Motilal Oswal Financial Services (MOFSL) is the Motilal Oswal group’s holding company with stake in four group companies: Motilal Oswal Securities (MOSL – the stock broking arm), Motilal Oswal Commodities Brokers (MOCB - the commodity business arm), Motilal Oswal Venture Capital Advisors Pvt Ltd (MOVC - the venture capital advisory arm) and the Motilal Oswal Investment Advisors Pvet Ltd (MOIAPL - the investment banking arm).

The object of the issue is to raise funds to enable the group to improve its competitive position and support growth plans through deployment of long-term working capital, enhanced financing facility for broking customers, and additional office space and technology advancement.

MOFSL proposes to infuse IPO funds into MOCB (Rs 10 crore) and MOSL (amount not mentioned) by subscribing to their equity shares, advancing unsecured loan or any combination of this and provide Rs 40 crore as additional margin capital for both the subsidiaries. Such capital infusion is to strengthen their balance sheets and enable them to increase trading volumes in the equities and commodities market. Also, MOFSL provides financing facility to its retail broking customers. It now proposes to enhance this financing facility by infusing Rs 110 crore. Besides, about Rs 450 crore will be used to purchase / lease new office space for business expansion and technology upgradation.

MOFSL incorporated MOVC in April 2006 as an investment manager and advisor with a target to raise US$ 100 million. Commitments stood at Rs 181.67 crore (US$ 42.15 million) on March 2007. The funds raised to date have yet to be invested.

Strengths

• Large and diverse distribution network with well established brand among retail and institutional investors in India. Registered retail customer base exceeds 200,000. This is serviced through 1,200 business locations spread across 377 cities with 2,072 employees (including 741 on contract basis). It is also empanelled with 251 institutional clients including 165 FII clients (end March 2007).

• Recent forays in investment banking and venture capital is to diversify its revenue stream from brokerage income. The share of brokerage income came down to 85.8% of the consolidated operational income in the year ending March 2007 (FY 2007) from 92.5% in FY 2006.

Weakness

• With about 85.8% of the operation income still coming from brokerage income, performance is correlated to the cyclical nature of the stock markets.

• Management fees paid by portfolio management service (PMS) clients is part of the consolidate revenue. This declined 45% to Rs 8.30 crore in FY 2007. Thus, the segment’s contribution to the total operational income fell from 5.8% end March 2006 to 2.3% in FY 2007. The assets under management were down from Rs 520.00 crore end March 2006 to Rs 508.86 crore end March 2007.

• Though an established player in stock broking; the increased level of competition is a cause of concern. Moreover, performance in investment banking and venture capital segment is untested. Lack of experience and competitive nature of these businesses is a cause of concern.

Valuation:

In FY 2007, consolidated revenue increased 39% to Rs 358.75 crore. After accounting for EO expense of Rs 4.26 crore on account of ESOP compensation, net profit after minority interested increased 15% to Rs 69.58 crore. On the adjusted net profit excluding EO items, EPS on post- issue equity of 14.20 works out to Rs 26.

At the offer price band of Rs 725-Rs 825, P/E works to 27.9 (on lower band) to 31.7 (on upper price band) times. The peer composite TTM P/E of securities/commodities trading companies stands at 27.21. P/E of other comparable listed players is: India Bulls Financial Services (24.9 times), Emkay shares (25.5 times), India Infoline Financial Services (41.1 times), IL&FS Investsmart (33.3 times) and Geojit Financial Services (33.6 times).

Fortunes of such scrips are directly linked to the fortunes of the stock markets. When the markets are buoyant, trading opportunities plenty and turnover strong, such scrips often get into the bull orbit. But in adverse markets, they find themselves in rough weather.