The stock broking and financial services businesses are witnessing exciting times. There are reams of newsprint and bytes of electronic space spent on extolling the opportunities that this sector has. Virtually written off in the late nineties, the financial services firms have risen to meet India?s thirst for finance. Now, they are the most sought after by the investors and predators wanting to expand their presence in this sector.

Both have caused the valuations of the existing players to rise. Motilal Oswal Financial Services (MOFS), an established profit making player, does not want to get lost in this consolidation spree. It intends to tap the capital market and issue Rs 5 face value shares in the price range of Rs 725 to Rs 825. At the higher end of the price band, the company would raise around Rs 246 crore.

Investment argument

There are several factors investors look at while taking an investment decision in an initial public offer (IPO). Prime amongst them is promoter credentials. In the case of MOFS, both Motilal Oswal and Raamdeo Agarwal have demonstrated their expertise in the business over a reasonably long period that encompasses market highs and lows.

Though stock broking comprises a large chunk of revenues, MOFS has diversified into other businesses as well. They have received several citations from global agencies for the quality of their research and service. It recorded sales worth Rs 358.74 crore and earned a net profit of Rs 72.3 crore. The return on networth at 20.89% for FY07 is easily one of the best amongst peers. There are little concerns on this front.

Then comes the business aspect. Around Rs 110 crore or around 45% of the funds raised (upper band price) will be used to finance client needs. In other words, ?margin financing?. This enables the brokerage firm to retain clients and build on higher trades. The brokerage income has been dipping as competition is on the rise. Funds raised will then strengthen MOFS?s business prospects.

The flip side

However, the nature of the business remains fraught with risk. Any downward trend in the stock market could have a definite adverse impact on the company?s earnings ability. This is something the investor will have to take into consideration before investing. At the moment things look rosy, but global tremors have started to shake market confidence. It remains to be seen how things shape up.

The pricing, at the first glance, looks to be steep. The price-earnings ratio of 23 times of trailing earnings might look very attractive but then one must consider that there are a few peers with varied history to compare with.

Investors should also remember that these are near ?dream? times witnessed by the industry and therefore there are high valuations. Over the long run, financial services companies tend to have price-earnings ratio much lower than the market average.

Overall

Keeping fundamental factors aside, the fact that MOFS is approaching the IPO market will keep overall investor interest high. The company is also not raising a very large amount so market experts reckon that chances of listing gains could be high.

For long-term investors, there is a definite need to watch how the sub-prime issue unfolds and how many are left standing when the dust settles down.