Motilal Oswal Securities IPO Review

Capital gains

IPO REVIEW

Mumbai August 20, 2007

Motilal Oswal Financial's issue is attractively priced and provides
scope for price appreciation.

Players engaged in equity broking business are having a party. Thanks
to India's fast-growing economy, foreign institutional investors
(FIIs) registered with SEBI have almost doubled in the last six years
pumping in billions of rupees in Indian equities.

Further, retail and corporate investors are getting more interested in
stocks as their investible surplus is rising. Consequently, stock
prices of equity broking players like Indiabulls, India Infoline and
Geojit Financial services are soaring on the bourses.

This is encouraging players such as Motilal Oswal Financial Services
(MOFS) to go public. Also, as the broking business gets more
competitive, customers demand better services such as margin
financing, which needs more capital for the broker.

The company, which is the holding company, offers equity broking,
commodity broking, mutual fund investments, private equity, investment
banking and portfolio management services (PMS) through its
subsidiaries namely Motilal Oswal Securities (MOSL), Motilal Oswal
Commodities Brokers (MOCB), Motilal Oswal Venture Capital Advisors and
Motilal Oswal Investment Advisors.

PEER COMPARISON
Cons. financials (FY07)
(Rs crore) Sales % chg Oper.
profit % chg Net
profit % chg P/E Mcap
(Rs bn)
India Infoline 416.00 95.31 324.20 106.89 75.60 53.66 38.87 35.00
IL&FS Investsmart 235.10 6.52 73.80 -28.56 40.00 -42.00 28.97 13.00
Indiabulls 1241.00 102.45 745.00 80.83 443.00 75.10 22.55 122.00
Motilal Oswal 379.10 39.10 121.80 34.30 69.58 15.31 20.3-23.6 20-23
Geojit 132.00 -36.23 40.70 12.74 25.20 11.01 25.38 8.60


The objects of the issue are to grow each of these businesses. The
company is offering about 2.9 million shares in the price band of Rs
725-825 per share out of which around 0.14 million will be reserved
for employees.

The issue will collect between Rs 216-246 crore, and constitute 10.5
per cent of the post issue equity capital. About 50 per cent of the
issue proceeds will be used for margin financing for its clients. The
rest of the money will be spent on expanding the broking business by
meeting higher working capital requirements, office space and
technology.

Worth investing

Market experts feel the pricing of the issue leaves enough money on
the table due to reasonable valuations amid great opportunity. Besides
valuations, the company's issue looks attractive on various other
business parameters and offers several triggers for the future.

It has a strong distribution network, research capabilities,
experienced promoters and a wide basket of products, all of which are
required for a successful broking operation.

MOFS has a wide distribution network spread across 1,200 business
locations in 377 cities and towns through its own operations and 815
business associates. Besides pursuing inorganic growth strategies, the
company is also tying up with leading banks (the recent tie-up with
State Bank of India) for their online broking services.

MOFS acquired three companies in the past one year. As a result of
these initiatives, the company's clientele is increasing and its
market share is rising. At the end of March 2007, the company's retail
client base in the equity broking business grew 50 per cent to 2.38
lakh, while the same in the commodity broking business tripled to
4,718 clients.

Further, the company was empanelled with 251 institutional clients
including 165 FIIs. As a result, the company's market share in the
cash equity market has risen consistently over the last few years from
1.05 per cent in FY03 to 5.15 per cent in FY07.Similarly its market
share in equity derivatives has jumped 322 basis points to 3.72 per
cent in the same period.

But acquiring clients is not enough; providing them value added
service is a bigger requirement, says the company management. And this
is possible through its strong research focus to generate ideas (its
research has won awards from Asiamoney. In March 2007, the company had
25 equity research analysts covering 221 companies in 26 sectors and
nine analysts covering 26 commodities.

The company's future strategies also instill confidence. MOFS plans to
increase its market share further in retail and institutional broking
businesses and offer new products and services.

The company is also open to inorganic expansion. It plans to boost its
fee based income by growing its investment banking, portfolio
management services, venture capital and entering distribution of
insurance products in addition to mutual funds.

Some risks though

Investing in equities involves high risk. So does investing in the
equity broking business. The most common risk is that equity broking
business is susceptible to market volatility especially in a emerging
market like India. Further, there is a risk in terms of delinquencies
by customers if markets fall too fast.

Customers have to pay an initial margin for their investments, but if
the value of the investments falls a lot quickly, and if the margin is
not enough to defray the losses, then the broker has to cough up the
balance in case the customer defaults. Further, in services-led
industry, the ability to retain good talent especially for a research-
focused organisation like Motilal Oswal is a challenge.

Relatively safe

However, MOFS is well-placed to survive and flourish even if the
operating environment deteriorates. Its client base is hedged between
institutional and retail business.

Besides, equity broking, it is also foraying in other areas such as
wealth management, PMS, private equity and investment banking which
are less cyclical and are fee-based businesses.

Plus, it has the India growth story to boot. According to Motilal
Oswal, chairman and managing director, MOFS, "Indian equity markets
will remain attractive as the GDP growth shows no signs of slowing
down and for the next two years corporate profits are expected to grow
at a robust 20-25 per cent."

Further a low equity participation of about two-three per cent
(including investing through mutual funds) means that opportunity will
be huge. Based on this, the broking industry should do well.

Promoters Motilal Oswal and Raamdeo Agrawal are veterans in the equity
broking business with two decades of experience each in the financial
services industry and are qualified chartered accountants. The company
is ranked first and second in some of Asiamoney

Moreover the company is not facing any problem on the employees front.
Says Oswal, "Our strategy is to give promotions to the internal staff
and recruit people more at the junior level, which takes care of
attrition and employee costs."

Growth ahead

Moreover, the company is debt-free, which gives it enough scope to
leverage and grow in future. In FY07, the company's consolidated
revenues jumped 39 per cent to Rs 379 crore with equity broking
business constituting about 80 per cent.

Even as the company grows its new businesses, equity broking will
still form a significant portion of its revenues. Emkay Share expects
80 per cent growth in MOFS' revenues in FY08, 60 per cent of which
will be contributed by its retail broking business.

On the other hand, profits grew at a lower rate in FY07 as is the case
with most broking companies due to competitive brokerage rates offered
on the one hand and higher employee and other operational costs.

Reasonable valuations

At the given price band, MOFS' market capitalisation stands third at
Rs 2050-2340 crore after Indiabulls Financial Services and India
Infoline in line with its revenues and profits. The issue is priced at
20.7-23.6 times its consolidated earnings for FY07.

While MOFS at both the lower and upper price band is cheaper than
India Infoline, it is cheaper than Indiabulls Financial Services only
at the lower end. Kashyap Jhaveri from Emkay Shares and Stock Brokers
recommends subscribing to the issue as he expects investors money to
double in less than a year.

Adds Kshitij Prasad of Anand Rathi Securities, "The issue looks
attractive as there are few listed broking companies available in the
market." For investors, MOFS should be a good long-term bet.