The Hindu Business Line : Religare Enterprises: Invest at cut-off

The company has managed strong growth in retail broking services. But a limited financial track record and the possibility of volatile earnings peg up risks.

Mr Sunil Godhwani (left), CEO & MD, Religare Enterprises and Mr Peter Maher, Group Head, Macquarie Financial Services… Religare has tied up with Macquarie to offer wealth management services.

Aarati Krishnan

Investors with a high risk appetite may subscribe to the Initial Public Offer from Religare Enterprises, a financial services firm which derives the bulk of its revenues from equity broking and financing services. A recent entrant to the financial services space, the company has managed an impressive ramp-up in its client base and transaction volumes. However, the company conducts its business through a web of subsidiaries. Relevant financials for Religare’s consolidated operations are available only for a year and a half.

The offer price band of Rs 160-185 values the company at about 20-23 times its earnings for 2007-08 on the fully diluted equity base. The earnings for the full year have been estimated using first half performance, after factoring in operating profit margins managed by the company’s peer group. Most brokerage firms of comparable size trade in the price-earnings band of 30-40 times their current earnings at this juncture.

Background

Religare’s businesses, routed through subsidiaries in which it holds 75-100 per cent stakes, span stock broking, loans against shares, commodities broking, personal lending, depository services, wealth management, venture capital, insurance broking, real-estate investing, insurance and arts advisory services. These are offered to retail and institutional clients.

Equity broking: Pluses and pitfalls

Most of these businesses are in a nascent stage, and equity broking and financing services currently contribute the lion’s share of the company’s consolidated revenues and earnings. For the first half of 2007-08, Religare reported a total income of Rs 307 crore on a consolidated basis; with EBIDTA (earning before interest, depreciation, tax and amortisation) margins of about 41 per cent and net profits of Rs 36.7 crore.

Broking operations (mainly equity), contributed 52 per cent of this income; interest on loans against shares/delayed payments from clients brought in about 30 per cent; while transaction charges/fees from clients and investment income chipped in with the rest. Though the company has a presence in the institutional segment, it is the retail business on which revenues and earnings rely heavily.

The focus on retail broking may deliver strong growth under the secular bull market conditions prevailing now. However, this may result in high volatility in Religare’s earnings over the medium-to-long term.

This pegs up the company’s risk profile in relation to others who have a more broad-based revenue stream. Regulatory and systemic risks would also be higher with retail-focused firms.

The equity broking business is a volume-driven one. Transaction volumes, which have reached new highs recently, could dry up quickly if stock markets move from a buoyant to a prolonged choppy or range-bound phase. This could have a direct impact on Religare’s revenues and, thus, profits.

Falling fee structures also heighten these risks. The growing retail pie in the domestic stock market has intensified competition, with private banks, finance companies and new global players entering the business. The possible rise of discount brokerages and popularity of online trading, also point to pressure on fees earned by full service broking firms such as Religare, making volumes crucial.

Strong growth so far

Religare has, however, displayed an ability to grow quite aggressively in its key businesses in the relatively short period of its existence. The number of clients registered for Religare’s equity/derivative broking services grew from just 12,000 in March 2005 to 2.37 lakh by September 2007. An expansion in the number of trades executed from 49,517 to 4.70 lakh over the same period; gave the company a rough 3.8 per cent share on the combined turnover on the NSE and the BSE.

These compare well with established players such as Motilal Oswal Securities. Religare’s investments in acquiring a pan-India presence (392 cities reaching out to 1200 locations) and a strong research backing for each of its businesses, appear to have aided asset expansion.

The company has been a relatively late entrant to the online platform, starting trading in August 2006 and investments in May 2007. The wealth advisory services and portfolio management services, advised/managed assets of Rs.185 crore and Rs.255 crore respectively in September, most of it garnered since 2006.

The company’s ability to deliver sustainable earnings growth may hinge on its success in driving growth in its non-broking businesses.

Several of the nascent businesses into which Religare is charting a foray (insurance broking, insurance, wealth management, asset management) hold immense potential for growth. This apart, these businesses are also quite scalable and may require lower incremental investments, given Religare’s wide geographic reach and its existing resources in terms of research and marketing personnel.

Having acquired a good client base in equity broking, there are also significant cross-selling opportunities that each new business can tap into.

However, with a slew of Indian and foreign players making a beeline for each of these businesses, none of this will offer Religare any protection against competition.

Overall, investors with a high risk appetite may consider subscribing to this offer in the light of the lower pricing relative to listed firms in this space and the sector’s growth potential.

Offer details: Religare Enterprises is offering 75.7 lakh shares in the price band of Rs160-185 to raise Rs121-140 crore. Offer proceeds will be deployed mainly in funding the lending and retail finance businesses and in expanding the branch network.

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