Microfinance Failure Puts Focus on Credit Ratings, Islamic Banking, & Co-operative Banking

Indian microfinance sector has suddenly entered a turbulent phase, casting a long shadow on not only whether for-profit money can ever be used for poverty alleviation, but having the potential to shake the foundations of even Nobel Laureate Dr. Muhammad Yunus promoted Grameen Bank like models for the simple anomaly of the poorest-of-the-poor being charged double the interest rates charged from the richest-of-the-rich. Financial inclusion is noble, and a few MFIs had contributed much towards this noble ideal, but are the poor being increasingly chased for financial inclusion, and are they being included without their interest? While even the role of the credit rating agencies is likely to come under the scanner due to this, much interest is emerging in alternatives to microfinance like Islamic banking and zero-interest or low-interest co-operative banking.

In March of 2009, during the height of the world financial crisis, Vatican had a piece of advice for Western financial system - turn to Islamic banking. Though Catholic Church and mainstream Islam see eye-to-eye on a few ethical issues, such as abortion, this one was unexpected by any measure. But not really, if you really understand Islamic banking, beyond what the name implies.

Even economists like Dr. Manmohan Singh, Pranab Mukherjee, and P Chidambaram don’t seem to have much love for the system. Not that this was the main reason why a recent international conference on Islamic banking in Kochi was strictly curtailed; it was rather due to the issue of speakers arriving on tourist visa.

Not even Dr. Muhammad Yunus is thrilled with classic Islamic banking. Though he considers his Grameen Bank as a practical Islamic banking model, not many are willing to concede the point, and that includes not only international Islamic scholars on the subject, but a native and pragmatic voice like Sheikh Hasina. But it is a profound irony that it was an Islamic state like Bangladesh that made microfinance famous. Its approvers would take the Nobel Peace Prize as proof for microfinancing’s superiority over Islamic banking. Sure, microfinance has proven to be a bit more practical, but superior? Not by a long shot.

And in India, as usual, we have taken something ok from outside - microfinance - and overdone it to monstrous proportions, much like fast food and indecent dressing. Yesterday, microfinance was touted as the next big thing after outsourcing, for all among us - from the poor to the investors. But today, microfinance champions are facing prosecution for coercive recoveries from the poor. If you too were unduly impressed by the microfinance model, don’t despair; even NR Narayana Murthy was impressed.

But the biggest microfinance irony came from rating agencies like CRISIL (BSE: 500092, NSE: CRISIL), which informed the market that they are re-assessing the generous credit rating they had given to many MFIs. Though CRISIL, a Standard & Poor’s company, deserves some credit for always keeping some reservations about the socio-political risks the MFIs faced, the moot point is what kind of an expertise is involved in re-evaluating the ratings much after even the smallest investors have re-evaluated companies like SKS Microfinance (BSE: 533228, NSE: SKSMICRO ). Now, the real paradox is whether Indian rating agencies themselves will get regulated and re-rated due to the MFI rating fiasco, much like how the US rating biggies like S&P, Moody’s, & Fitch came under scrutiny for indirectly causing the sub-prime housing finance crisis. The Indian agencies were already facing some potential regulatory heat before the MFI house of cards started tumbling.

Anyway, coming back to coercion, it is only a side-effect at best. The issue is ultimately about the ‘time value of money’ - that beautiful phrase economists have coined to denote interest. What can justify the poorest-of-the-poor being charged double the interest rate than the richest-of-the-rich? That they have no collateral? Or that moneylenders charge even more? As many micro-finance institutions found out for themselves recently, they are already running out of such excuses. Especially so, since microfinance institutions (MFIs) are actively marketed setups, unlike passive setups like banks. Nobody forced them to chase the poor and lend to them at exorbitant rates; they chose to do it on their own. Nobody gave them a mandate to financially include all the poor they could find.

Does that mean all MFIs are rogue setups? Not at all. In fact, many MFIs were genuine NGOs working for the up-liftment of the poor, not too long back. But slowly but surely the profit motive crept in. Not that profit motive is a bad thing in itself, but profit motive driven by high interest rates, powered by the justification of no collateral, is next to evil.

This is where the relevance of Islamic banking comes. Created around the basic Islamic tenet that Riba (increase in capital without service) and Usury (interest) are Haraam (forbidden), Islamic or Sharia banking delivers most banking services like loans, leases, hire purchases, bonds, equity funds and even derivatives, on an alternate structure.

For example, for effecting an interest-free vehicle or home loan, a fixed sum is added to the purchase price to arrive at the loan value. Not only is this amount much smaller than the interest that would accumulate over the years, but more importantly this amount is fixed, meaning that you won’t be penalised for occasional defaults, and thus the ‘time value of money’ concept is effectively done away with.

