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Indiabulls IPO: How good is it?

September 03, 2004

 Issue Summary
  • Type
  • Public issue, 100% book building
  • Min. subscription
  • 365 equity shares
  • Size
  • Rs 435 m to Rs 517 m
  • Lead Managers
  • SBI Capital Markets, DSP Merrill Lynch
  • Price
  • Rs 16-Rs 19 per share
  • Listing
  • BSE & NSE
  • Face value
  • Rs 2
  • Promoters
  • Sameer Gehlaut, Rajiv Rattan and Saurabh Mittal
  • Shares on offer
  • 27.18 million
  • Promoters post
        issue holding
  • 44.7%
  • Issue Opens
  • September 6, 2004
  • Issue Closes
  • September 10, 2004

     Issue structure

     QIBsNon-Institutional InvestorsRetail Portion
    Number of shares13,593,759 6,796,880 6,796,880
    % of net offer to public (non-employees)*50%25%25%
    Minimum Bid/Application sizeRs 50,001 Rs 50,001365 equity shares
    Maximum Bid/Application sizeNot exceeding the size of the issueNot exceeding the size of the issueRs 50,000

       Objects of the issue
      • To promote new business activities like retail finance and asset management.

      • To upgrade fixed infrastructure (like installing Virtual Private Network (VPN) to connect branches) and opening another 75 branches by the end of calendar year 2006.

      • For the purpose of inorganic growth by way of acquiring strategic stake in other companies and further investment in subsidiary company Indiabulls Securities Limited (ISL).
       Background
    • Business
       

      Indiabulls is essentially engaged in providing financial services in equity, derivatives and debt markets. The company's other financial services include distributorship of insurance products, mutual fund advisory, depository for listed shares, equity research and other non banking financial services. The company operates through a network of 75 branches spread across the country. The graphs below indicate the breakup of the revenues from its online and offline brokerage businesses.

      Brokerage business (both online as well as offline) accounts for nearly all of the company's revenues from operations. While the online segment contributes 35% of brokerage revenues, offline contribution stands at 65%. As far as size of the business is concerned, the overall revenues from the brokerage business were Rs 695 m in FY04, while the overall revenues from operations were to the tune of Rs 696 m.

       
    • Promoters
       

      Sameer Gehlaut, Rajiv Rattan and Saurabh Mittal are the promoters of Indiabulls Financial Services Limited. While Sameer Gehlaut will have a 23.0% stake in the company post the IPO, Rajiv Rattan and Saurabh Mittal will have a post issue holding of 11.5% and 10.1% respectively. All the three promoters of the company are engineering graduates while Saurabh Mittal is a management graduate as well.

       
    • Sector
       

      Since Indiabulls derives most of its revenues from the brokerage business, its fortunes are very much dependent on the performance of the capital markets, i.e. debt, derivative and equity markets. The Indian equity markets have grown from strength to strength in the last decade with combined daily volumes of all segments on the BSE and the NSE touching Rs 232 bn in April 2004, from Rs 5 bn in FY96. Total shareholders in the country are over 20 m (2% of population) and this is the third largest after the US and Japan, in absolute terms. However, if one were to compare the percentage of all households in India that are invested in the stock markets, it is only about 1.9% as compared to an estimated 52% (including indirect ownership by way of mutual funds) of all households in the US. This highlights the long-term potential for the sector.

       Reasons to apply
    • Online trading potential is huge:  Online trading accounted for 5% of overall market in FY04 as compared to an estimated 3% in FY03. Indiabulls currently has almost 20% market share of volumes in the Internet trading space. The table below indicates the growth in volumes of the Internet trading segment on the NSE over the last few years. The growth is indicative of the potential of this segment, which we believe is likely to be robust going forward as well. This is primarily driven by increasing penetration of computers, significant decline in Internet charges, convenience of usage and cost advantage. To put things in perspective, the offline brokerage on equities is around 1.0% as compared to 0.5% in the online trading space.

      NSE online trading statistics...
       Enabled members*Registered clients*Trading Value (Rs bn)% of total trading value
      FY003 -   
      FY0161 123,578 73 0.5
      FY0282231,899 81 1.6
      FY03 CM80346,420 154 2.5
      F&O**1369,340 51 1.4
      FY04 CM70413,454 379 3.5
      F&O**14164,642 430 2.0
      CM: Cash Market, F&O: Futures and Options market    * At the end of the financial year
      ** trading value for F&O segment compiled from June 2002
      Source: NSE website
       
    • Advisory services:  Indiabulls is also into mutual fund and insurance advisory businesses. Though this field is extremely competitive and requires significant research skills, these are highly profitable business segments. Though these businesses currently account for an insignificant portion of overall revenues, considering the penetration levels of mutual funds and insurance in the country, prospects are promising.

