Indo Thai Securities - Insecure growth expectations

Recently, Indo Thai Securities (ITSL), a Madhya Pradesh-based stock broking firm tapped the market to raise funds worth Rs 29.60 cr. The company had fixed the price band at Rs 70-84, and the issue price was fixed at Rs 74 per share. The IPO was oversubscribed 1.18x. The retail individuals portion was oversubscribed by 3.35x, while Non-Institutional Investors subscribed 0.02x. However, QIB did not subscribe to a single share.

The scrip was listed on 2nd November, 2011, and opened 1.35% higher at Rs 75. On the day of listing, the scrip made an intraday high of Rs 99.10. However, it could not sustain the levels, and witnessed a decline of 69% to close at Rs 23.

In our IPO Analysis, we had clearly recommended that investors should avoid the offer. At the current levels, even after a sharp fall of more than 70% from its issue price, we suggest that our readers stay away from the scrip. Further, around 40 lakh equity shares were offered for subscription. However, the numbers of equity shares traded on the first day of listing was 3.73 cr, which also hints at speculative trade happening on the counter.

ITSL is a stock broking firm, and started off by dealing with securities in the Capital market. Further on, the company also started dealing in Derivatives, Mutual Fund services, Interest Rate futures and Commodity Trading. Of the total funds raised, 33% would be used for its working capital requirement, 27% would be used for the purchase of office space, approximately 10% and 7% would be used for brand building and for expansion and upgrading branches respectively, and the remaining for general corporate and public issue expenses.

In an uncertain global market, the broking business players are finding it difficult to survive and grow, as investors are preferring to stay away. ITSL also witnessed the same backlash. For FY11, the company posted disappointing numbers. Its operating income was down by 7% to Rs 4.36 cr, while profits declined by 46% to Rs 1.06 cr. Other well-established players also have yielded negative YTD returns – Motilal Oswal (51% down), Edelweiss (45% down), IndiaInfoline (16% down) etc. ITSL is currently trading at a P/E multiple of 20x, which is also very high. We feel that it should ideally have a P/E multiple of around 8x-10x.

With subdued growth expectations from the broking business, and with the scrip currently trading at higher valuations (despite being beaten down 70%), we recommend that investors avoid taking any fresh positions, and exit the counter if they are currently holding the stock.