Another example of how Islamic banking is effected comes from purchase of a factory or office. The Islamic bank joins with the entrepreneur to form a partnership that will own this new facility, and this partnership will repay the bank the purchase amount (plus a small profit) from profits made by the new facility, and the moment the loan is repaid, the bank exits the partnership. The model is impressive not only due to its avoidance of interest, but due to the more responsible and proactive role the bank will take in ensuring success of the business.

There is no reason why all countries including India shouldn’t actively encourage Islamic banking as an alternative banking channel. Just like alternative medicine like Ayurveda and Naturopathy, there is room for every philosophy. And let merit decide which comes up. Also to be tried is an even greater model proposed by the Mahatma for Indian industry, and which some of our petty politicians converted into their filthy playground - the co-operative movement. Though the country has some successes in this field like Amul, co-owned by 2.8 million dairy farmers, our banking sector is yet to have a big co-operative success like the Swedish JAK, which is a co-operative interest-free bank.

Manappuram Improves Further on Higher Growth, Lower Expenses

Manappuram General Finance & Leasing (BSE: 531213 / MANAPPG, NSE: MANAPPURAM) has continued to impress its investors with a second-quarter performance of 226% jump in net profit. Chairman VP Nandakumar feels that it is a direct outcome of pursuing higher growth avenues relentlessly, even while cutting expenses significantly. Seasonal Magazine interviews Manappuram Group Chairman VP Nandakumar on the performance of the Group’s flagship company Manappuram Finance, and the Group’s new jewellery venture, Manappuram Jewellery‘s plans to expand pan-India:

Also Read on Manappuram:
Manappuram at All Time High - How to Invest Here Now?
Manappuram Improves Further on Higher Growth, Lower Expenses
Manappuram’s Gold Loan Business - Risky or Rewarding?
Manappuram - Overrated or Underrated?  
Can Manappuram Keep Growing at 60%?

Manappuram Finance has come up with yet another quarter of blistering performance with net profit up by 226% YoY. But a performance of the same scale is not seen in the EPS even though it too improved by around 62% YoY. How did the YoY dilution contribute to this, and what would be the scenario going forward?

Considering YoY, the Q2 EPS growth should be higher, almost double of what you mention, as there was a bonus issue between these two quarters. But, apart from that, yes, dilution by way of our last QIP and the preferential issue were contributing factors to EPS growth lagging profit growth. But these very factors are going to correct the EPS in the coming quarters, as more capital was brought in to facilitate better portfolio growth. And these steps are already delivering results. By this fiscal end itself, hopefully, you will see EPS growth catching up with profit growth. So this should not be of much concern now, I feel.

But with another Rs. 1000 crore QIP in the offing, maybe in this fiscal, how will dilution pan out?

We have decided on a QIP, yes, but we have not yet decided on the amount to be raised. The Rs. 1000 crore figure was given as an estimate, taking into consideration the next 18 months’ requirement by way of maintaining our Capital Adequacy Ratio at 15%. That is, we planned for this fiscal’s and 2011-12’s requirement. But it need not be implemented like this. We may go in for this year’s requirement alone, which will be to the tune of Rs. 500 crore only. Even for meeting this figure, we intend to plough-back almost Rs. 250 crore. So, if we go for the capital raising incrementally, the first step will only be to the tune of Rs. 250 crore, and even at our current valuation, that is not going to create much dilution.

From a 52-Week High of around Rs. 165 recently, the Manappuram scrip has corrected by around 15-17%. According to you, what could be the reasons?

It is better we leave the price-performance issue to the markets, as we have always felt that markets offer the best price-discovery mechanism on an ongoing basis. But having said that, one reason that readily comes to my mind is the confusion caused by the microfinance controversies. Though Manappuram Finance is a pure gold loan company that doesn’t have anything to do with microfinance, the sentiment affected us too. In fact, we were not alone in this, many NBFCs unconnected with microfinance were affected. Maybe some quarters thought that since our ticket-size too was low, we would be affected. The interesting fact is that, as far as risk is concerned, gold loans and microfinance stand at the opposite ends of the risk-spectrum. While gold loans are fully secured and taken by SMEs and lower-middleclass to upper-middleclass customers, micro-loans are delivered to the poorest of the poor in the society with no asset to back it up. Then there was the liquidity crunch in the markets due to the mega IPOs. At Manappuram, we hope that the steep growth curve that we continue to travel in, will compensate for all such intermediate setbacks.

