Career Point Infosystems: Strong Point

Career Point Infosystems is entering the capital market on 16th September 2010 to raise Rs. 115 crore, via a fresh issue of 37-39 lakh equity shares of Rs.10 each (depending on the price discovered). The issue, priced in the band of Rs. 295 to 310 per equity share, constitutes about 20% of post-issue paid-up capital of the company and closes on 21st September 2010.

The company provides tutorial services for engineering and medical entrance exams such as AIEEE, IIT-JEE and All India pre-medical and pre-dental tests. It has presence through 33 centres, of which, 17 are company operated while balance 16 are franchisee centres, spread over 13 states of the country, mainly in North, East and Central India.

For FY10, it had close to 32,000 student enrolments, of which, over 40% were from a company operated Kota centre alone. Kota centre alone accounted for over 60% of the company’s consolidated revenues of FY10.

Going forward, the company plans to discontinue the franchise model for tutoring and also diversify into the formal education space. It plans to set up a university in the name of Career Point University in Kota, Rajasthan and also set-up another university in Himachal Pradesh.

The funds being raised via the IPO will be used to finance the following:

a) Establishing an integrated campus spread across 8.6 lakh square feet in Kota, for 3,000 students, with investment of Rs. 68.25 crore. This facility will provide accommodation to students and visiting parents, library, recreation and other such facilities.

b) Expansion of campus and office at Kota, across 45,000 square feet, with investment of Rs. 16.49 crore.

c) Strategic acquisitions worth Rs. 15 crore, to be deployed in FY11, however no targets have yet been identified

For objects a and b above, no funds have been deployed till date, despite a cash balance of Rs. 22.74 crore and liquid investments of Rs. 37.87 crore in its books, as of 31st March 2010.

The company, being debt-free, earns most of its revenue during the first six months of the financial year itself. For FY10, on a consolidated basis, it generated a topline of Rs. 66 crore against Rs. 48 crore in FY09, growth of 38%. Of this, education and training income grew by 49% to Rs. 59 crore, from Rs. 40 crore in the previous year. However, the company’s margins have been on a decline, mainly due to decrease in franchisee fees and rising employee costs. Employee costs increased by 75% in FY10 to Rs. 21 crore, from Rs. 12 crore a year ago.

The net profit for FY10 was Rs. 18 crore, resulting in net margin of 27%. The resultant EPS was Rs. 13.2 on equity of Rs. 14.42 crore. Post IPO, if book gets discovered at the upper end of the price band at 310, the company’s equity will rise to Rs. 18.13 crore. Promoter holding, presently at 75.4% would drop to a little under 60%, post-issue.

As on 31st March 2010, the company’s networth stood at Rs. 133 crore and BVPS was Rs. 92. As on that date, the company had cash and cash equivalents (liquid investments) aggregating to Rs. 61 crore.

For FY11, the company is expected to report net profit of about Rs. 21 crore. Discounting one year forward PAT by 20 times, gives a value of Rs. 420 crore. Add to that the cash and cash equivalents of Rs. 61 crore, as of latest balance sheet date, gives a pre-IPO valuation of Rs. 481 crore for the company. This gives a per share value of Rs. 334, while the upper band is set at Rs. 310. Looks fair, as it leaves close to 8% on the table for the prospective investors.

The company is expecting its core business to grow at the rate of 30% on an annualised basis, while its margins are likely to improve slightly by over 33% on marginal basis. The contribution from new areas will start flowing in from FY 12 onwards, which will improve its financials further, so as to service the higher equity base post IPO. To implement these new projects, the company made a preferential allotment of shares in July 2009, at Rs. 248.60 to Franklin Templeton for Rs. 50 crore, and to Mr. N S Raghavan, founder promoter of Infosys, at Rs. 292.64 per share in January 2010, for Rs. 10 crore.

This is the first company from tutorial education field, tapping the capital market, from Kota, which is termed as Mecca for IIT aspirants and hence is likely to have some extra interest in its IPO. We advise to apply in it, even at the upper end of the band at Rs. 310, as it is likely to give some listing gains but better gains in the longer horizon of 6-8 months.

