firms and will make open offers. Should investors tender their shares?

In the past two years, it is not just the Sensex that has shot up 125 per cent; trading volumes too have surged 122 per cent. And if market observers are to be believed, we will be in a bull phase for the next few years too.

"Our markets can still be called virgin markets with a lot of potential for growth," says Avinash Gorakshakar, head of research in Emkay Share & Stock Brokers' Private Clients Group.

The sure-shot beneficiaries in this scenario are broking firms, the intermediaries enabling investors to trade.

Besides stock markets, broking firms are also spreading their wings to other areas like commodity trading and distribution of mutual fund and insurance products to broad-base their revenues.

The expected boom in the fortunes of broking firms along with the bull market, has lured foreign financial firms to India.

In the past three weeks, two oversees entities have made open offers to grab a pie of the fast growth expected in broking firms: E*Trade Financial Corporation plans to increase its stake in IL&FS Investsmart, while BNP Paribas will hike its stake in Geojit Financial Services.

As an investor of these companies should you tender your shares in the open offer or bank on the growth story and hold on?

E*Trade Financial Corporation, through its indirectly wholly-owned subsidiary E*Trade Mauritius, has announced that it is making an open offer for 1.39 crore shares or around 21 per cent stake of IL&FS Investsmart at Rs 210 per share.

The offer follows the proposed conversion of E*Trade Mauritius' GDRs into fully paid equity shares, which will increase the company's fully paid up voting capital of IL&FS Investsmart to 27.87 percent and requires the company make an offer to the shareholders of IL&FS Investsmart.

BNP Paribas is set to acquire a 33.35 per cent stake in Geojit Financial Services for Rs 207 crore through an issue of 5.68 crore fresh shares and 2.28 crore warrants convertible into equity shares at Rs 26 per share. BNP will also make an open offer for 20 per cent from the public.

In case of IL&FS Investsmart, the offer is being made at Rs 210, compared with the current stock price of Rs 195.90, thus opening a small arbitrage opportunity. E*Trade Financial is into trading, investing, banking and retail as well as institutional lending.

IL&FS Investsmart too provides financial services like investment management and advisory services, merchant banking, equity and debt broking and distribution of financial products to retail and institutional customers. IL&FS Investsmart is expected to benefit from the technology and expertise that will be fused in from E*Trade.

The offer price for Geojit has not been announced yet. While BNP will invest at Rs 26, the stock price has already shot up to Rs 30 after the offer. Geojit has been a pioneer in online trading, commodity trading and is the first Indian broking firm to enter the Gulf markets.

The company has secured membership in the commodity exchanges of Singapore and Dubai, and is able to provide commodity trading round the clock to its clients. The deal with the French banking major will bring the capital required for Geojit's expansion, and is likely to put the company on the growth path.

Both the companies are doing well financially. In the June quarter, Geojit's sales increased 86.2 per cent y-o-y to Rs 26.85 crore. The company posted a net profit of Rs 6.64 crore, 123.6 per cent higher than that posted in Q1FY06. The operating profit margin improved by 615 basis points to 41.9 per cent, while the net profit margin was up 413 basis points to 24.7 per cent.

IL&FS Investsmart's sales grew 59.3 per cent y-o-y in Q1 FY07 to Rs 56.64 crore. The company's net profit was up 80.76 per cent to Rs 17.67 crore. The operating profit margin and net profit margin were up 420 basis points and 371 basis points to 51.9 per cent and 31.19 per cent respectively.

Growth for both companies will be good for the next few years. "Stock markets look attractive from a three-five year perspective. Given this fact, broking firms would definitely do well. If you have invested in any good broking firm, you should continue holding it," says Tejas Doshi, head of research, Sushil Stock Broking.

Gorakshakar too feels that stocks of broking firms will show significant upside in the long run. He feels that the IL&FS Investsmart stock might just start rising after the open offer closes.

However, Tarun Sisodia, director institutional equities, Anand Rathi, does not conform to this view.

"One should exit from IL&FS Investsmart," he says. "The company has already expanded and therefore there is not much growth expected," he adds.

But he believes one should hold on to Geojit. Geojit is mainly operating in the south at present. Expansion in other markets will boost revenues for the firm.

The stock prices of both Geojit and IL&FS Investmart have appreciated substantially in the past three months: Geojit has nearly doubled, while IL&FS Investsmart has gone up 78 per cent.

The valuations for both firms are rich at present, and though the long-term is attractive, the near-term upside seems limited. The Geojit stock trades at 20.7 times its trailing twelve-month earnings at the current price of Rs 30. IL&FS Investsmart trades at 13.74 times its trailing twelve-month earnings.