The Hindu Business Line : IL & FS Investsmart: Accept

Though the changes at the management and ownership level lend long-term credibility to the company's business, uncertainties may surface over the near term as it manages the transition.

Pick up in business volumes to take a while
Earnings likely to remain under pressure in the near-term
E*TRADE's investments to add value in the long-term

Shareholders of IL & FS Investsmart (IIL) can accept the open offer by E*TRADE Mauritius at Rs 210 per share which is slightly above the current market price of Rs 205.Uncertainties pertaining to the transition period along with lack of business momentum are likely to limit the scope for capital appreciation over the near term. The stock has also recorded a sharp rise of about 30 per cent over the last three months. As such, the open offer is likely to offer a good exit point.

IL & FS Investsmart (IIL) offers diverse financial services such as retail and institutional brokerage, margin financing, investment banking and distribution of third-party products. The regulatory ban on opening new depository accounts has had its impact on the company's business in the recent past.

Following the ban in April, the company's business volumes in both the primary and secondary markets have dropped. Though the ban was lifted (in July), the pick-up in volumes is likely to take a while owing to intense competition and volatility in the market. Lower volumes and slower pace of expansion in margin book are likely to exert pressure on earnings over the next few quarters. The retail business is at the core of Investsmart's strategy and has linkages with other businesses.

The offer is being made by E*TRADE Mauritius — a wholly-owned subsidiary of E*TRADE Financial Corporation, which is a global financial services company offering a range of financial services to retail, corporate and institutional customers under the brand E*TRADE, Financial. E*TRADE, Mauritius recently increased its ownership stake in IIL to 23 per cent giving it (the former) operational control.

Leveraging on E*TRADE's technology for online trading in particular (a fast-growing area that holds significant potential) and its experience in global financial services, IIL is likely to derive a competitive edge in the electronic global trading platform.

Through this open offer, E*TRADE intends buying another 20 per cent of the company's equity, which if/when successfully completed would make it a dominant shareholder. This, in our view, is likely to add value to the Investsmart's business over the long-term.

The key driver

Through its strong and established global brand and wider distribution platform, E*TRADE is likely to be a key driver of IIL's growth in the long-term. Though the acquirer has been providing strategic inputs to IIL for a while now and has committed management resources, greater level of clarity on its growth plans and strategy is expected to emerge only on completion of the open offer.

Though the changes in the management and ownership level may lend long-term credibility to the company's business, the same could act as a drag on the near-term momentum.

Offer details: The acquirer (E*TRADE Mauritius), along with persons acting in concert, intends to acquire up to 1.3 crore shares representing 20 per cent of emerging voting capital amounting to about Rs 275 crore. SBI Capital Markets is the manager to the offer. The offer, which opened on December 1 closes on December 20.

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