Investors can refrain from investing in the initial public offering of Inventure Growth & Securities (IGSL), given the increasing competition and declining commissions in the broking industry. At a time when even the established brokers with diverse revenue streams such as Motilal Oswal Financial Securities and Edelweiss Capital are finding it difficult to grow their broking income, IGSL with a limited client base, concentrated regional exposure and lesser brand recall doesn't make for an attractive investment bet.

The offer valuations appear pricey too. At the price band of Rs 100-117, it is priced at about 23-26 times its FY11 per share earnings on a pre-offer equity base. This is much higher than the valuations enjoyed by established peers such as MOFS and India Infoline (11-13 times). With the offer likely to result in an equity dilution of about 33 per cent, the valuations would become even more unattractive on a post offer equity base.

Challenges ahead

IGSL offers trading services in equities and derivatives, debt, commodities and currency futures segment. It also offers loans against shares, wealth management, and distributes financial products through its many subsidiaries. Headquartered in Mumbai, it operates through 233 business locations including branches, franchisees and sub-brokers located across 29 cities and towns. Of these, 187 are located in Maharashtra and 17 are located in Gujarat. To that extent, the company has a concentrated regional exposure.

As of June 30, it had 15 branches located across the western region and served over 35,877 clients (including institutional). Such a dominant regional presence in a highly competitive market may, therefore, limit the company's growth opportunities. While the company is looking to expand its geographical presence, it may be a while before the expansion begins to pay. Besides with the current challenging market conditions, growth even in the existing regions would be difficult.

Deployment of proceeds

IGSL has earmarked a substantial portion of the IPO proceeds (about Rs 30 crore) for its loan against shares business (LAS), offered through its NBFC subsidiary IFPL. The subsidiary serves 96 clients presently. The move to induce cash into the subsidiary, therefore, would enable it to service more clients.

It would help IFPL earn higher interest income from its lending activities, while also generate additional brokerage income for IGSL. However, for sustained growth in this business, it would be the company's risk-management techniques (aside of market conditions) that would hold the key. In this regard, the limited track record across market cycles is a bit of a negative.

Its financial scorecard, lumpy and chequered, too doesn't provide much confidence. Its income from operations and profits in the year-ended March (consolidated) fell by over 21 per cent and 58 per cent to Rs 31 crore and Rs 6 crore respectively. Lower income and higher staff costs drove the operating margins down to 24 per cent from 46 per cent seen in FY10. This, in addition to higher interest costs, led to a substantial fall in profits.

Crucial factor

While IGSL isn't the only broking company to report a fall in revenues and profits, its high dependence on broking business (71 per cent and 90 per cent of total revenues in FY11 and FY10) works against it. The company plans to use about Rs 20 crore of the IPO proceeds towards funding its working capital. While this would definitely relieve some pressure on its finances, incremental growth would largely hinge on its broking income only. Addition of clients and overall market conditions, therefore, become crucial.

The initial public offer is open till July 22. The company seeks to raise Rs 70-81 crore through this offer.

Related Topics
comment COMMENT NOW