Your foray into jewellery retailing is keenly watched. Should investors foresee any kind of buyout of this company by Manappuram Finance in the future, or will it take the IPO route and be another listed firm by the Group?

Both companies will be separate, and we hope to take the jewellery retailing business public by as early as 2015. We think such a structure would be ideal, as though both involve gold, they are as different as chalk and cheese. Our listed company, Manappuram Finance is a non-banking finance company that enjoys superb EBITDA margins, RoE etc that is at par or better than the NBFC industry average, while Manappuram Jewellery will be a pure retail play that should be compared with retail industry’s EBITDA, RoE etc. But having said that, we are confident that in the retailing sector, or more specifically in the jewellery retailing sector, Manappuram Jewellery will be leading by way of all core operating ratios, similar to what Manappuram Finance has achieved in the gold loan business.

Retailing is not a high-margin business, maybe gold retailing is better, but it is still retailing. So, what makes you so confident of better metrics in your retail foray?

Margins are only one side of the business. Manappuram Finance has always thrived on a two-prong strategy of higher and higher growth and lower and lower costs. The same will continue with gold retailing too. You will be surprised to know that at Manappuram Finance, our non-interest operating expense ratio has been steadily declining, quarter after quarter. Manappuram Jewellery will follow a mass-market model created around cost-effective medium-format shops, exclusive pure BIS gold, competitive pricing, and a wide range of contemporary designs. Much market-study and research have gone into creating this model, and we are more than sure that this model is going to deliver. Being in the gold loan business, we know the kind of pathetic quality gold available in many markets, especially outside Kerala. This is already helping Manappuram Finance in one of its first markets, Bangalore. Manappuram Jewellery’s value proposition of purest gold at competitive prices will give it the edge. A mega educative campaign on gold shopping is on the anvil for achieving this objective.

How could you control the costs this much at Manappuram Finance, given your publicity campaign that involve several celebrity brand ambassadors?

The key point here is that the campaign has delivered. Yes, it has been a costly campaign, but then everything should be judged by the cost-benefit analysis. So as a ratio, our expenses are down even with this campaign. On the other hand, today Manappuram has become a household brand due to this campaign. This has been so effective that we have added three more celebrity brand ambassadors - Mithun Chakraborty for Bengal, Sachin Khedekar for Maharashtra, and Uttam Mohanty for Orissa. Our earlier endorsers, Akshay Kumar, Vikram, Mohanlal, Venkatesh, & Puneet Rajkumar will continue.

Manappuram was earlier considering overseas expansion for its gold loan business. Where does the initiatives stand now?

We weren’t actively pursuing it, but yes, some overseas proposals had come our way, especially from countries like Sri Lanka. But then there are regulatory hurdles to be overcome in those countries. It will take its own time, but the scope for gold loans is immense in many countries, and that need not be only those countries having a sizeable Indian or Keralite population.

The listed gold loan segment is soon to have another entrant - Muthoot Finance - and many already listed NBFCs like Magma Fincorp and Shriram City Union are strengthening their gold loan operations. How do you view the impact on the industry?

More gold loan companies going for their IPOs to get listed is definitely a good thing for them, as the sole listed gold loan company in the country for long, Manappuram have shown the way for them. It should be good for the industry too as more capital market players means more visibility for the sector. Coming to the already listed NBFCs trying their luck in gold loans, I should say everything will depend upon whether they will be able to build a core competence in gold loans. There were reports of even microfinanciers mulling gold loans. But the core competence of these NBFCs are somewhere else, and not in gold loans. This is the same reason why most banks are unable to progress much in this business.

How do you see the current problems in microfinance sector panning out?

I had just gone through the ordinance by Andhra Government on the issue. My view is that RBI is better suited to play the regulator role here. There is no doubt that many good MFIs had contributed immensely to financial inclusion of the poor. So, financial inclusion should not be sacrificed in the name of regulation, but at the same time malpractices by MFIs like multiple lending, coercion etc, if any, should be strictly controlled. I think opening up the sector further, increasing competition, and making lower-cost funds available for MFIs, should solve the microfinance problems to a large extent.

Prestige IPO Succeeds, Oversubscribed by 2.26 Times

The IPO of Bangalore based Prestige Estates Projects Ltd has received bids for 2.26 times the total number of shares on offer.

According to data from NSE, updated 04:00 PM, the Issue got bids for 12.92 crore shares as against the 5.72 crore shares on offer.

On NSE the Prestige IPO garnered 1.62 times bids, while on both NSE and BSE combined, the oversubscription was to the tune of 2.26 times.

Some investment bankers think that the final figures might be higer, close to 5 times oversubscription.

60% of the bids received was at the cut-off price.

