SME IPO: Stellar Capital Services

Stellar Capital Services (SCSL), a Delhi-based non-deposit taking NBFC, has come up with an IPO to list its equity shares on the BSE SME platform. The issue opened on October 15, 2013 and will close on October 18. The company is offering 45 lakh fresh equity shares at a fixed price of Rs 20 per share, and intends to raise an amount of Rs 9 crore. Out of the total issue, 2.5 lakh equity shares are reserved for market makers. The company has appointed Aryaman Financial Services as lead manager for this issue.

SCSL was originally incorporated in the year 1994 as a private company and became public in 2013. It provides financial services and also has interests in trading and investing in securities. This NBFC’s financial services include inter-corporate deposits, financial consultancy, retail IPO funding, management consultancy, loan against property, personal loan and unsecured loans.

The company’s major revenue is earned from the interest on loans provided to corporates and individuals. During FY13, it earned a total income of Rs 3.89 crore, 37% higher from that in FY12. On an annualised basis, however, SCSL reported a total income of just Rs 2.89 crore for FY14, 26% less than that in FY13. On the expenses front, SCSL's total expenses increased by 33% to Rs 3.74 crore in FY13 against Rs 2.81 crore in FY12. The rise was primarily due to higher expenses on the purchase of gold coins, bonds and equity shares. Further, the net profit of the company stood at Rs 10 lakh in FY13 and its annualised FY14 net profit came in at Rs 58.5 lakh.

SCSL intends to use the funds raised for expansion and to augment the capital base for its NBFC activities. The company has plans to expand its operations in Kolkata and Jaipur, and an amount of Rs 19.55 lakh will be used to set up offices in these locations. It also proposes to utilise Rs 8.21 crore to augment its capital base.

On the valuations front, the company is offering its equity shares at a FY13 PE of 329x, which is much higher than that of its peers. Its peer companies like Edelweiss Financial Services, First Leasing Co. of India, Nalwa Sons Investments, Muthoot Finance and Bajaj Finance are trading at PE levels of 13x, 1x, 12x, 3.4x and 10.7x respectively.

The government has tightened the rules for NBFCs in December 2012, which needs to be met by all the players in this sector. This makes the coming years very challenging for NBFCs, and only those who can prove themselves will survive. Considering the higher valuations, we suggest that investors avoid this issue.