Microsec Financial Services: For micro returns

Microsec Financial Services is entering the capital market on 17th September 2010 with a fresh issue of 1.25 crore equity shares of Rs. 10 each, in the price band of Rs. 113 to Rs. 118 per share. The company will raise Rs. 141 to Rs. 148 crore via the public issue, depending on the price discovered. The issue, constituting 39.3% of post-issue paid-up capital of the company, will close on 21st September 2010.

Microsec, an NBFC, is a financing and investment company, providing services such as investment banking, brokerage (equity, commodity and currency), wealth management, insurance broking, financial planning and loan against shares. It has a dominant presence in East India (where 89% of its 239 branches are located) with strong focus on West Bengal (accounting for 74% of branch network) and more particularly in Kolkata with 99 branches (which accounts for 41% of total branch network).

As of 30th June 2010, the company had 26,000 broking clients and 459 clients registered for its loan against shares service. The fund deployed towards loan against shares facility, as on 31st March 2010, was Rs. 41 crore for 72 clients, leading to an average ticket size of Rs. 42 lakh per client with no NPAs, as of that date. Going forward, the company plans to increase its focus on this line of financing activity.

Of the total funds to be raised in the IPO, the company plans to use Rs. 113 crore for expanding the financing business and Rs. 8 crore each for setting-up new facilities (30 branches and 4 regional offices) and upgrading present technology.

For FY10, on a consolidated basis, the company had a topline of Rs. 57 crore, of which, brokerage and investment banking accounted for 37% and 26% respectively. The net profit for the year was Rs. 25 crore, implying a net margin of 43%. The company’s net margins remain strong due to significant contribution of investment banking (debt syndication) income, which almost entirely gets added to the company’s bottomline.

As on 31st March 2010, the company’s networth was Rs. 92 crore with BVPS of Rs. 47.4. Its cash / bank balance (net of debt) stood at Rs. 15 crore, as on that date. EPS for FY10 was Rs. 12.6 on equity of Rs. 19.3 crore.

Post IPO, the equity will expand to Rs. 31.8, which is considered high for the nature and scale of the business operations. Post-issue, the promoter holding will reduce to 54.78% from the present 90.25%.

The narrow price band of 4%, between 113 to 118, is a refreshing positive, wherein the company will be valued in the range of Rs. 359 to 375 crore, at the lower and upper price bands, respectively. This seems to be quite stretched for a broking company, whose fortunes are so closely linked with the performance of secondary markets, thereby leading to uncertainty on future profitability.

Broking firms having made their IPOs in the boom time of 2007, viz. Motilal Oswal, Edelweiss and Religare Enterprises, have not all rewarded their shareholders in the long term. Except for Religare Enterprises, both Motilal Oswal and Edelweiss have underperformed, either the markets or in absolute terms, from their IPOs till date. Edelweiss’s market cap has reduced by one-third from Rs. 6,200 crore at the time of its IPO in Nov 2007, to less than Rs. 4,000 at present. On the other hand, market cap of Motilal Oswal increased by just 1% since its IPO in Aug 2007, as against Sensex’s return of 29% during the same period.

This company can be compared more with Emkay Global, having present market cap of Rs. 212 crore, with annualised topline of Rs. 115 crore and high promoter stake at close to 72%. This share is ruling at Rs. 87 on the hopes of promoters’ wanting to sell their stake in the company. This company, having gone public in March 2006, is still ruling way below its issue price of Rs. 120 per share. Microsec, being a regional player and that too in the Eastern part of the country, will have its disadvantage.

At 113 and 118, the issue is being priced at a revenue multiple of 6.3 and 6.6 times respectively. Bigger listed peers (both in terms of presence and turnover) are presently ruling at revenue multiple of around 3 times. On a PE based multiple, against the average of 16 for listed brokerages, the issue is priced cheaper at 9.0 and 9.4 times respectively, the higher net margins probably coming to the company’s rescue. However, Microsec stands at the disadvantage due to the smaller scale of its operations vis-a-vis the other listed players.

Given the sentiments around are very positive, the issue may give prospective investors some listing gains, but may not be able to reward investors having horizon of 12 months, on a sustainable basis. It would have been better, had the issue been priced at around Rs. 100 per share, which would have left higher margin of safety and returns on the table for the prospective investors. Investors can go for the issue only for listing and short term gains.