Riding the bull

IPO WATCH

As a financial services company focused on Indian retail markets, Indiabulls Financial Services (Indiabulls) has taken big strides forward in the last couple of years. Emboldened by its success, the company recently announced plans for an IPO.

Indiabulls derives its revenues from three of its subsidiaries namely Indiabulls Securities (ISL), Indiabulls Insurance Advisors (IIAPL) and Indiabulls Commodities (ICPL) of which ISL contributes about 96 per cent.

While Indiabulls' business model has stood it in good stead and helped it survive the dotcom bust, its ability to remain strong despite the competition from big players will be put to test going forward.

While analysts are impressed by the growth story, they are wary about the capricious nature of the equity markets and investors who form the fulcrum of the com pany's clientele.

Indiabulls' IPO opens on September 6, 2004, with a 100 per cent book-built public issue of 2,71,87,519 equity shares of Rs 2 each, and closes on September 10. The price band for the issue has been set at Rs 16-19 per share.

The company plans to raise Rs 51.5 crore at the top end of the band, through the offering will constitute 25 per cent of the fully diluted post-issue paid-up capital of the company.

While upto 50 per cent of the issue will be allocated to QIBs (qualified institutional buyers), up to 25 per cent will be allocated to non-institutional bidders and 25 per cent to retail bidders. Its shares are proposed to be listed on the NSE and the BSE. 
 

Financials
(In Rs Cr)	FY04	FY03	% Change	Q104	Q103	% Change
Revenues from ops.	69.75	25.77	170.66	22.11	9.01	145.39
Other income	2.19	0.89	146.07	1.02	0.05	1940.00
Operating profit	34.34	10.92	214.47	9.40	5.05	86.14
OPM (%)	49.23	42.37	-	42.51	56.05	-
Net profit	19.35	5.10	279.41	5.54	2.29	141.92
Net margin (%)	27.74	19.79	-	25.06	25.42	-
EPS (Rs)	2.24	0.66	239.39	-	-	-

Market growth provides leg-up
Indiabulls' ride to success has been on the back of the explosive volume growth in Indian capital markets. The combined average daily turnover of the BSE and the NSE expanded to around Rs 23,209.40 crore in April 2004 from about Rs 480 crore in 1995-96. The market expansion has helped top players, including Indiabulls, to rake in the moolah.

Over the last seven years, the marketshare of the top five brokers has risen to 13 per cent (December 2003) from 6 per cent (1996-97). In off-line volumes, the company's marketshare stands at 4 per cent of the total NSE volumes for July. Also, Indiabulls' volumes grew 223 per cent in 2003-04, higher than the overall market growth (the NSE's volumes grew 205 per cent in 2003-04).

Consolidation in Indiabulls' online business, which constituted 34.85 per cent of its total revenues in FY04, is even greater. The company's online turnover as a percentage of the NSE's online turnover stands at 18 per cent for the January-March 2004 period.

With the retail participation in equity markets expected to grow by more than 25 per cent per annum over the next 10 years, the company is well-poised to reap the benefits, note analysts. "The growth in retail business is dependent on two things," says Tejas Doshi, head of research at domestic securities firm, Sushil Finance.

"Firstly, the market grows and you grow along with it and, secondly, you grow your distribution network and thus reap the benefits of higher penetration. Indiabulls has been fortunate on both accounts. While the markets have grown over the past couple of years, the company has expanded its network across the country," notes Doshi.

Established in 2000, Indiabulls has a network of 70 offices spread across 55 cities, catering to both retail and institutional clients. It has attracted over Rs 70 crore from venture capitalists and has a presence in depository services, insurance distribution, mutual funds, IPOs and equity, debt and derivatives broking.

Impressive financials
Indiabulls' financials, too, read well. It reported a total income of Rs 23.13 crore during the April-June quarter compared with Rs 9.06 crore during the same period in 2003. Net profit for the June quarter of 2004 stood at Rs 5.54 crore compared to Rs 2.29 crore.

For the financial year ended 2003-04, it recorded a total income of Rs 71.95 crore and a net profit of Rs 19.35 crore - up 169.77 per cent and 279.41 per cent respectively. The key driver of growth was the increase in number of clients to 30,498 in FY04 from 1,172 in FY02, a rise of 160.12 per cent. According to Doshi, the company will have to expand even more to sustain its growth rate.

But Indiabulls' fortunes are dependent on the vagaries of capital markets which accounted for 63.70 per cent, 59.90 per cent and 60.40 per cent of the company's revenues for FY04, FY03 and FY02 respectively.

Besides, it largely depends on its arms for revenues. Indiabulls generates only 1.33 per cent of the total group revenues, while IIAPL and ICPL contribute 1.69 per cent and 0.78 per cent respectively. Thus any downturn in the performance of ISL is likely to hit the group's performance.

Valuation is the key
At a diluted pre-issue EPS of Rs 2.24, the company attracts a P/E multiple of 8.48 at the higher end of the price band. That may seem cheap considering its growth rate in the past. However, sustainability of earnings depends on the performance of the markets.

According to an analyst with a local brokerage, at the higher end of the price band, the company will be valued at over Rs 200 crore, "which is a little too high for a broking firm."

"The company should be able to expand its business and network with the proceeds from the IPO, but whether it will be able to increase business per client remains a key question," he adds.

However, some analysts note that if growth in trading volumes doesn't take place and volumes drop consequently, Indiabulls may find it hard to sustain its growth rate.

In such a situation, it will have to look at acquisitions to ensure future growth. Analysts also feel that as consolidation gathers pace in the industry, big players like ICICI Bank, HDFC Bank, and Kotak may win the race for marketshare.

However, says Doshi, "I will put Indiabulls among the leading players in the retail segment today. I don't expect it to be marginalised even if consolidation takes place," he notes.

The pie is anyway large enough for Indiabulls to sustain, even without coming in direct competition with the biggies, say some analysts.

At a price band of Rs 16-19, the scrip offers a value proposition if one is hugely bullish on the equity markets. Abnormal listing gains are unlikely. Investors can wait for the company to get listed and take a call at that time than committing money upfront.