Edelweiss Capital is entering the capital market on 15th November 07, with a public issue of 83.86 lakh equity shares of Rs.5 each in the band of Rs.725 to Rs.825 per share.
Edelweiss is a known name in the financial market and the company with its nine wholly owned subsidiaries and two subsidiaries, is offering integrated financial services and products, including, investment banking, institutional equities, private client brokerage, wealth management, asset management and investment advisory services, insurance brokerage and wholesale financing.
For FY 07 the total income, on consolidated basis, was at Rs.371.25 crores with PBT of Rs.173.77 crores and PAT of Rs.109.00 crores. Of this, trading and arbitrage income was at Rs.114.22 crores. For five months ending 31st August, 07, the total income of the company was at Rs.284.86 crores, of which trading and arbitrage income was at Rs.103.46 crores. This has resulted in PBT of Rs.127.89 crores and PAT of Rs.80.93 crores.
If we analyse results of FY 07, and results of five months ending August 07, employee costs have increased by about 100%, on an annualized basis, while finance cost increased by about 350%, on annualized basis. As against this, core income of the company, being fee brokerage and commission income improved by just 50%, on an annualized basis.
For any financial services company, especially for an investment and broking and wealth management company, the core business revenue is from fee, brokerage and commission income and not the trading and arbitrage income. However, in case of this company, the bottomline over the years viz. FY 04 to FY 08 (part) has largely come from trading and arbitrage income. Hence the question arises - how far would it be acceptable to capitalize such income component, while valuing the company?
Even the debt component of the company rose sharply from Rs.386 crores as at 31st March 07 to Rs.976 crores as at 31st August 07. On gross basis, it has resulted in a yield of 13% for five months or about 2.5% per month. This kind of yield is given by arbitrage plays, even on a fund size of Rs.1,000 crores. So, the business model of the company is relying more on trading and arbitrage income which may not be perceived to be very healthy, on a sustainable basis, while valuing a company.
On an annualised basis, for FY 08, the company may have a bottomline of Rs.250 crores, which may result in an EPS of about Rs.33, translating into a PE multiple of about 25 times, at the upper band of Rs.825 per share. The market capitalization of the company, post issue, at the upper band of Rs.825 per share, works out at Rs.6,200 crores.
If we consider grey market premium of Rs.500 per share, market cap on listing would be about Rs.10,000 crores, which makes the issue definitely expensive when compared to its peer like Indiabulls Securities, India Infoline and Motilal Oswal.
The revenue model of the company does not give absolute comfort and looking at the grey market activity and quote, the subscription levels would be very high, resulting in poor allotment ratio. Still if somebody wishes to ride the momentum, one can go for it.