IPO raises Edelweiss Capital valuation, shares soar on debut

IPO raises Edelweiss Capital valuation, shares soar on debut

With a more than 83% rise in the stock on its debut, Edelweiss Capital Ltd becomes the second most valued among all listed broking houses in India. On Wednesday, the investment bank and broking firm’s stock was listed at a Rs1,443.75, at 75% premium to its offer price of Rs825. It rose to Rs1,608 in intra-day trading and closed at Rs1,509.95 on the Bombay Stock Exchange, giving 83% returns to those who invested in its initial public offering (IPO).

In its IPO, the company offered 81.8 crore shares to investors. The issue was oversubscribed by 110 times.

With the Indian markets delivering more than 40% return for the third consecutive year, the financial services business has become a lucrative sector and many domestic broking firms have attracted investments from foreign financial services firms and private equity funds.

The large listed brokerage houses command price earnings multiple in the range of 25-40 based on the earnings for the next financial year.

Edelweiss Capital is the third brokerage house to raise money through the IPO over the past four months. Religare Enterprises Ltd’s Rs140 crore IPO in November was listed at 75% premium to its issue price of Rs185. The stock is currently trading at Rs530. Earlier in September, Motilal Oswal Financial Services Ltd’s stock was listed at a 21% premium to its issue price of Rs825.

The stock is currently trading at Rs1,809.

Brokerage houses are utilizing the money raised towards expanding business by branch expansion or margin financing. Margin financing helps to boost the income from broking services because it allows investors to trade in shares by borrowing money from the broker. So, besides the broking fee, the broker earns the interest income for lending money to investors.

Analysts tracking the financial services sector point out that most of the brokerages are making a conscious effort to diversify into other financial services businesses and reduce dependence on the income from stock market activities.

For instance. India Infoline Ltd has managed to increase its fee income from 34% in 2005, to 45% in 2007. Fee income consists of income from distribution of financial products.

Similarly, Motilal Oswal diversified into merchant banking and private equity and increased its focus on wealth management business. Apart from repayment of loans and working capital, Edelweiss Capital plans to utilize the funds raised through the public float for its asset management business and non-banking finance operations. Unlike most of its peers, Edelweiss Capital doesn’t focus on retail broking activities. Instead, institutional broking and investment banking are its areas of interest. Analysts, who didn’t wish to be quoted, said that investors should look at the revenue model of the brokerage house before buying any brokerage stock.

“The market volatility can prove to be detrimental to the revenue of a broking company," an analyst, who did not want to be named because he works for an unlisted brokerage, said. “So you need see the break-up of the revenues of a broking firm. If it derives more income from broking, then it will be more exposed to overall market volatility."