Indo Thai Securities IPO - Is it subscription worthy?

Stock Broking companies in India are facing strong headwinds, as they have to protect their brokerage revenues and market share from tough competition. In volatile markets the going gets tougher for the companies as volumes are generally not stable. Despite this, Indo Thai Securities (ITSL), a broking firm, is tapping the market to raise funds in the range of Rs 28 to Rs 33.60 crore through the IPO route.

The company has decided to price the issue within a band of Rs 70-Rs 84 per equity share. The issue opens on September 30, 2011 and closes on October 5, 2011 and Corporate Strategic Allianz is the lead manager to it. The issue will comprise 40% of the fully diluted post issue paid up capital of the company.  The objects of the issue are as follows:

• For expansion and up-gradation of existing branches (Rs 2 crore)
• Purchase of office space for Mumbai office  (worth Rs 4 crore)
• Purchase and set up of corporate office (worth Rs 4 crore)
• For Brand building and Advertising (Rs 3 crore )
• For long-term working capital requirement (Rs 10 crore)
• General corporate expense and Issue-related expense

Business

ITSL was incorporated in 1995, as a stock broking firm which deals in securities in the capital market. It also started dealing in the Derivatives segment from 2007. Indo Thai Commodities is a member of Indo Thai group, which caters to the commodity derivatives segment. ITSL has a client base of 7200 spread across the country which comprises of High Net Worth Individuals and Retail clients. ITSL has a workforce of 59 employees and 14 branches, of which 13 are located in Madhya Pradesh and one in Maharashtra.

For FY11, the company posted disappointing numbers where operating Income was down by 7% to Rs 4.36 crore, while profit declined by 46% to Rs 1.06 crore. This was because of the high administrative expenses which were up by 27%  The EPS declined to Rs 1.77 per share from Rs 9.75 in FY10, on account of a rise in the equity base, as bonus shares were issued in the ratio of 2:1 in July 2010.

The number of active accounts declined substantially from 2250 in FY10 to 1108 in FY11 for ITSL.  Also, the number of new accounts opened for FY12 (in the past six months) is only 75 versus the yearly accounts opening of over 500 for the last two fiscals. This indicates that the company’s topline would be under pressure, and it would not be in a position to post good FY12 numbers.

Apart from this, many broking firms are offering Internet-based trading services ,which are common nowadays, but this company is still lacking on that front. It has a core presence in Madhya Pradesh (13 out of 14 branches), and its expansion plans are in Central India, and hence anything adverse in the region may directly affect the company.

The ongoing IPO of Onelife Capital also came with the same intention, i.e. to set up an office, the broking business and for development of Portfolio Advisory Services. This has not received any response from investors, and is zero per cent subscribed for the first two days.

Indo Thai is a very small player in the broking business, as compared to India Infoline, Edelweiss, India Bulls Financials etc. Considering the FY11 earnings, the Post Issue EPS of the company would be Rs 1.06 and therefore the company will be available at a Price-to-Earnings of 79x (assuming Issue price of Rs 84), which is very high as compared to its industry peers like India Infoline (16x), Indiabulls Finance (8x), Edelweiss (34x) etc.

Existing Broking firms too are struggling to survive and have failed to give good returns to investors, with negative Year-to-Date returns (Edelweiss down 42%, Almondz Global down 55%, India Infoline down 16%). It seems that the Broking business does not have a strong growth ahead, and the high priced IPOs are surely not the ones to subscribe to. We, at DSIJ, feel that the company is highly overvalued, and hence make a clear ‘avoid’ recommendation for the scrip.