At the NSE, the heaviest demand was from Qualified Institutional Buyers (QIBs), who bid for more than thrice the portion reserved for them. Among various QIBs, Foreign Institutional Investors (FIIs) accounted for more than 98% of bids with the remaining 2% coming from mutual funds, as is customary.

Domestic Institutional Investors (DIIs) were not much active. Bids by Retail Individual Investors were also lower, in tune with the how retail investors were not warming up these days to the primary market.

Also Read: Prestige IPO - Why Under-subscription Can be Misleading for Investors
Also Read: Why Prestige IPO Valuations are Reasonable
Also Read: Prestige IPO - What are the Core Attractions?

Prestige IPO - Why Under-subscription Can be Misleading for Investors

Prestige Estates Projects Ltd's IPO that opened on 12th Tuesday will close today. The Issue is not yet fully subscribed, and even if it succeeds in garnering full subscription on the last day, chances are that the retail portion will be grossly undersubscribed. The obvious reason, if this happens, will be the ’Avoid’ advice given out by several brokerages, as well as media analysts. Retail investors are the most easily swayed of all groups, as most others like QIBs, FIIs, and even many HNIs have their own research or private advisers.

Also Read: Prestige IPO Succeeds, Oversubscribed by 2.26 Times
Also Read: Why Prestige IPO Valuations are Reasonable
Also Read: Prestige IPO - What are the Core Attractions?

But the under-subscription, especially retail under-subscription experienced by Prestige IPO need not be that dire a situation for prospective investors. Brokerages and many media analysts project a feeling that retail under-subscription is a listing-day risk, as there wouldn’t be many who missed the chance, vying for the shares after listing.

However, a detailed look at the IPOs of 2009 and 2010, provide evidence to the contrary. DEN Networks (BSE: 533137, NSE: DEN) that went for its IPO in October 2009 just received less than 4000 applications from retail segment including HNIs. But within a year, the DEN scrip had appreciated to Rs. 256, from an opening of Rs. 195.

Coming to early 2010, MBL Infrastructures (BSE: 533152, NSE: MBLINFRA), Godrej Properties (BSE: 533150, NSE: GODREJPROP), and JSW Energy (BSE: 533148, NSE: JSWENERGY ) were all grossly under-subscribed in the retail segment. None of these scrips could garner retail subscription of even 0.5. But within 10 months, MBL Infra had risen from Rs. 190 to Rs. 292.90, Godrej Properties had appreciated from Rs. 510 to Rs. 823, and JSW Energy had gone from Rs. 102 to Rs. 136.

Even more impressive was the performance of Aqua Logistics (BSE: 533159, NSE: AQUA), that not only under-performed in the retail segment, but failed to garner overall subscriptions, and had to revise its price band downwards, as well as extend its closing date. But the Aqua scrip which opened at Rs. 219.40 had zoomed to Rs. 675.30 in less than 10 months.

What was at play here? Almost all these IPOs had accompanying ’Avoid’ tags from a few brokerages and media houses. While retail investors heeded this advice and stayed away, institutional investors - both foreign and domestic - lapped up the shares. It would almost seem that there was a conspiracy of sorts, through which retailers were kept away, for institutional investors to corner the shares.

The riddle gets murkier when we analyse the other side of the issue - whether IPOs with retail oversubscription have indeed done excellently. Take the case of Euro Multivision (BSE: 533109, NSE: EUROMULTI), Astec Lifesciences (BSE: 533138, NSE: ASTEC), and Thinksoft Global (BSE: 533121, NSE: THINKSOFT), companies that went public during the same period, 2009 and 2010. All three had IPOs with ’Subscribe’ tag from several brokerages, and they indeed had oversubscription of multi-times in the retail segment.

But today their year-to-date price performance speaks volumes. While Astec has managed a tiny 2.5% appreciation, Thinksoft Global is down by around 28% and Euro Multivision is down by 44%. Again, the moot question is whether there was any conspiracy of sorts to take retail investors into these scrips.

In any case, this phenomenon of ‘Avoid’ succeeding and ‘Subscribe’ failing is not alien to the realty sector too. Apart from Godrej Properties, a few years back there was the case of Orbit Corporation (BSE: 532837, NSE: ORBITCORP) that had ‘Avoid’ tags from even respected media analysts, but went on to become the most rewarding IPO for investors, around a year later.

Or, who can forget the most famous under-subscription of all time? Infosys Technologies (BSE: 500209, NSE: INFOSYSTCH), which went for its IPO in mid-90s was under-subscribed within the stipulated time, and Morgan Stanley had to do a bail out of the Issue. Simply because, many brokerages and media analysts had decided to ignore the Infosys issue at that time.

