Small investors may not be the significant beneficiaries in the stock market boom, brokerage companies have certainly gained a significant mileage from it. The boom has made the brokerage companies grow in leaps and bounds in the last two to three years and has prompted them to take on other servives to grow their businesses. So other than brokerage incomes, investment banking and advisory services income has also grown at a rapid pace, thanks to the of mergers and acquisitions deals and fund raising by various companies. Not to mention the trading gains on a daily basis made by these companies in the stock market.

Business

Edelweiss Capital is a Mumbai-based financial services company, which started the operations in 1996. Its business is divided in two divisions- agency and capital business lines. The company recognises income from fee, brokerage and commission under agency business, while its trading and arbitrage and investments and dividend income is recognised under capital business lines. It conducts all these activities through its various subsidiaries.

Edelweiss Capital intends to utilise majority of the funds to enhance the margin maintenance with stock exchanges by its subsidiary Edelweiss Securities (ESL). Currently, its margin maintenance stands at Rs 599.59 crore and it plans to enhance this by Rs 300 crore, through this issue. The margin is required to enter into contracts in equity index or stock futures and for to maintain mark-to-market margin. The company will also be repaying unsecured loans amounting to Rs 105 crore from this issue. The remaining proceeds, which is a small part of the total proceeds, is planned to be utilise in establishing additional offices and enhancement of the existing technological capacity.

Financials

The company is into diversified activities in the financial services sector. However, its majority of the income is generated from brokerage and commission and trading and arbitrage business. For the five months ended till August 2007, these two businesses contributed around 84.47% and 88.79% respectively in the FY2006-07. Edelweiss capital had grown at a CAGR of 152.91% in the last four years. The total income in the five months ending August 2007 was 284.86 crore and profit after tax of Rs 80.92 crore.

Valuation

The brokerage cum investment banking companies are seeing unprecedented growth in the last couple of years and the same is expected in the coming years, thanks to the bullish outlook of investors; both domestic but foreign especially. And this has led to a continuous surge in the foreign inflows in the market. And Edelweiss Capital is one of the companies reaping the benefits of this opportunity. Its fully diluted annualised earning per share (EPS) is Rs 23.82.

The company has given stock options to the eligible employees and this has been incorporated in the EPS calculation. The holding of the employees in the company including the options not exercised constitutes 17.96% of the post issue of the equity. Considering the upper and lower price band the P/E is 34.62(x) and 30.42(x) respectively, the offer is worth considering.

This is given the fact that Edelweiss has established a strong brand equity and service standard for itself in this growing market. However, conservative investors must realise that the brokerage and market related businesses are fraught with risks. Globally, brokerage firms like Merrill Lynch, Bear and Stearns are facing a lot of investor flak, due to the credit crises. Though, it is not applicable to the company under consideration, it remains a business risk that investors must be aware of before taking a decision.