Inventure Growth & Securities IPO: Unrealistic valuations being demanded

Makes sense to avoid the issue and invest in listed entity MotilalOswal or Edelweiss instead

Inventure Growth & Securities Limited (IGSL) is tapping the capital markets with its IPO for 70,00,000 shares in a price band of Rs 100-117. The issue opens on Wednesday the 20th of July and closes on Friday the 22nd of July 2011.

Price Band  Rs 100 – Rs 117
Offer size in shares 70,00,000 Equity Shares 
Issue Size Rs 7000 lacs at Rs 100 to Rs 8190 lacs at Rs 117 
QIB’s 35,00,00 Equity Shares 
Non Institutional Investors 10,50,000 Equity Shares 
Retail Investors 24,50,000 Equity Shares 
Book Running Lead Manager Intensive Fiscal Services Private Limited
Issue Opening Date Wednesday 20th July
Issue  closing date  Friday 22nd July
IPO Grade  ICRA grade 2/5 and FITCH grade 2/5 indicating below average fundamentals
Paid -up Capital Pre IPO 1,40,00,000 Equity Shares 
Paid -up Capital Post IPO 2,10,00,000 Equity Shares 
Market Cap post listing Rs 21000 lacs at lower band to Rs 24570 lacs at higher band
Bid Lot 50 shares
Bidding Amount for Retail 1700 shares at Rs 117 or Rs 1,98,900 per application

Inventure Growth & Securities Limited is a financial intermediary offering a host of services under one roof. Services offered include comprehensive advisory services that are well diversified from trading services in equity cash and derivatives market, commodities and currency futures segment to financing activity, wealth management, and distribution of financial products. IGSL has direct interests in equity, debt and currency futures broking, depository activities, PMS and other activities like commodity broking, non-banking financial services, wealth management and sale of insurance products are provided through its subsidiaries.
The company has been able to withstand the tough competitive environment since the global economic downturn which was witnessed in 2009-10. The company did lose on profitability but was able to survive the onslaught of dropping business.

Objects of Issue
The objects of the issue are as follows: –

1. Investment in Subsidiary IFPL Rs 3000 lacs
2. Augmenting long term working capital requirement Rs 2000 lacs
3. General Corporate purposes XX
4. Public Issue Expenses XX

The bulk of the money is being raised for investment in the subsidiary which is a non-deposit taking NBFC registered with RBI. The proceeds would help this company take increased exposure.
The company reported gross revenues of Rs 28.36 crs in March 2009 which rose to Rs 46.27 crs in 2009-10 and fell to Rs 41.35 crs in 2010-11. The net profit on a consolidated basis after tax and minority interest was Rs 5.53 crs which increased dramatically to Rs 14.71 crs and fell equally sharply to Rs 6.21 crs.

Rupees in lacs year 2009 year 2010 year 2011
Income from Operation 2422.48 3925.5 3116.43
Other Income 413.42 701.21 1018.63
Total Income 2835.90 4626.71 4135.06
Total Expenses 2077.28 2593.55 3198.65
Profit before tax 758.62 2033.16 936.41
Taxes 207.91 563.78 317.52
Net Profit After Tax 550.71 1469.38 618.89
Less Minority interest -2.64 -1.89 -2.34
Net Profit After Minority Interest 553.35 1471.27 621.23
NET MARGINS 19.42 31.76 14.97

The income from operations has dropped significantly and the present broking scenario is not very conducive. There has been substantial downsizing in a large number of brokerage houses and there have been some of these which have shut shop completely in recent times. Cash market turnover on the NSE has dropped below the 10,000 cr mark on a daily basis which till a year ago used to average over 15,000 crs on a daily basis. This drop is significant and is a cause of worry going forward.

The company has chosen to compare itself with companies like Arihant Capital Market, Geojit BNP Paribas, Khandwala Securities and Emkay Global Financial Services Limited. IT has not compared itself with the industry leaders like MotilalOswal or Edelweiss. MotilalOswal had revenue of Rs 589 crs and a net profit of Rs 137 crs. The company has an earnings per share of Rs 9.52 for the year ended March 2011. Edelweiss has gross revenues of Rs 1491 crs and a net profit of Rs 246.92 crs, an EPS of Rs 3.28. When such large companies which have the wherewithal to withstand the present slowdown and are available at valuations which are less than a third demanded by IGSL, I believe one has little or no choice about this issue. Very clearly the fact that the merchant banker is making his debut with this issue it appears he has got his valuation all wrong. The price band recommended is atrocious and extremely aggressive. The company has also chosen not to have any road shows in Mumbai for its IPO which is yet another way of not wanting to face the media and analysts embarrassing questions about the pricing and valuation.

The broking industry is passing through very tough times and consolidation of the industry is yet to happen, even though the beginning has been made. When large players and market leaders are available at valuations which are around ten times the earnings the need to subscribe for a company which is struggling and does not have the size at valuations close to four times that of the leaders simply makes no sense. There is of course the standard practice that small and midsized IPO’s receive support from “friendly intermediaries” and this may also be witnessed in this issue. I still believe it does not make sense in applying for such issues at such steep valuations. If one believes that the industry is good and one should invest, I feel a better investment would be in the shares of MotilalOswal Financial Services Limited.  

SEBI Disclaimer: – I do not intend to subscribe to the above issue.

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