IL&FS: In float mode

The IL&FS Investsmart public issue doesn't seem too expensive

IL&FS Investsmart, a financial services intermediary is making an initial public offering worth about Rs 125-140 crore. Post-listing, this would give the company a market capitalisation of close to Rs 500 crore, or about five times FY05 sales.

But revenue multiples don't make much sense for financial services companies such as Investsmart which has net margins as high as 31 per cent.

Based on its pre-issue capital, the company had an EPS of Rs 9.45 in FY05, which discounts the IPO price band of Rs 110-125 by 11.6 to 13.2 times.

Recently listed India Infoline trades at 11.6 times FY05 earnings, and India Bulls which listed last year trades at a PE of 32.5 times consolidated FY05 earnings.

But Investsmart is not entirely comparable to either of these companies. True, all three players are involved in retail broking services, but this segment accounts for less than 40 per cent of Investsmart's operating revenues.

Besides, its revenue streams include other retail services such as distribution of IPOs and financial products, portfolio management fees, and interest earned on margin trading.

Importantly, around 26 per cent of the company's operating revenue comes from the institutional segment, most of which is from syndication, merchant banking and other fee based services. The balance comes from the institutional broking business.

Clearly, Investsmart's is a much more diversified business, which helps, given the cyclical nature of the capital markets. In FY05, for instance, when the broking business didn't grow as much as in FY04, it was the non-broking services segments that drove revenue growth, accounting for about 65 per cent of total incremental revenues.

(In FY04, it was the broking business that drove revenues, accounting for 56 per cent of incremental revenues). Given its diversified business portfolio and the fact that it's not too expensive at 11.6-13.2 times trailing earnings, the issue should sail through, unless of course the markets were to crash in the interim.

Birla Corp

Birla Corporation reported a 27.96 per cent growth in profit before tax to Rs 41.46 crore in the March quarter, despite net sales expanding merely 9.53 per cent.

Profit growth was aided by a 160 per cent jump in other income to Rs 9.22 crore and lower depreciation. Other income rose thanks to the Rs 4.31 crore profit on sale of part of the plant and machinery at the company's unit Birla Synthetics.

Revenues at the cement division were more or less unchanged at Rs 314.52 crore last quarter and that's because realisations in key markets like UP, Rajasthan and West Bengal were flat on a y-o-y basis. However, the company had to face higher inputs such as imported coal and pet coke.

As a result, segment profit fell 16.06 per cent to Rs 33.65 crore in the last quarter. Meanwhile, improved profitability of the jute and the company's other businesses helped partially overcome the lacklustre performance of the cement division.

Improved export performance has helped segment profit of the jute division expand 19.42 per cent to Rs 1.66 crore. In addition, there was a turnaround at the other businesses with segment profit expanding to Rs 1.88 crore as compared to a loss of Rs 1.96 crore in the previous year and analysts point out that's largely due to improved performance in the auto trims division.

As a result, operating profit rose 8.1 per cent to Rs 47.1 crore in the March quarter though operating profit margin fell marginally to 11.89 per cent.

Going forward, cement prices in the company's key markets are expected to remain more or less flat during the monsoons. As a result, an aggressive profit growth for the company appears unlikely in the short run, which explains its single-digit forward PE of about 9 times.

LIC Housing Finance

LIC Housing Finance's gross profit for the fourth quarter of FY 05 fell 17.6 per cent to Rs 32.38 crore compared to the corresponding period of the previous year. Gross profit for Q4 was also much lower than Q3's gross profit of Rs 62.56 crore.

After taking into account the impact of deferred tax provisions and the equity dilution on account of the GDR issue, earnings per share for Q4 were little more than a fifth of that notched up in Q4 of the previous year.

There are several reasons for the company's tepid performance, but perhaps the numbers that best capture the problem are as follows: while total interest income for FY 05 as a whole increased by 7.4 per cent, interest expenses went up by 10.98 per cent. Interest spreads are therefore under pressure.

The trouble is that, in spite of the boom in housing finance, LIC Housing Finance has not really been able to grow fast enough to offset the pressure on spreads.

Compared to HDFC's 30 per cent or so growth in sanctions and disbursements, LIC Housing Finance's growth in these parameters has been 12 per cent for sanctions and 13 per cent for disbursements.

The company's NPAs too have risen, due to the introduction of the 90-day norm. Gross NPAs are at 4.43 per cent and net NPAs at 2.79 per cent.

The nub of the problem is that the company's lukewarm performance comes at a time when the housing finance industry has been booming.

No wonder the sock plunged after the results were declared.

With contributions from Mobis Philipose and Amriteshwar Mathur