Religare takes a different route

Religare takes a different route
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First Published: Tue, Apr 08 2008. 12 01 AM IST

Domestic brokerage firms that have thrived thus far in the retail segment are now chasing the institutional segment aggressively. Some players such as India Infoline Ltd and Anand Rathi Securities Ltd have hired key people from foreign stock broking houses CLSA Asia-Pacific Markets and Citigroup to build their institutional businesses. Religare Enterprises Ltd has taken a different approach. It has decided to buy Hichens Harrison and Co. Plc., a London-based broking firm, and the company says it is part of an exercise to build the institutional side of its business.
Religare’s shares have been among the worst hit in the market correction that started in January. At current levels, it’s almost exactly halved from its peak of Rs729 in January. The market’s concern is understandable. Religare’s growth thus far has come from a rapidly expanding retail broking distribution network and from a thriving margin funding business. Both segments have been hit as a result of the correction and the resultant drop in volumes.
Under margin funding, a client normally has to pay only 40-50% of the total value of purchase of each scrip, with the rest being provided by the broker. The investor has to pay an interest charge on the money brought in by the broker, which variesbetween 12% and 16% a year. If the investor is unable to meet the ongoing, or maintenance, margin requirement, the broker has the right to sell the scrip.
The institutional business is generally more stable (not that it doesn’t get affected), and the addition of Hichens Harrison will result in a well-needed diversification. In fact, the company had already told analysts and investors more than six weeks ago that it was looking to acquire a UK-based broking firm to augment its institutional business.
Yet, that’s not all Hichens Harrison brings to the table. The company is an approved nomad in the Alternative Investment Market (AIM) of London, or a broker which is allowed to introduce firms to list on the exchange. Companies that wish to list on AIM have no choice but to go through a nomad. Since many Indian companies use the AIM market to raise funds, having Hichens Harrison in its portfolio will help Religare tap this segment in the country. Further, Hichens Harrison has established offices in six emerging markets and had plans to open new offices in Qatar and Singapore in January.
The deal will give Religare a vast reach and help tap clients in each of these countries who want to invest in India. What’s more, the deal doesn’t look expensive, at about 13 times of past earnings. Interestingly, the markets have been lukewarm to it, with the Religare stock up less than 1% in the past week. But it reflects more of the mood the markets are in currently. A few months ago, this would have led to a surge in its shares.
Also note that the deal is still not a given. There could still be a counterbid. Trading in shares of Hichens Harrison had practically stopped since the deal became public, with an average traded volume of 13,000 shares with the shares not trading at all in one trading session. But last Friday, volumes soared to 940,00 shares, the highest in at least a year. With so many shares changing hands close to Religare’s offer price, it seems a section in the market is hopeful that a higher bid would soon arise.
Buying growth at Nitin Fire Protection
The shares of Nitin Fire Protection Industries Ltd (NFPIL), that manufactures, erects and commissions fire protection and security systems, moved up 4% on Monday on news of it acquiring Dubai-based New AgeCo. Llc.. The terms of the deal haven’t been disclosed, but the stock went up on the reasoning that it expands NFPIL’s footprint in a part of the world that benefits from high fuel prices and will hopefully be immune to slowdown worries.
However, the acquisition is not the main reason for the bullishness in the company’s stock. Reports say New Age’s revenues in fiscal 2008 was just Rs44 crore, around a third of NFPIL’s estimated turnover for the year. But that turnover will get a big boost this fiscal year, thanks to NFPIL’s CNG (compressed natural gas) cylinder manufacturing plant at Visakhapatnam in Andhra Pradesh that began production last February and which analysts say will stabilize in the current month.
Analysts estimate that the company’s turnover could triple in financial year 2009, largely because the firm diversified into manufacturing CNG cylinders.
Moreover, since the margins on these cylinders is higher than on fire protection systems, overall margins will increase and operating profit growth will be even higher than the growth in revenues.
Of course, the expansion is old news and the market had pushed up the stock to a high of Rs666 last January on the strength of that. Although it has corrected significantly since then, it has fallen far less than the Bombay Stock Exchange’sSmall Cap index. NFPIL currently trades at around Rs460, which is a valuation of around 12 times last fiscal year’s earnings, not taking the acquisition into account.
Demand for CNG cylinders is expected to grow robustly in countries such as Iran and Pakistan and that should help to absorb any increase in raw material costs. The icing on the cake is provided by the lower effective tax rates since the Visakhapatnam plant is located at a special economic zone, and is eligible for tax benefits.
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First Published: Tue, Apr 08 2008. 12 01 AM IST