Prestige is no Infosys, but there is no reason why it can’t put up a performance like Godrej Properties or Orbit Corp, if the fundamental performance of the company improves going forward. Evidently, there is a case for investors to think on their own before considering recommendations from brokerages and media.

(The above should not be construed as investment advice. All IPOs carry investment risks, and the decision to invest or not in a aparticular Issue should only be of the investor.)

Why Prestige IPO Valuations are Reasonable

Prestige IPO that opened on 12th October has been attacked by a few analysts and brokerages for being expensive. But an in-depth analysis shows that while it may not be cheap, it is not overpriced either. Here are the reasons why Prestige IPO valuations comes across as reasonable.

Also Read: Prestige IPO Succeeds, Oversubscribed by 2.26 Times
Also Read: Prestige IPO - Why Under-subscription Can be Misleading for Investors
Also Read: Prestige IPO - What are the Core Attractions?

On the price-earnings front, Prestige IPO is being offered at a P/E of 41. While it comes across as expensive compared with Sensex / Nifty forward P/E of 22 to 24, it is not expensive compared with how the capital markets rate real estate developers. The realty industry has an average P/E of around 40 now, and this is by no means its all-time high. So the bottom-line is that Prestige has valued it at par with industry, and not above or below it.

But the problem some analysts find is that Bangalore-based peers Sobha Developers (BSE: 532784, NSE: SOBHA), Puravankara Projects (BSE: 532891, NSE: PURVA), and Brigade Enterprises (BSE: 532929, NSE: BRIGADE) are now trading at P/E multiples of just 23, 17, & 29 respectively. While this augurs well for these companies as safe investment-prospects going forward, there is a flip-side to it as well. P/E not only indicates whether a stock is cheap or expensive, but how much the market values it, going forward. The higher the P/E, higher is the valuation market ascribes to it, and lower the P/E, lesser is the market expectation.

Prestige evidently wants the market to value it at industry par. Whether the market too thinks the same way, it is for market to decide in the long-term. But what Prestige is asking for is not something unheard of in the industry. For example, industry leader DLF (BSE: 532868, NSE: DLF) trades at a P/E of 74, which is fast approaching double the realty industry P/E.

And DLF is not the only developer enjoying such valuations. Gurgaon based developer MVL (BSE: 532991, NSE: MVL) trades at a P/E of 103, while Mumbai based developers Indiabulls Real Estate (BSE: 532832, NSE: IBREALEST) and Sunteck Realty (BSE: 512179, NSE: SUNTECK) can stun anyone with their P/E multiples of 398 and 710 respectively.

And despite having these sky-high valuations for some time now, the ironical fact is that these companies have outperformed the broader realty index, with last three-months returns ranging from 30% in the case of MVL to 10% in the case of Sunteck. During the same period DLF had a price-performance of around 25% and Indiabulls had a price appreciation of around 15%.

Interestingly, almost none of the lower-valued developers in Bangalore had a price-performance reaching 20% during the same period, with some falling as short as 6%. On a pan-India basis, a few lower-valued developers even came up with negative returns.

What is common with the highly-valued developers? They have huge developable areas, they deliver high-margin luxury projects, and they have strong brand value. Prestige too has a claim to be in this category of premium developers like DLF, Indiabulls, MVL, & Sunteck, as both their unit sale prices and their lease rates are the best in Bangalore.

More importantly, the above discussion on P/E brings out the leaders-or-laggards question again, that is, where should investors put their money? With the safer laggards or the riskier leaders in the sector?

Stock market history has repeatedly shown that it is leaders who deliver returns than laggards. Beyond the obvious reason of superior valuation lies the fact that the scope for further price-performance by way of earnings expansion is always a possibility with the leaders. When earnings finally expand in tune with the valuation expectations, rarely do we find the P/E ratio correcting downwards. Prestige too may benefit from such a phenomenon going forward.

Another concern analysts have pointed out with Prestige IPO is its price-to-book-value which is around 3 times. The realty industry average is around 2. But here also there are exceptions, with leaders like DLF enjoying a P/BV of over 5, while MVL and Sunteck remain stunners on this metric too with P/BV of 19 and 21 respectively. For a capital market used to ascribe such valuations when high intrinsic value is there, Prestige’s P/BV of 3 should be no big deal.

Considering both P/E and P/BV, Prestige is almost similarly valued as industry leader Unitech (BSE: 507878, NSE: UNITECH) that enjoys a P/E of around 41 and P/BV of around 3.

