Multibagger Diwali Gift: Sumedha Fiscal Services Ltd - BSE Code 530419 - CMP 36/-

Sumedha Fiscal is a long established player in the Financial Services Industry. The company is a well known name in the small and medium enterprises group for it's investment banking activities and derives major portion of it's revenue from loan syndication. The company is one of the most undervalued company on the bourses and provides an opportunity for making an investment. Sumedha Fiscal Services Ltd is primarily into Investment Banking and Capital Market operations. The company derives 80% of it's revenue from Investment Banking Services like loan syndication, equity placement, etc while 20% from Capital Market operations, prominently Brokerage services and Wealth Management Services. The company has been growing at a breath taking pace and reported stellar numbers even during the toughest year i.e FY 09.

Corporate Services:-

Corporate services is the major earning source of the company. It can be categorized in various segments such as:- 

1. Equity Placement 

2. Financial Restructuring 

3. Merchant Banking 

4. Debt Syndication 

5. Mergers and Takeovers 

6. Portfolio resolution of Stressed Assets 

 This business segment retain edits position as the company's principal growth driver and revenue earner,accounting for 84% of income from operations in 2009-10. 

 Income received from this division registered an increase of 47%(YOY) to Rs. 1,158.89 lacs in 2009-10 on account of focus on various large ticket size transactions by reputed corporate groups.   

 The company not only was able to raise the quantum of loan syndicated and increase its revenue during the year under review thereof, but also handled demanding assignments despite the environment not being conducive for loan syndication activities as the banks were facing problem of receiving good credit proposals.

Investment & Wealth Management Services

Investment services caters to the need of all the segments of clients which includes corporate/institutions, high net worth individuals and retail. It can be categorized in various segments such as:- 

1. Stock Broking 

2. Commodity Broking 

3. Depository Services 

 Income from the capital market operations segment increased by 145% to Rs. 213.64 lacs in 2009-10 from Rs. 87.14 lacs in 2008-09. 

 Broking division(except for commodity broking) and wealth management division reported an increase of 208% (y-o-y) to Rs. 165.98 and 44%(y-o-y) to Rs. 47.66 lacs, respectively, in their incomes in 2009-10. 

 Revenue from commodity broking services (through a subsidiary company) increased to Rs. 4.66 lacs in 2009-10 from Rs.0.27 lacs in 2008-09.

Subsidiaries

• The company is having a subsidiary company which deals in Commodity. 
• SFSL Commodity Trading (P) Limited is the subsidiary company of SFSL. 
• Company has various Associate/ Joint Venture concerns viz:- 
• SFSL Insurance Advisory Services (P) Ltd. 
• SFSL Risk Management Services (P) Ltd. 
• Capita Finance Services (P) Ltd. 
• U.S. Infotech (P) Ltd. 
• Seasoft Solutions Pvt. Ltd. 

 Financial Highlights:-

• The company has done well over the years especially since FY 06. The company has been reporting sequential growth since then and has been able to expand it's margins thus bringing in operational efficiency.
• The company has seen an exponential growth in it's bottom-line from Rs 0.89 crore at the end of Mar'06 to Rs 4.91 crore at the end of Mar'10.
• In the first quarter ending Jun'10, Sumedha has come out with a stellar performance. The revenue for the quarter ending Jun'10 stands at Rs 3.53 crore, a 49.57% increase on YOY basis.
• The net profit for the quarter ending Jun'10 stands at Rs 1.19 crore i.e. almost a 40% increase on YOY basis. 
• The company is trading at a TTM PE of 4.58 which is very low by any standards.

