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Microsec financial services ltd ipo note

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Microsec financial services ltd ipo note

  1. 1. Microsec Financial Services Ltd. IPO Note Price Band (Rs.): 113 - 118 Retail Research 16 September 2010 Sector: Financial Services SBICAP Securities Limited, Corporate Office: 191, Maker Towers 'F', Cuffe Parade, Mumbai 400 005 Tel.: (Board) +91 22 30273300/01 • Fax: (022) 30273420. For a list of our branches refer to our website: www.sbicapsec.com SBICAP Securities Limited, Corporate Office: 191, Maker Towers 'F', Cuffe Parade, Mumbai 400 005 Tel.: (Board) +91 22 30273300/01 • Fax: (022) 30273420. For a list of our branches refer to our website: www.sbicapsec.com MFSL is a non-banking financial company registered with the RBI and it is engaged in the business of financing, which primarily comprises giving loans against shares, and making investments. In its financing and investment business, MFSL offers loans against shares to its clients, secured by liquid and marketable securities at appropriate margin levels. Its LAS business helps their clients leverage their equity market positions to take increased exposure. The company was originally incorporated as 'Satyam Fiscal Services Private Limited' and the name was changed to 'Microsec Financial Services Limited' on October 21, 2005. It is also the ultimate holding company of the Microsec Group. The promoters acquired the entire shareholding of the company from the previous shareholders. Prior to its acquisition by the current promoters on August 1, 2005, the company was a financial services company and was engaged in the business of financing and investment management. MFSL offers loans to clients, including brokerage clients of MCap and MCL, against specified securities which fall within the 'approved list' of the Microsec Group. Only a certain percentage of the market value of the securities is advanced as loan, and this helps to provide for market fluctuations in the value of the security. The client is required to deposit and maintain a appropriate margin and is responsible for infusing additional funds in case the margin falls below the prescribed limit, failing which MFSL has the power to sell the securities to the extent that would be required in order to maintain the required margin. Margin levels of exposure can be monitored on a real-time basis as the selling price of the securities securing the loan are usually transparent and easily accessible on a stock exchange. As at March 31, 2010, 27 clients of MFSL maintained a margin of 50% or more and the loan amounts outstanding in respect of such clients aggregated to approximately Rs. 140.94 million; 44 clients maintained a margin between 25% to 50% and the loan amounts outstanding in respect of such clients aggregated to approximately Rs. 155.83 million; one client maintained a margin below 25% and the loan amounts outstanding in respect of such client aggregated to approximately Rs. 8.35 million. MFSL had no non-performing assets as on March 31, 2010. Until fiscal 2009, no material amount was written off on account of bad debts. However, MFSL paid Rs. 39.50 million as liability for early recall of loans during the Fiscal 2009. MFSL assigned receivables of certain loan accounts and incurred a loss of Rs. 11.27 million in such assignment during fiscal, 2010. ISSUE DETAILS: Date of Opening 17th September 2010 Date of Closing 21st September 2010 Issue Size Rs. 147 cr. No. of Share Offered 12,500,000 (1.25 Cr.) Face Value Rs. 10 BRLM SBI Capital Markets Ltd. Registrar Link Intime (I) Pvt. Ltd. Bid Lot 52 Post Issue Share Capital Rs. 31.81 Cr. Source: RHP, SSL Research For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus. PRE ISSUE No. of Shares % Promoter & Promoter Group 17,427,633 90.25 Non Institutions 1,882,867 9.75 Public - - Total 19,310,500 100.00 SHAREHOLDING PATTERN POST ISSUE No. of Shares % Promoter & Promoter Group 17,427,633 54.79 Non Institutions 1,882,867 5.92 Public 12,500,000 39.30 Total 31,810,500 100.00 OBJECTS OF ISSUE Expansion of financing business of the company 113.00 Expansion of MCap's domestic operations by increasing network of branches 8.00 Enhance MCap's existing technological capacity 7.50 General corporate purposes [•] Total [•]
  2. 2. Microsec Financial Services Ltd. Financial Services SBICAP Securities Limited 16 September, 2010 • 2 Key Strengths Integrated business model: The Microsec Group operates as an integrated group, providing various financial products and services to its target client base. The group operates through the company and its subsidiaries, MCap, MRPL, MTL, MIBL, MCL and PRP. The integrated service platform allows them to leverage relationships across lines of business and their industryand product knowledge byproviding multi-channel delivery systems to their client base, thereby increasing their ability to cross-sell their products services. Research and knowledge based organisation: They have adequate base of research with delivery capabilities. Their research reports are covered by print and electronic media at pan India level. They benchmark their research calls against relative index which provides accountability to research. Theyhave started a research based retail distribution channel namely "Club Kautilya" through