Lastly, another concern of analysts is with Prestige’s debt situation. This should be viewed together with the fact that Prestige is a large-scale developer that has almost 60 million sq ft of developable area. The leverage on the balance sheet obviously came up with such massive land acquisition. But this should have been more of a concern in the downturn, especially if there was no IPO plan. But the Group had weathered the downturn quite impressively, especially by cutting construction costs drastically. Now with the IPO on, the debt-equity ratio is all set to be 0.5, which is better than the industry average. And with the debt safely managed, Prestige will reap gains in the future from having a huge developable area of their own, that will translate to better margins.

(The above should not be construed as investment advice. All IPOs carry investment risks, and the decision to invest or not in a aparticular Issue should only be of the investor.)

Prestige IPO - What are the Core Attractions?

Prestige Estate Projects Ltd’s IPO is valued almost at par with industry P/E, but its strong branding, ability for premium pricing, developable space of 57.36 million sq ft, strong focus on the Bangalore market, low debt-equity ratio post-IPO, relatively small equity base, flexible performance during downturns, and compounded annual growth rate of 36% in revenue during the last four years, are all positives for this Issue.

Also Read: Prestige IPO Succeeds, Oversubscribed by 2.26 Times
Also Read: Prestige IPO - Why Under-subscription Can be Misleading for Investors
Also Read: Why Prestige IPO Valuations Are Reasonable

The jinx facing realty IPOs has finally been busted, with Oberoi IPO getting oversubscribed by 12 times. This undoubtedly makes the market sentiment better for the next real estate IPO down the line, of Prestige Estate Projects Ltd that opens on 12th Tuesday and closes on 14th Thursday. Investors are keenly looking at the fundamentals of the Issue, not only to ascertain whether this is another good opportunity, but to get confirmation on whether the trend would hold.

Compared with Oberoi, the Prestige Issue is more bang-for-buck in some ways as the total saleable (and leasable) area that Prestige is developing (or can develop) stands at 57.36 million sq ft, whereas in Oberoi’s case it was around 2.5 million. Of course no two markets are alike, but Bangalore real estate demand is now on a definite upswing.

The networth of Prestige is around half of that of Oberoi on a consolidated basis, but Prestige has the distinct advantage of achieving it on a significantly lower equity base.

Prestige’s focus on a single booming regional market and distinctly luxury projects will also entice investors. Though they have ongoing projects in several South Indian cities, 73% of their projects are in Bangalore.

The Issue has a rating of 3/5, verifying average fundamentals. The price band is fixed at Rs. 172 - Rs. 183. Since retail participation is expected to be not extra strong - Oberoi’s retail segment was barely subscribed one times - Prestige too has earmarked a significant portion for QIBs and anchor investors.

Post-IPO the debt-equity ratio of the company will come down to 0.5, which is an attractive position compared with many peers.

Prestige Group’s IPO is coming after a long and prudent wait for around 10 months for the capital markets to gather momentum and for real estate prices to improve. Besides the reasonable issue size of around Rs. 1200 crore, Prestige IPO is reasonably valued, leaving some money on the table for its investors, and thus likely to have a smooth sail.

At a P/E multiple of around 41, the Issue is comparable to the capital market industry segment of ‘Construction & Contracting - Real Estate’ that currently trades on a price-earnings multiple of around 39.50. For the past four years, Prestige’s revenue has been growing at a compounded annual growth rate of 36%.

Industry leaders DLF (BSE: 532868, NSE: DLF) and Unitech (BSE: 507878, NSE: UNITECH) are now trading at P/E ratios of around 75 and 42 respectively.

Two other aspects are likely to favour this realty IPO, one being that capital markets are now more appreciative of focussed regional players, as many pan-India developers are finding themselves over leveraged. The bulk of Prestige projects continue to be in Bangalore, and the Group has a newfound focus on the buzzing North Bangalore, where it has projects like Prestige Oasis and Prestige Golfshire that commands price points like Rs. 2 crore to Rs. 7 crore for luxury villas.

Secondly, Bangalore realty which largely depends on senior-level IT employees, is on an upswing now with salaries increasing by 15% to 20%. While most developers like Sobha and Brigade have hiked prices between 5-10%, Prestige could hike prices by 15% without affecting demand.

Though Prestige declined to go public during the last realty boom, unlike direct competitors Sobha Developers (BSE: 532784, NSE: SOBHA) and Puravankara Projects (BSE: 532891, NSE: PURVA), it had filed its DRHP on 26th November 2009. It had also announced pre-IPO placement plans. The delay in finally going for the IPO signalled a kind of prudence, as another Bangalore based developer, Nitesh Estates (BSE: 533202, NSE: NITESHEST) , had not done too well with its recent IPO.

