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Keynote Capitals has come out with report on Edelweiss Capital IPO. The firm has advised to subscribe the issue with medium term view.

Edelweiss Capital, a diversified financial services company, has opened for subscription with its initial public offering (IPO) of 8,386,147 equity shares of Rs 5 each for cash, at a price to be decided through a 100% book building process.

The issue will close close on November 20, 2007. The price band is between Rs 725 and Rs 825 per equity share of face value Rs 5.

Keynote Capitals report on Edelweiss Capital IPO

Recommendation - Subscribe with a medium term view

* Edelweiss Capital (ECL) is a diversified financial services company in India offering services to corporate, institutional and high-net-worth clients. It operates from 43 offices in 19 Indian cities. Strong, professional management.
* It operates through various subsidiaries to offer a wide spectrum of services. Impressive track record since inception in 1995. Topline and bottomline grew at a CAGR of 130% and 142% respectively during FY04-07.
* Bottomline growth mainly on account of expanding EBITDA margin, up from 46.3% in FY04 to 52.6% in FY07. Higher margin attributable to revenues from proprietary trading, institutional clients and investment banking. Its investment banking division has been scaling up operations, successfully lead managed IPOs of MIC Electronics, Meghmani Organics, C & C Construction etc.
* The IPO is aimed primarily at meeting margin money requirements indicating strong growth in the clientele base.
* ECL’s cash balance as of August 2007 stood at Rs 994 crore. In spite of the huge cash on its books, it is raising money primarily to have adequate liquidity and also for prepayment of loan of Rs 105 crore.
* When compared with peers MOFSL and Religare (which went public recently), across a few key parameters, ECL comes across as a mixed bag.
* EBITDA margin superior vis-à-vis that of MOFSL and Religare (32% and 37% respectively).
* MOFSL and Religare have presence in both institutional and retail segments. ECL, however, does not have much presence in the retail segment.
* ROE declined from 42.8% in FY05 to 18.8% in FY07 due to the expansion in net worth, attributable to the issue of preference share capital. However, in spite of this, ROE is on par with that of MOFSL and Religare.
* Broking income constituted 58.4% of ECL’s FY07 revenues; vis-à-vis 87% and 50%% for MOFSL and
Religare respectively. For ECL, income from arbitrage and trading constituted as much as 31% of FY07 revenues. We find the bias towards arbitrage and trading revenues to be a matter of concern.
* Lower leverage and higher interest coverage than that of Religare (however, ECL’s interest cost has increased substantially during the period of 5 months to August 31, 2007, due to sharp increase in debt.
* Reduction in promoter/group stake to just 35%, post-IPO is also a concern.
* Pre-IPO placements to Galleon Special Opportunities Master Fund, Sequoia Capital India and promoters in August, 2007 @ Rs514/517 per share, the last reflecting a discount of 60% to the IPO cap price.
* In line with expected growth in operations, we expect topline and bottomline growth CAGR of 70.3% each during FY07-09. As per our estimates, ECL’s IPO valuation (36.8xFY08E and 21.3x FY09E) is somewhere in between that of MOFSL (39.7xFY08E and 28.4xFY09E) and Religare (22.6xFY08E and 14.4xFY09E). However, in view of strong promoter background and brand equity, we recommend subscribing with a medium term view.

Investment Concerns

* Downturns or disruptions in securities markets could reduce transaction volumes, causing a decline in business. Revenues from operations arise largely during bullish phase in equity market which is not a consistent phenomenon.
* The subsidiary ESL was barred by securities regulators from dealing in securities of certain Indian companies in the past. ECL derives significant business from ESL, any effect in its operations shall affect the consolidated numbers.
* The subsidiary Edelweiss Capital USA LLC is into losses to the tune of Rs 0.09 crore as of August 31, 2007.
* Asset management, investment advisory, financing and wealth management are new businesses in which ECL has recently forayed. It does not have lot of experience in this field.
* There are conflicts of interest within promoter and promoter group. They have equity interests in other entities namely Ivy Financial Services Pvt Ltd and E Cap Partners.

Source: Moneycontrol.com