Outlook for the Financial Sector:-

• The Funds tapped by Corporate India through syndicated loans and equity issuances shot up significantly for the quarter ended March 2010. Equity offers raised Rs 44,100 crore in the March quarter of 2010 compared with Rs 1,100 crore for the same period last year. The up-trend is expected to continue.
• As per the KPMG-CII report PE and Venture Capital funding in India needs to increase threefold to $ 30 billion annually from the current level to shore up funding for small but promising companies.
• An ERNST and YOUNG study to measure confidence in the global economy said over half of the Indian companies surveyed were optimistic about making acquisitions in the next 12 months due to the improving business climate.
• Increasing the market participation, expanding issuers, streamlining processes and deepening product markets are the key elements that may lead to a three fold growth in India's capital markets by 2020, says a FICCI-Mckinsey report.
• Currently, Corporate bond market players only report their trades on the three platforms i.e. NSE, BSE and FIMMDA. Regulators are working towards putting in place a platform for trading of bonds, like the BSE and NSE screens for shares.
• The Government is planning to raise FII investment limit in corporate bonds. The domestic debt market could increase four times to $1.5 trillion by 2016 if cost of issuance of bonds is reduced and listing norms are simplified.

Investment Rationale:-

• The company is a long established player in the Financial Services Industry. The company is a well known name in the small and medium enterprises group for it's investment banking activities. 
• The Management holds 52.73% equity in the company which is very good by any standards. 
• The company is trading at a PE multiple of 4.58 based on it's trailing twelve month's earnings, while the other industry player command a minimum PE of 10-12.
• Although the market cap of the company is 24 crores, however the enterprise value is just 12-13 crores. This is the best bet one can get considering the fact that company is generating more than 5 crore cash from operations.
• If one is to consider the valuations and consider the stock as if buying the business, then the investor is getting close to 50% return on his investment.

Some key stats...

 52 week's high/low = Rs 41.85/11.13 – The stock recently made a new 52 week high. As it is in the strong bullish phase it can continue to make new highs.

 Peak share price = Rs 41.85 (15th October '10) –The stock scaled a new high just a few days back. The stock deserves a re-rating and we may see SFSL continue making new highs.

 Trading volume = Avg. 0.942 lacs shares(approx) per day –Earlier the volume was low however in the last few days the liquidity has improved with investors rushing in.

 EPS = Rs 7.75 – Company has recorded an EPS of Rs 7.75 on trailing twelve months basis.

 PE = 5 - On the basis of annualized forward earnings the stock is available at a PE of 3-4 which is a discount compared to the industry standards.

 Book Value = Rs 22.89 - The current stock price at Rs. 35.80 is trading at about 1.56 times its book value price.

 Shareholdings : No Of shares [% Share Holding ]

 Total DII: 2.76 lakhs [4.05%]

 Total Non-Institution: 19.8 lakhs [29%]

 Total Bodies Corporate Holding: 9.7 lakhs [14.22%]

 Total Promoters: 35.98 lakhs [52.73%]

 Total Outstanding Shares : 68.24 lakhs [100 %]

Debt/Equity = 0 [Mar'10]

ROCE = 54.8% [Mar'10]

RONW = 36.8%[Mar'10]

Current Ratio = 2.1[Mar'10]

Delivered Volume per day = 86.69%

BSE Code 530419

Bond Market –Thinly traded !!!

 The graph above presents a comparison of the exchange-traded corporate debt market and equity markets in India. 

 The corporate debt market (exchange-traded) is barely 2.6% of the equity market. This is contrast to markets in other developed countries like US, where the debt market is around 3 times the size of the equity market. 

 A functioning corporate debt market is generally recognized to be a necessary component of a modern economy. It is also observed that the debt market in the other developed economies is significant and acts as an important source of funding for corporate. 

Statistics on Indian Bond Market :-

 The above data clearly indicates that Indian Bond Market is under developed compared to other developing nations. 

 In India the bond market has a very huge scope for improvement. Various authorities in India has suggested that Indian Bond Market has to be improved for further development. 

 The Equity Market of India is well versed but bond market is still under developed.

Four fold growth opportunity to USD 1.5trillion:-

 The bond market in India has huge opportunities for the market is still quite shallow. The equity market is more popular than the bond market in India. 

