Microsec Financial Services - Subscribe With Limited Exposure

DSIJ Intelligence / 17 Sep 2010

Microsec Financial Services (MFSL) is a non-banking financial company registered with the RBI. MFSL is engaged in the business of financing, which primarily comprises of giving loans against shares, and making investments. It is also the ultimate holding company of the Microsec Group. The company is tapping the capital markets with its initial public offering to garner funds of Rs 141.25-Rs 147.50 crore on its price bands of Rs 113-118 respectively with 1.25 crore shares. At present, we suggest our readers to subscribe to the IPO with limited exposure on a longer term perspective.

Microsec Financial Services

Microsec Financial Services (MFSL) is a non-banking financial company registered with the RBI. MFSL is engaged in the business of financing, which primarily comprises of giving loans against shares, and making investments. It is also the ultimate holding company of the Microsec Group, which operates as an integrated group in providing its various financial products and services to its target client base of retail investors, high net worth individuals, companies and institutions. The company is tapping the capital markets with its initial public offering to garner funds of Rs 141.25-Rs 147.50 crore on its price bands of Rs 113-118 respectively with 1.25 crore shares. The issue will constitute 39.30 per cent of the fully diluted post issue paid-up capital of the company.

Objectives of the Issue
With the issue proceeds the company intends for the following plans:
To expand its branch network in order to generate pan-India presence
To provide more funding for business of loan against shares which generates strong earnings yield
To invest in technological innovations in order to expand service through internet-based platform

Particulars	Amount (Rs Cr)
Expansion of financing business of the Company	113
Expansion of Microsec Capital’s domestic operations by increasing network of branches	8
Enhance Microsec Capital’s existing technological capacity	7.5
General Corporate Purposes	[.]

Strengths
Integrated business model: The Microsec Group operates as an integrated group, providing various financial products and services to its target client base. The Group operates through the Company and its Subsidiaries.
Expanding membership through increased geographic coverage: In order to increase its pan-India presence, MFSL plans to expand its subsidiaries into smaller cities and towns that are under-serviced by financial services companies.
Continue to develop information technology platform: MFSL has acquired PRP Technologies in fiscal 2009, which launched a web-based personal resource planning application to provide information management services to individuals.

Key Risks
The company plans to extend funding for loan against shares (margin loans), any downturn in the stock markets accompanied by any default by a client could result in substantial losses for the company.
High competition may affect the profitability of the company: MFSL along with its subsidiaries operates in a highly competitive industry wherein there are large numbers of players of various sizes and specializing in a specific segment.
The business of the company is directly related to the securities market which is highly volatile in nature: Being a financial services company it faces the uncertainties that are common in the securities market.

On the financial front, the company has performed well in the last fiscal. The topline and the bottomline have witnessed growth of 50 per cent and 181 per cent respectively on a YoY basis for FY10 and stand at Rs 57.09 crore and Rs 24.45 crore. The key point to note down would be the fact that no non-performing assets were generated by the company during FY07-10. We believe this is mainly due to company’s exposure to margin funding business with adequate risk coverage and management’s ability to recover debts effectively. Also, the company is almost a zero debt company which opens up the possibility of more leveraging for future growth prospects.

The stock on its post issue equity trades at an adjusted price to book value of 1.54-1.56x on its price bands of Rs 113-118 respectively. The valuation looks to be in line with its other listed peers in the listed space. At present, we suggest our readers to subscribe to the IPO with limited exposure on a longer term perspective. On the recommendation we must mention that we remain cautious over cyclical nature of business and volatility involved with in as well as hurdles that it may face for expansion. We believe in the management’s ability to grow the business in such a competitive environment; however, it remains a challenge to grow at the similar pace across India in the coming years.

Issue Information
Issue Opens on	17-Sep-10
Issue closes on	21-Sep-10
Issue Size (No. of Shares)	125 lakh equity shares
Price Band (Rs.)	Rs. 113-118
Issue Route	Book Building
Promoters	Banwari Lal Mittal and Ravi Kant Sharma
Post issue Equity	3.18 crore equity shares
Lead Managers	SBI Capital Markets
Listing	BSE, NSE
Retail Portion	43.75 lakh equity shares
QIB Portion	62.50 lakh equity shares
Non Institutional Portion	18.75 lakh equity shares

Financial Performance (Rs/Cr)
	FY10	FY09
Total Income	57.09	37.87
Operating Expenses	13.85	24.47
Operating Profit	43.24	13.41
Depreciation	2.84	3.01
Tax	6.39	2.76
Net Profit	24.45	8.70