Prestige is also continuing their efforts to differentiate themselves from competition by launching distinctly premium projects like Silver Oak, which is mainly a villa project following Middle East architecture. At the same time, Prestige Chairman Irfan Razack who is also the Vice-President of industry body CREDAI, has to do a balancing act by coming out with affordable projects, which he prefers to call ‘standard’ projects as against the premium projects Prestige specializes in.

South India based Prestige is a developer who is doing noted projects like UB City and Shantiniketan, and is very closely and equally held by three brothers including Irfan, and the Group has generally shied away from company level stake sales, even while expressing comfort at project level stake sharing. The current IPO plan involves around 20% dilution.

Size-wise, Prestige is comparable to Sobha with a FY’2009 turnover of Rs. 914 crore, and almost double the size of Puravankara. The book value of the Prestige share is quite good, and there is no reason why the Group can’t successfully conclude its IPO as the price-earnings valuations are reasonable, around the industry average.

To even better its fundamentals, Prestige has lined up Rs. 7000 crore of new launches in calendar year 2010, of which a few has already been launched.

L&T FINANCE IPO - Can a Broad NBFC Succeed Like Niche NBFCs?

India’s largest heavy engineering firm, Larsen & Toubro (BSE: 500510, NSE: LT), is finally taking their diversified financial services division public, through a Rs. 1500 crore IPO. Better hedging of risks due to generalised portfolio, strong parentage, proven capital market stewardship for wealth creation, an investment business apart from financing, a strong investment portfolio, and a possible banking licence are all pluses for this NBFC, provided the IPO is on investor-friendly valuations. But the million dollar question before investors is whether a broad based NBFC like L&T Finance Holdings can succeed as much as niche NBFCs that thrive solely around their super-specialised core competencies.

If you are an average investor, you have heard of Shriram Transport (BSE: 511218, NSE: SRTRANSFIN). You have heard of Cholamandalam (BSE: 511243, NSE: CHOLAFIN). You have heard of Manappuram (BSE: 531213, NSE: MANAPPURAM). And you have heard of SKS Microfinance (BSE: 533228, NSE: SKSMICRO). And how they created significant wealth for themselves and their shareholders using transport finance, leasing, infrastructure finance, gold loans, microfinance and all those specialised financing. Now, here comes the antithesis to these niche plays.

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Name any happening NBFC sector, and you will find L&T Finance Holdings there. Not exactly this one company, but its four subsidiaries serving diverse finance needs. For example, their infra finance subsidiary, L&T Infrastructure Finance Company Ltd provides financial support to infra development and construction sectors, with special emphasis on high-growth sectors like power, roads & bridges, telecom, oil & gas, & ports.

Another subsidiary, L&T Finance Ltd, undertakes retail finance and corporate finance activities. Retail business include financing most income-generating activities and assets including transport finance, construction equipment finance, rural products finance, and, of course, microfinance.

Corporate business include extending corporate loans, term-loans, leases, discounting, working capital, supply chain finance, vendor /dealer finance, capital market offerings etc.

The next two subsidiaries are indirect ones - they are subsidiaries of L&T Finance Ltd - but they make the group holding company now going for the IPO a lot more than a finance company. Because, between them, these two subsidiaries, L&T Investment Management Ltd and L&T Mutual Fund Trustee Ltd are investment companies serving retail and corporate requirements.

Two things stand out, when analysing these myriad connections. One is that prospective investors in the holding company going in for the IPO now will get the full benefits from the subsidiaries as they are all wholly owned subsidiaries, including the two indirect subsidiaries.

Secondly, the holding company, L&T Finance Holdings has created these subsidiaries from a judicious mix of organic growth and inorganic acquisitions. Whenever an acquisition made more sense - like for getting a ready customer base - the Group opted for it and the best example remains how DBS Cholamandalam AMC Ltd and DBS Cholamandalam Trustee Ltd were acquired and integrated as the Group’s investment business arms.

And if you thought all these subsidiaries sums up L&T Finance Holdings Ltd, there is a bit more. The holding company is parent to also a sizeable SPV by name of India Infrastructure Developers Ltd, created for financing a single captive power project.

A further attraction for potential investors include the holding company’s significant investment portfolio that includes 5% stake in Federal Bank (BSE: 500469, NSE: FEDERALBNK) , 5% stake in City Union Bank (BSE: 532210, NSE: CUB), a nearly 9% stake in Invent Asset Reconstruction Company, and a 30% stake in NAC Infrastructure & Equipment Ltd.