MCap. Brand recognition and strong relationships: They believe that success in the financial services industry is derived from brand recognition and client relationships. They believe that 'Microsec' is a well-recognized brand, especially in eastern India. They also believe that their clients associate the 'Microsec' brand with differentiated and quality services, solutions to strategic and financial challenges and execution of their clients' transactions. They focus on nurturing long-term relationships with their corporate, institutional and high net-worth individual clients. Theybelieve that these relationships provide them with an advantage in attracting deal flow and securing transactions and enable them to offer their clients diversified products and services and increase their revenues per client. Strong regional base with emerging pan India presence: Microsec Group enjoys a strong presence in eastern India. As at June 30, 2010, they had a network of 239 branches, out of which 178 branches were located in West Bengal. They have 26 branches in states other than eastern states and intend to strengthen their pan-India presence, they believe their presence in eastern India provides them with a competitive advantage and presents them an attractive opportunity to grow their client base and revenues. For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus. • Source: RHP ~ Integrated business model ~ Research and knowledge based organisation ~ Strong regional base with emerging pan India presence
  3. 3. Microsec Financial Services Ltd. Financial Services SBICAP Securities Limited 16 September, 2010 • 3 Business Strategies Geographic expansion: They plan to expand their operations into smaller cities and towns that they believe are under-serviced by financial services companies or where they believe they can develop their business. They may also consider, from time to time, growth opportunities through the inorganic route. Whilst they propose to offer their range of products and services across their businesses through their expanded network, they also plan to set up 200 exclusive outlets of 'Club Kautilya' within a period of two years. They also plan to set up a network of 'Microsec Enterprises' (a network of entrepreneurs as channel partners for distribution of financial products) and 'Microsec Network Services' (a network of professionals, such as CAs, as channel partners for distribution of multiple financial products) through a combination of the issuer and its subsidiaries, throughout India. Strengthening institutional business: They have already set up desk through MCap for servicing the institutional business. Theyhave filed applications for empanelment to several institutions. Theyhave alreadybeen granted empanelment bynine institutions out of which five have started business. Theyplan to establish and scale the broking business with institutions. The institutional desk will also provide additional support to their investment banking business. Strengthen research capabilities and continue to develop client relationships: They believe that they have adequate research capabilities in MCap that complement the business of Microsec Group, particularly their brokerage business. They intend to develop their research division as a separate profit centre to provide research services to their clients, including their brokerage clients. They propose to enlarge their team of research analysts and advisors and dealers to strengthen relationships with their clients. They propose to expand their business by increasing the number of their client relationships in the Issuer and its Subsidiaries. They believe that increased client relationships will add stability to their business. Expand internet based platform for financial services and products: They are currently in the process of setting up an internet-based platform through MCap for providing their products and services to their clients, particularly the brokerage clients. They believe that internet based services are cost effective, less risky and transparent. They also propose to offer wealth management, insurance broking, financial planning and related services through internet-based platform. They have acquired PRP Technologies Limited, company which launched an internet-based personal resource planning application to provide information management services to individuals. They believe that an internet based, easily scalable product delivery model will enable them to respond effectively to the competitive challenges of discount equity brokerages. For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus. • Source: RHP ~ Geographic expansion ~ Strengthening institutional business ~ Strengthen research capabilities and continue to develop client relationships
