Issue Summary

Type Public issue, 100% book building Min. subscription 365 equity shares Size Rs 435 m to Rs 517 m Lead Managers SBI Capital Markets, DSP Merrill Lynch Price Rs 16-Rs 19 per share Listing BSE & NSE Face value Rs 2 Promoters Sameer Gehlaut, Rajiv Rattan and Saurabh Mittal Shares on offer 27.18 million Promoters post     issue holding 44.7% Issue Opens September 6, 2004 Issue Closes September 10, 2004

Issue structure

QIBs Non-Institutional Investors Retail Portion Number of shares 13,593,759 6,796,880 6,796,880 % of net offer to public (non-employees)* 50% 25% 25% Minimum Bid/Application size Rs 50,001 Rs 50,001 365 equity shares Maximum Bid/Application size Not exceeding the size of the issue Not exceeding the size of the issue Rs 50,000

Objects of the issue

To promote new business activities like retail finance and asset management. To upgrade fixed infrastructure (like installing Virtual Private Network (VPN) to connect branches) and opening another 75 branches by the end of calendar year 2006. For the purpose of inorganic growth by way of acquiring strategic stake in other companies and further investment in subsidiary company Indiabulls Securities Limited (ISL).

Background

	Business
	Indiabulls is essentially engaged in providing financial services in equity, derivatives and debt markets. The company's other financial services include distributorship of insurance products, mutual fund advisory, depository for listed shares, equity research and other non banking financial services. The company operates through a network of 75 branches spread across the country. The graphs below indicate the breakup of the revenues from its online and offline brokerage businesses. Brokerage business (both online as well as offline) accounts for nearly all of the company's revenues from operations. While the online segment contributes 35% of brokerage revenues, offline contribution stands at 65%. As far as size of the business is concerned, the overall revenues from the brokerage business were Rs 695 m in FY04, while the overall revenues from operations were to the tune of Rs 696 m.
	Promoters
	Sameer Gehlaut, Rajiv Rattan and Saurabh Mittal are the promoters of Indiabulls Financial Services Limited. While Sameer Gehlaut will have a 23.0% stake in the company post the IPO, Rajiv Rattan and Saurabh Mittal will have a post issue holding of 11.5% and 10.1% respectively. All the three promoters of the company are engineering graduates while Saurabh Mittal is a management graduate as well.
	Sector
	Since Indiabulls derives most of its revenues from the brokerage business, its fortunes are very much dependent on the performance of the capital markets, i.e. debt, derivative and equity markets. The Indian equity markets have grown from strength to strength in the last decade with combined daily volumes of all segments on the BSE and the NSE touching Rs 232 bn in April 2004, from Rs 5 bn in FY96. Total shareholders in the country are over 20 m (2% of population) and this is the third largest after the US and Japan, in absolute terms. However, if one were to compare the percentage of all households in India that are invested in the stock markets, it is only about 1.9% as compared to an estimated 52% (including indirect ownership by way of mutual funds) of all households in the US. This highlights the long-term potential for the sector.

Reasons to apply

	Online trading potential is huge:  Online trading accounted for 5% of overall market in FY04 as compared to an estimated 3% in FY03. Indiabulls currently has almost 20% market share of volumes in the Internet trading space. The table below indicates the growth in volumes of the Internet trading segment on the NSE over the last few years. The growth is indicative of the potential of this segment, which we believe is likely to be robust going forward as well. This is primarily driven by increasing penetration of computers, significant decline in Internet charges, convenience of usage and cost advantage. To put things in perspective, the offline brokerage on equities is around 1.0% as compared to 0.5% in the online trading space. NSE online trading statistics...   Enabled members* Registered clients* Trading Value (Rs bn) % of total trading value FY00 3 -     FY01 61 123,578 73 0.5 FY02 82 231,899 81 1.6 FY03 CM 80 346,420 154 2.5 F&O** 13 69,340 51 1.4 FY04 CM 70 413,454 379 3.5 F&O** 14 164,642 430 2.0 CM: Cash Market, F&O: Futures and Options market    * At the end of the financial year ** trading value for F&O segment compiled from June 2002 Source: NSE website
	Advisory services:  Indiabulls is also into mutual fund and insurance advisory businesses. Though this field is extremely competitive and requires significant research skills, these are highly profitable business segments. Though these businesses currently account for an insignificant portion of overall revenues, considering the penetration levels of mutual funds and insurance in the country, prospects are promising.
	Aggressive growth plans:  Indiabulls has set aggressive targets to expand its business in the offline space. This includes investments in upgradation of branch network and opening another 75 branches by the end of calendar year 2006 (150 in total). The company has also indicated its intent to acquire strategic stake in other companies towards growing the business inorganically.

Reasons not to apply

	Vulnerable to stock market fluctuations:  Nearly all of the company's revenues are derived from stock broking business (online as well as offline), which is a major cause of concern. Stock markets, like any economy, are cyclical in nature. While bull phases are generally accompanied by significant growth in brokerages (as was seen in FY04), during downturns, revenues could fall at a faster rate. While the company has announced its intention to enter the asset management business, presumably to reduce its dependence on one revenue stream, we feel that the company does not have any prior experience in this business and to that extent, risks are enhanced.
	Low entry barrier in the online space:  It is easy for an established offline player (brokerages, banks and NBFCs) to enter the online trading space. As a matter of fact, most of the current online trading players initially started off with an offline presence. Considering the cost benefits of being in the online space, this segment could attract lot more competition going forward. Also, Indiabulls is hampered by the lack of banking presence, which is an essential part of the whole online broking transaction process. For instance, almost 15% of the online trading transaction by Indiabulls' customers is carried out through the HDFC Bank's payment gateway. This in itself might lead to conflict of interest, as the HDFC Group also offers its own online trading service through HDFC Securities. There exists the threat of the key bank withdrawing its gateway support in order to promote its own interest. More importantly, there exists the threat of poaching of the current online trading customers of Indiabulls. Banks, due to a captive base of customers are in a better position to offer retail broking services to its clients. The entry of HDFC Bank and ICICI Bank in the online trading space could be viewed in this context.
	Past growth might not be maintained:  Indiabulls has posted a strong growth in its business in its limited period of existence. The growth has been to a large extent aided by the extraordinary rise in the stock markets in FY04. Keeping this in mind, it is imperative to note that the past performance of the company is not indicative of the future performance and to that extent investors need to be cautious.

Financial Performance

(Rs m)	FY02	FY03	FY04
Sales	130	258	698
Other income	3	9	22
Total income	133	267	719
Expenditure	73	149	354
Operating profit	57	109	343
OPM (%)	43.9%	42.4%	49.2%
Interest expenses	9	30	45
Depreciation	7	9	11
Profit before tax	44	79	309
Tax	3	28	115
Net profit	41	51	194
Minority interest	-	-	0
Equity in affiliates	-	-	-
Extraordinary item	7	0	1
Net Profit after adjustments	47	51	194
NPM (%)	36.6%	19.9%	27.8%
No. of shares	78	78	87
EPS (Rs)	0.5	0.6	2.2