Investors, especially those with a moderate risk appetite, can refrain from subscribing to the initial public offering from Future Capital Holdings and evaluate the stock for investment at a later date. The company is addressing two major financial service businesses with high growth potential — investment advisory services and consumer credit — with an experienced management team at the helm. While the business undoubtedly offers huge room for scalability, earnings visibility is extremely low at this juncture.

A nascent consumer credit business, untested business model of offering unsecured credit at the point of consumption, high dependence on group companies for business volumes and high competition from private banks and NBFCs peg up risks associated with this investment. The asking price for the offer is stiff, offering little margin of safety on execution.

At Rs 765, the higher end of the price band, the offer values the entire business at a price-book value (P/BV) of about 6.6 times. Assuming an asset-based valuation for the advisory business (at 15 per cent of expected assets), the consumer credit business alone is being valued at 4.5-5 times book value post-IPO. Entrenched peers in banking/financial services with similar opportunities for growth — Indiabulls Financial, ICICI Bank and IDFC — are available at comparable valuations. Future Capital reported a total income of Rs 31.3 crore and a net loss of Rs 12 crore on consolidated operations for the six months ended September 2007; the present financials do not offer scope for a meaningful PE computation.

Business Future Capital Holdings, the financial services arm of the Future (Pantaloon) group, has three key revenue drivers.

Investment advisory: The company leverages on the group’s experience in the retailing business to offer advisory services to realty and venture capital funds investing in India. This is the more established of the company’s businesses, with funds under advice including Kshitij Venture Capital (mall development), Indivision Capital (private equity), Horizon Development (real estate) and FHL Developers (hotel development), managing a combined asset base of $1.1 billion (Rs 4,183 crore).

A fund focussed on logistics and warehousing services has also been recently added to the advisory portfolio. As a complement to advisory services, the group also plans to generate revenues from research services on real estate, mall management and other related areas.

Revenues from the advisory business are in the form of a flat fee on assets plus a performance fee based on returns generated above a minimum rate. Advisory fees contributed Rs 21 crore of Future Capital’s Rs 31 crore revenues in the half-year ended September 2007. Given that the funds under advice have been in operation for just one-two years, the “performance”-based component could post significant growth over a two-five year time-frame.

Growth prospects for the advisory business will be pegged to the group’s ability to bag new mandates, returns generated and the exit price for the portfolio. A well-networked management team acquired over the past two years (from rival financial and consumer firms) position the company well to bag new advisory mandates and ramp up the assets under advice. However, increasing competition for mandates could result in higher performance benchmarks and pressure on fees generated in this business. The cyclicality of the mall management, hotel and realty businesses, could also result in volatile earnings.

Retail credit: Earnings prospects for Future Capital will also significantly depend on the scaling up of its consumer credit business, towards which the IPO proceeds will be deployed. Future Capital has entered into an exclusive agreement to offer retail credit services at present and future malls/outlets operated by the Pantaloon group across India. The company will establish a presence in these malls and offer loans to fund consumer durable and furniture purchases, apart from offering unsecured personal loans. Plans are also afoot to offer a “Future Card” (credit card) in alliance with ICICI Bank and to distribute financial products. This business is currently in the start-up stage, with total loans of just Rs 11 crore disbursed till date.

The low levels of retail loan penetration in India and the successful ramp-up managed by players such as GE Money and CitiFinancial, are testimony to the huge growth potential of the consumer credit business. Future Capital’s tie-up with Pantaloon Retail may help it leverage on the retail chain’s ambitious roll-out plans and provide it with a captive customer pool, at low start-up costs. However, given that consumers already enjoy easy access to credit through banks and credit-card companies, Future Money may have to compete with the latter either by offering more attractively priced loans, or accepting customers of lower credit quality.

A sharp focus on unsecured loans with relatively small-ticket sizes could expose the business to a high risk of delinquencies and servicing and recovery costs. The recent trend of rising defaults on retail loan portfolios poses a key risk to Future Capital’s plans.

Overall, these factors suggest that it may be prudent for investors with a long term perspective to wait for a longer execution track record, post-listing, before considering investment in the stock. Listing gains on the stock are however a possibility, given the recent market fancy for financial services stocks.

Offer details: Future Capital Holdings is hoping to raise Rs 450-490 crore through a book-built initial public offering in the price band of Rs 700-765 per share. The proceeds will be used mainly to augment the capital base to fund retail financing services. The offer opens on January 11 and closes on January 16.

Source : Hindu

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