  4. 4. Microsec Financial Services Ltd. Financial Services SBICAP Securities Limited 16 September, 2010 • 4 Risk Factors Outstanding litigation against the company, its subsidiaries and the group company The company, subsidiaries and group companies are involved in disputes with various parties arising from their operations from time to time. Their legal proceedings are pending at different levels of adjudication before various courts and tribunals. Should any new developments arise, such as a change in law or rulings against the company or its subsidiaries by appellate courts or tribunals, the company or its subsidiaries may need to make provisions in its financial statements, which could adversely impact its business results. Furthermore, if significant claims are determined against the company and it is required to pay all or a portion of the disputed amounts, there could be a material adverse effect on the company's business and profitability. Funding requirements and the deployment of the net proceeds are based on management estimates and may be revised from time to time, which may adversely affect the results of operations Their funding requirements and the deployment of the net proceeds have not been appraised by anybank, financial institution or any other independent institution. Substantial part of the funds raised through this issue is proposed to be used for the financing activities of the company. In fiscal 2010, the financing activity contributed approximately 26% of their standalone revenues, but since this activity has been commenced recently since May 2005, their results may differ substantially going forward. Further, in view of the highly competitive nature of the industry in which they operate, they may revise their management estimates from time to time and consequently their funding requirements may also change. This may result in the rescheduling of their funds deployment and a change in their proposed expenditure for a particular object which may adversely affect their results of operations. Extended loans against shares, or margin loans, to the clients, and any default by a client coupled with a downturn in the stock markets could result in substantial loss The company and MRPL, at times, also extend significant credit to clients at specified interest rates for the purchase of shares. In the case of highly volatile stock market or adverse movements in stock price, clients may not be able to repay their loans, and the collateral securing the loans may have decreased significantly in value, resulting in losses they may not be able to support. For instance, in fiscal 2010 an amount aggregating to Rs. 11.27 million was written off as loss on assignment of receivables, in the books of the company, in respect of three clients. Operations are significantly concentrated in the eastern and north eastern regions, and failure to expand the operations may restrict growth and adversely affect business Historically, their operations have been focused on the eastern and north eastern regions of the country. Accordingly, a very substantial part of their revenues are generated from operations in eastern and northeastern India. Failure to expand their operations either through branches or business associates or otherwise may restrict their growth potential and adversely affect their business plan. This will adversely affect business operations and growth of business. ~ Outstanding litigation against the company, its subsidiaries and the group company For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus. • Source: RHP ~ Funding requirements and the deployment of the net proceeds are based on management estimates ~ Extended loans against shares
  5. 5. Microsec Financial Services Ltd. Financial Services SBICAP Securities Limited 16 September, 2010 • 5 Financials & Valuations Snap Shot: For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus. Microsec Financial Services Ltd. (Rs. cr.) Pre Issue Post Issue FY10 FY10 Lower Price Band (Rs.) Upper Price Band (Rs.) Particulars 113.00 118.00 Net Sales 57.09 57.09 57.09 Total Income 58.47 58.47 58.47 EBIDTA 33.61 33.61 33.61 PAT 24.45 24.45 24.45 Equity Share Capital 19.31 31.81 31.81 No of Equity Shares 1.93 3.18 3.18 Face Value 10.00 10.00 10.00 EPS 12.66 7.69 7.69 CMP 118.00 113.00 118.00 Cash and Bank 19.31 19.31 19.31 Debt 4.01 4.01 4.01 Market Cap 227.87 359.46 375.36 PE(x) 9.32 14.70 15.35 Enterprise Value 212.57 344.16 360.06 Mcap/Sales (x) 3.99 6.30 6.57 EV/Sales (x) 3.72 6.03 6.31 EV/EBIDTA (x) 6.33 10.24 10.71 EBIDTA/Sales (%) 58.87 58.87 58.87 Source: RHP, SSL Research Particulars. Edelweiss Cap. India Infoline Motil.Oswal.Fin. Microsec Financial Services Ltd. CMP (Rs) 52.50 99.15 163.75 113.00 118.00 TTM Sales (Rs Cr) 1,025.70 1,247.78 606.87 57.09 57.09 M.cap (Rs Cr) 3,942.75 2,884.27 2,361.28 359.46 375.36 P / E (x) 16.97 13.55 13.68 14.70 15.35 EV / Sales (x) 4.83 2.88 3.36 6.03 6.31 EV / EBIDTA (x) 8.41 7.99 8.02 10.24 10.71 M.cap / Sales (x) 3.84 2.31 3.89 6.30 6.57 OPM (%) 57.47 36.08 41.86 58.87 58.87 NPM (%) 22.65 17.06 28.44 42.83 42.83 Relative Valuations Source: RHP, Capitaline, SSL Research
  6. 6. Microsec Financial Services Ltd. Financial Services SBICAP Securities Limited 16 September, 2010 • 6 DISCLAIMER: SBI Capital Markets Limited (SBICAP) is a full-service, integrated Investment Banking company and its wholly owned subsidiary SBICAP Securities Ltd is a Stock Broking Company having memberships on BSE and NSE. SBICAP is also an underwriter of securities. ("SBICAP and SBICAP Securities Ltd. are collectively referred to as SBICAP Group") SBICAP has Investment Banking, Advisory and other business relationships with a significant percentage of the companies covered by our Research Group. Our research professionals provide important inputs into our Investment Banking and other business selection processes. 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