       
    • Aggressive growth plans:  Indiabulls has set aggressive targets to expand its business in the offline space. This includes investments in upgradation of branch network and opening another 75 branches by the end of calendar year 2006 (150 in total). The company has also indicated its intent to acquire strategic stake in other companies towards growing the business inorganically.

       Reasons not to apply
    • Vulnerable to stock market fluctuations:  Nearly all of the company's revenues are derived from stock broking business (online as well as offline), which is a major cause of concern. Stock markets, like any economy, are cyclical in nature. While bull phases are generally accompanied by significant growth in brokerages (as was seen in FY04), during downturns, revenues could fall at a faster rate. While the company has announced its intention to enter the asset management business, presumably to reduce its dependence on one revenue stream, we feel that the company does not have any prior experience in this business and to that extent, risks are enhanced.

       
    • Low entry barrier in the online space:  It is easy for an established offline player (brokerages, banks and NBFCs) to enter the online trading space. As a matter of fact, most of the current online trading players initially started off with an offline presence. Considering the cost benefits of being in the online space, this segment could attract lot more competition going forward.

      Also, Indiabulls is hampered by the lack of banking presence, which is an essential part of the whole online broking transaction process. For instance, almost 15% of the online trading transaction by Indiabulls' customers is carried out through the HDFC Bank's payment gateway. This in itself might lead to conflict of interest, as the HDFC Group also offers its own online trading service through HDFC Securities. There exists the threat of the key bank withdrawing its gateway support in order to promote its own interest. More importantly, there exists the threat of poaching of the current online trading customers of Indiabulls. Banks, due to a captive base of customers are in a better position to offer retail broking services to its clients. The entry of HDFC Bank and ICICI Bank in the online trading space could be viewed in this context.

       
    • Past growth might not be maintained:  Indiabulls has posted a strong growth in its business in its limited period of existence. The growth has been to a large extent aided by the extraordinary rise in the stock markets in FY04. Keeping this in mind, it is imperative to note that the past performance of the company is not indicative of the future performance and to that extent investors need to be cautious.

       Financial Performance

        (Rs m)FY02 FY03 FY04
        Sales 130 258 698
        Other income 3 9 22
        Total income 133 267 719
        Expenditure 73 149 354
        Operating profit 57 109 343
        OPM (%) 43.9% 42.4% 49.2%
        Interest expenses 9 30 45
        Depreciation 7 9 11
        Profit before tax 44 79 309
        Tax 3 28 115
        Net profit 41 51 194
        Minority interest - - 0
        Equity in affiliates - - -
        Extraordinary item 7 0 1
        Net Profit after adjustments 47 51 194
        NPM (%) 36.6% 19.9% 27.8%
        No. of shares 78 78 87
        EPS (Rs) 0.5 0.6 2.2

       Indiabulls Vs Ameritrade

      Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.


      More Specials

    • Ameritrade is one of the largest online brokerages in the US and, thus, we felt the need to compare Indiabulls with the same. While Ameritrade is much larger than Indiabulls in terms of size of operations, Indiabulls compares favorably in terms of operational as well as return metrics. However, the graph highlights the vulnerability of companies like Ameritrade during a bearish phase wherein the company has been in losses at the net level in three of the last five years. Looking at the finances of Ameritrade over the last five years, it is apparent that fixed cost form a larger share of overall expenses and are inflexible during downturns.

      As far as the valuations are concerned, while Indiabulls looks cheaper in comparison to Ameritrade, it must be kept in mind that Ameritrade has a matured business model. Thus, considering that the strong growth witnessed in the last three years is unlikely to sustain, we believe that the risk reward equation is skewed more towards risks. To that extent, investors need to exercise caution.

      Comparative parameters
       IndiabullsAmeritrade *
      Revenues (Rs m) 698.0 28,845
      OPM (%) 49.2 55.2
      NPM (%) 27.8 28.0
      ROE (%) 18.9 20.5
      ROA (%) 8.6 1.6
      P/E ratio (x) 8.0 18.6
      No. of clients (in '000s) 30 3,412
      Revenues per client 23,591 8,454
      * Year ending September, client data for December ending 2003, revenues converted in Rupee terms

       Shareholding

      (%)Pre-OfferPost-Offer
      Promoters 59.6 44.7
      Others 40.4 30.3
      Public - 25.0
      Total 100.0 100.0

      Disclosure: Quantum Information Services Limited is a competitor of Indiabulls in the Equity and Personal Finance side.

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