Edelweiss prices IPO at the top

The $176 million offering for the Indian investment bank is 111 times covered despite volatile markets.
Given the current jitters in global financial markets, it may not seem like the best time to bring a company involved in brokerage and investment banking to market, but in fact, relative to its size, the initial public offering of Edelweiss Capital turned out to be one if the ôhottestö offerings in India so far this year.

When the books closed on Wednesday, investors had submitted orders for 111 times the overall number of shares available. This allowed the firm to fix the price at the top end of the Rs725 to Rs825 offering range for a total deal size of Rs6.92 billion ($176 million). Citi, Kotak Mahindra and Lehman Brothers were the joint bookrunners.

The healthy demand may be a reflection of the fact that the Indian stockmarket has held up better than many other Asian markets in the recent downturn, but it could also be a vote of confidence in the longer-term performance of the market.

Observers also give a lot of credit to Edelweiss itself, noting that the mix of businesses that it offers is unique and no other listed financial services company in India can provide the same exposure. Started in 1996 as a boutique investment bank, the firm has growth significantly and, in addition to its institutional and private client brokerage and investment banking business, the company is now also involved in proprietary trading and treasury operations, asset and wealth management, insurance broking and wholesale financing.

This diversification means ôit should be relatively less affected by a cyclical downturnö, says one source close to the deal.

The firm is also well known for its strong brand, for its innovations and for its ability to identify emerging investment themes that will drive economic activity. In the late 1990s, it was among the first investment banks to set up an advisory business focused on private equity investments after spotting the emerging wave of private equity investments in this country.

Within the investment banking industry, the firm has also made a mark for itself through its use of stock options. Aside from its two founders, Rashesh Shah and Venkatchalam Ramaswamy, company employees owned 11.3% of the company before the IPO and another 9% has been set aside to cover its employee stock option programme. This has helped the firm to hold on to its staff at a time when a shortage of domestic investment banking talent is causing a lot of job hopping in India.

ôThe opportunities are good, the Indian outlook is good and the capital markets are good, but for a firm like this, the management team makes all the difference," the source says.

ôWe believe that by motivating employees through our partnership culture, we are able to recruit talented professionals and reduce employee attrition,ö the company notes in the listing document, adding that most in its senior management team have been with the firm for the past five years.

The company offered 8.39 million shares, or 11.2% of its share capital. Sixty percent of the deal, excluding the 2.4% portion that was set aside for employees, was sold to qualified institutional bidders (QIBs), 10% to non-institutional bidders, including corporates and high net-worth individuals, and the remaining 30% was earmarked for retail investors.

According to the National Stock Exchange of India website, QIBs subscribed for 153 times the amount of shares on offer, non-institutions ordered 164.3 times their portion and retail investors asked for 17.2 times.

The demand remained strong throughout the four-day bookbuild even though the benchmark Bombay Sensex index was down on all four of those days, losing a combined 3.3% and experiencing large intraday swings. Still, this was less of a decline than in some other markets such as Hong Kong where the Hang Seng Index shed 4.8% in the same period.

The source noted that nobody retracted their orders during the roadshow and the official data show there was no price sensitivity in the book.

The IPO price pitched Edelweiss at a fiscal 2008 price-to-earnings multiple of 32.1 to 36.8 times, based on forward earnings projections by two India-based analysts. This compares with 35.4 times for smaller brokerage firm Motilal Oswal Financial Services, that is considered one of the closest comparables. In its prospectus, the company also notes Indiabulls Financial Services as a possible comparable, although market watchers say its focus on retail clients means the two firms arenÆt really competitors and Edelweiss with its focus on institutions, corporate and high net-worth individuals, does deserve a premium. As of yesterday, Indiabulls was quoted at 25.6 times its fiscal 2008 earnings.

Edelweiss also has a strong track record of high profitability and growth with both revenues and net profits increasing at a compound annual growth rate of about 120% between fiscal 2005 (to end March) and 2007. It posted a net profit of Rs1.09 billion in fiscal 2007 and in the five months to August 2007 the bottom line it had already reached Rs809 million. The analysts forecast that the bottom line will continue to expand at 60% to 70% in fiscal 2008 and 2009.
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