IFCI Factors IPO: An Unconventional Business Taps The Market

Many companies, big and small, government and private have lined up their plans to raise funds from the primary markets. This trend is not new. The moment markets start looking good, companies try to raise funds riding on the positive sentiment in vogue. Investors have lost a good amount of money in the past due the irrational exuberance that overshadows rational thinking during a bull market. The best way to avoid this damage, is to do a pre-check on these companies and be sure that you don’t hasten up with something and later regret. We have been arming you with all the analysis that is necessary to objectively decide on whether to invest in an IPO or not. Going one step further, we are now providing you with the initial background of the IPOs that are likely to hit the market in the near future. This is our humble attempt at helping you to be better prepared to profit from the markets.

After having told you about NTPC, here is another company which is shortly slated to come to the markets with its IPO. IFCI Factors Ltd (IFL), promoted by IFCI plans to issue 3.91 crore shares, of face value of Rs 10 each. The issue is an offer for sale of fresh equity by the company reducing promoter's holding which will bring down their stake from the existing 99.74% to 66.83%.

IFL is a financial services company, providing factoring solutions across various industries. Factoring is a continuing financing arrangement, where a business organisation assigns its accounts receivable to a third party, called a “factor”, at an agreed discount and a factoring fee. The facility typically provides immediate liquidity to finance the operations of an organisation. The products offered by the company include domestic sales and purchase bill factoring, advance against future receivables, export factoring and bill discounting under letters of credit, and allied financing services such as short term corporate loans.

IFL enjoys an early mover advantage in the domestic factoring business in India. Regulated by the RBI as an NBFC- ND – SI it is currently rated by CARE as A (SO) (A (Structured Obligation)) for its long term Rupee borrowings and A1+ (SO) (A One Plus (Structured Obligation)) for its short term Rupee borrowings.

IFL's promoter, IFCI, is India's oldest development financial institution, established after India's independence. It provides infrastructure financing, medium and long term project finance, and allied corporate advisory services. The company was incorporated as Foremost Factors Limited in December 1995 and after its acquisition by IFCI in 2008, it changed its name to IFCI Factors Ltd in January 2009.

IFL is raising funds to increase its capital base. The RBI requires companies like IFL to maintain a capital adequacy ratio (CAR) of at least 15 per cent of its risk-weighted assets, with the minimum requirement of Tier I capital being 10 per cent. The company's disbursements and business is directly related to amount of Tier I and II capital. IFL's total CAR was 20.39 per cent as of March 31, 2011, with Tier I capital comprising 14.06 per cent. The total debt to Shareholders' fund ratio stood at 6.18:1 as of March 31, 2011. By infusion of fresh equity share capital, IFL would be in a better position to expand its business.

The company's customer base is small and medium enterprises (SMEs) particularly in the manufacturing sector. SMEs contribute to around 45 per cent of the industrial output, and 40 per cent of exports. Their contribution towards GDP is expected to increase to 22 per cent by 2012 from 17 per cent in 2009. This segment where IFL garners most of its revenues from will drive its growth going forward too. The opportunities in servicing this segment are immense and IFL with its experience is well placed to capitalize on this opportunity.

IFLs own experience is very well complemented by the marketing network of its promoter company. IFL has built an extensive and diverse client base and expertise across sectors and geographies. Its representatives strategically spread across seven locations in India and it is in the process of expanding its regional marketing network further. All this will ensure that it does well going forward. We will wait for it come up with the specifics of the issue when it is ready to hit the markets which should throw light on how well it fares on the valuation front.