SPS Finquest To Come Up With SME IPO

SPS Finquest (SFL), a Mumbai-based non-banking financial company (NBFC), has filed draft prospectus for its public issue on the BSE SME platform. It has plans to raise a fund of Rs 25.08 crore through a fresh issue of 33.44 lakh equity shares. The offered shares are available at a fixed price of Rs 75 per share. Lead managers, also the market maker to the issue is Networth Stock Broking.

The main objective of SFL behind raising the fund is to augment its capital base and repay its existing interest cost debt. The company has a total long-term debt of Rs 59.97 crore as on September 30, 2013.

SFL, formerly known as Ceenik Holding Private Limited Company, was incorporated in the year 1996. It is a RBI registered non-deposit taking NBFC. SFL is engaged in advancing loans against securities to its client. It is a part of SPS group, which is involved in the business of providing brokerage services to its clients who invest in the capital market. The NBFC arm (SFL) of the group facilitates fund against securities to its clients to enable trading transactions.

On the financial front, SFL posted revenue of Rs 7.87 crore for FY13. The annualised (9M) FY14E revenue for the company will be Rs 4.94 crore, which is 37% down from previous year. Net profit of the company for FY14E will be Rs 0.18 crore, a drop of 51% on yearly basis. 

The book value of the company is Rs 2.45 crore as of September 30, 2013. The company has total assets of Rs 62.57 crore as of September 30, 2013. However, the assets on SFL's books are predominantly funded by long-term borrowing, which stood at Rs 59.97 crore as on September 30, 2013. The company has borrowed the loan from its shareholders at an interest rate of 11% as per the filed DRHP. As per our telephonic conversation with Mr. Girish Jajoo, Managing Director, SFL lends its funds to its borrowers at an interest rate of 12% to 24% against their shares and mutual fund holdings. 

Further, on the valuations front, SFL with the issue price Rs 75 per equity share, the company stock’s price to book value (P/BV) is 11.3x. Its book value per equity share is of Rs 6.64 as of September 30, 2013. SFL has a higher P/BV ratio as compared to its peer. In the listed space, the SFL's peers such as BCB Finance, Titan Securities and HB stockholding have a P/BV of 1.4x, 0.58x and 0.17x respectively. Also, the margins of the company dropped dramatically in the past three years (FY12-FY14E). Operating and net margin stands at 5.48% and 3.59% for annualised FY14 from 20.9% and 14% in FY12 respectively. Considering the contracting profitability of the company and its considerable higher valuation compared to its peers, we advise investors to stay away from this SME IPO.