Of comfort to investors will also be the strong parentage and capital markets stewardship of Larsen & Toubro (BSE: 500510, NSE: LT), which is not only India’s largest heavy engineering company by all metrics - sales, profits, & assets - even ahead of PSU behemoth BHEL (BSE: 500103, NSE: BHEL), but also a heavyweight in Sensex & Nifty, and even while not being an outperformer this year, was stable with its 25% year-to-date returns.

However, on a longer horizon - if you count the last two decades - L&T has been one of the most ardent wealth creators, having multiplied investors money by more than a 100 times. As an aside, the IPO of the finance arm can provide a much needed boost to the L&T scrip.

L&T’s unique lead investors - LIC and the L&T Employees Welfare Fund - also provide stability to both this heavy engineering major and its finance arm going public now.

If provided on investor-friendly valuations, this is one NBFC IPO to watch out for, especially since not many generalised NBFCs that hedge risks better than niche segment NBFCs is coming to the market these days. Not to mention is the possible banking licence due to generalised operations.

And if L&T Finance Holdings can steer clear of the jack-of-all-trades-but-master-of-none syndrome, this IPO will not only be about immediate gains, but sustained long-term gains.

RAHEJA UNIVERSAL IPO - The First Rahejas to Enter Listed Real Estate Space

India’s real estate sector is not in the pinkest of health. But the country’s capital markets are booming, and real estate developers too aren’t missing this chance, - which comes after two years - to raise money from primary markets. Now, Raheja Universal Ltd has joined the IPO fray. The surname Raheja is noted in the industry as much as the Tatas, Birlas, Ambanis, Godrejs, & Mahindras, but in capital markets they have had only a smaller presence, especially in their staple of real estate development. Confusing things further for investors, there are too many Raheja groups in business, some connected, some sharing nothing but the Raheja tag.

Rahejas need no introduction in India Inc. The noted surname is associated with almost every happening sector in Indian industry, including real estate. However, a rank outsider would find it difficult to understand the connect or dis-connect between various Rahejas, simply because there are too many successful and not-so-successful Rahejas around.

For example, in real estate alone, there are at least five to six successful Raheja clans, some connected, some unconnected.

It is in this backdrop that three Rahejas - Father Suresh Raheja, and sons Rahul Raheja and Ashish Raheja - are taking their real estate development firm, Raheja Universal Ltd into the listed space through an IPO. The move is noteworthy as they are not the biggest of Rahejas, even in real estate. But they are all set to prove that they are the fastest.

For most considerations, Raheja Universal Ltd is an independent company unconnected to any other Rahejas. Still, Raheja Universal and its promoters have co-developed with some other Rahejas in the past.

Their immediate connection is with K Raheja Corp (ventures include Shoppers Stop / Crossword / Inorbit Mall / Mindspace) led by brother Chandru L (CL) Raheja, which together with Raheja Universal, was part of the K Raheja Group.

They are less connected with another ‘brotherly’ firm K Raheja Constructions led by Gopal (GL) Raheja, as also cousin-brotherly firm B Raheja Builders (projects include JW Marriott in Bangalore’s UB City) which had later split into two firms, V Raheja & Advantage Raheja.

Then there is NCR-Delhi based Raheja Developers, led by Navin M Raheja, with whom Raheja Universal doesn’t seem to have much connection.

And finally there is the vast R Raheja Group (ventures include Exide / HR Johnson / Outlook / Hathway Cable / Asianet Satcom / Trident Hotels / Globus Stores / Prism Cement / Supreme Industries / ING Life) led by the reclusive billionaire Rajan Raheja, who still has sizeable assets in real estate development.

Still, for all these Raheja Groups active in real estate, Raheja Universal is going to be the first listed developer with this surname. And this is going to help a bit as Mumbaikars readily associate the surname with realty development.

While Suresh Raheja is backed by three decades of experience in realty development, Rahul Raheja is backed by experience as well as an MBA from London School of Economics, while brother Ashish Raheja is a gold medallist from Sydenham College.

Together, they have created a reasonable brand in Mumbai real estate, which even while focusing on large-scale residential projects in Mumbai Metropolitan Region, has had some commercial successes too like the Standard Chartered Towers and Motilal Oswal HQ.

Raheja Universal’s ambitions is evident not only in this IPO, but in their unique tagline – ‘The World to Come’ – as well as their Superbrand status.

But in capital markets, a lot will depend on how the market values realty businesses, with both the realty index as well as recent realty IPOs continuing to under-perform the broader indices like Sensex, Nifty, & the BSE IPO Index.

If Raheja Universal can succeed in getting its IPO rated at 4/5 and if they are willing to offer it to investors at reasonable valuations, this should be a realty IPO to watch out for.