 ASSOCHAM and PWC have jointly forecast size of Indian debt market including public sector debt grow nearly four fold from current level of roughly US$ 400 billion to US$ 1.5 trillion by 2016. 

 The proposed measures include minimization of cost of issuance of bonds with effective market making mechanism and listing norms for corporate bonds be made simpler by permitting their disclosure in abridged version. 

 A developed trading reporting system should be evolved for bonds with robust trading platform which can go a long way in enabling efficient price discovery for corporate bonds as also help in creating depth and vibrancy in the market. 

 A specialized debt funds for infrastructure financing should be created as recommended by high level expert committee on corporate bonds and securitization and lastly India needs to develop a market for debt securitization apart from reducing stamp duty on debt assignments including bonds.

 The ASSOCHAM and PWC are confident that with execution of aforesaid proposals, Indian debt market including public sector debt can go about 55% of national GDP in next 6 years which at current level is estimated at around 45% of India's GDP. 

 So, things are set to change as Regulators are working towards putting in place a platform for trading of bonds, like the BSE and NSE screens for shares. 

 Lastly and most importantly, the Government is planning to raise FII investment limit in Corporate bonds. Until now, the FII's were present only in a limited way in the bond market due to the ceiling on their investment in the debt market, currently there is a cumulative sub- ceiling of $0.5 bn on investment in corporate debt.

Increasing interest in Indian Corporate Paper:-

 Over the past few years, investment by FIIs in the Indian debt market has been primarily directed at government securities or G-Secs. Investment in G-Secs has been capped at $ 5 billion by the government and the Reserve Bank of India (RBI).

 Foreign funds have hit the ceiling of $5 billion for investments in government bonds which means that fresh investments are mainly corporate debt. 

 Foreign portfolio investors or FIIs have invested a record $5 billion in Indian corporate paper in the first four months of this year as high bond yields and a strong local currency ensure that such investments pay off handsomely. 

 This is the first time that overseas portfolio investors have poured money on such a scale in corporate debt offerings issued by Indian firms. 

 Last year, the investment limit for FIIs in corporate bonds was raised to $15 billion, which means that there is plenty of headroom still for them to subscribe to bond offerings. 

 The bulk of such investments have been in top-rated bond offerings of an average tenure of 18 to 24 months and in commercial paper. Foreign portfolio investors prefer shorter duration paper as it is far more liquid, making exit easier. 

 Data published by capital market regulator SEBI shows that net investment by foreign portfolio investors in all forms of debt (sovereign included) so far is $ 12.13 billion. 

 India's corporate bond market is gaining depth, the country's largest mortgage lender, Housing Development Finance Corp. Ltd (HDFC), recently raised Rs. 1,000 crore through a sale of 15-year bonds. 

 The bonds were placed privately with pension funds at an annual rate of 8.96%. HDFC had planned to raise Rs500 crore, with a so-called green shoe option of raising an additional Rs. 500 crore in the event of sufficient investor demand. 

 JP Morgan, Barclays and HSBC top the list of leading foreign portfolio investors in the local corporate bond market. 

 Although India does not enjoy the highest rating in the global debt markets, it is still attractive to large investors because of the higher yields available and the rising currency. 

 Thus, the corporate bond market is deepening in India and the Foreign Institutional Investors are gradually becoming more confident about the same. 

Loan Syndication –A big business

 With corporate India's appetite for funds showing no signs of abetting, the loan syndication market looks poised to increase its pace of growth. 

 Not only are more banks willing to lend to India, but the deal sizes are also increasing. This is because the India growth story is still strong. 

 Syndicated loans raised by Indian businesses the year to end-August are the highest in Asia excluding Japan. Total volume of syndicated loans (both international and domestic) touched $58.6 billion through 128 transactions. 

 Compared with this, Indian businesses raised $33.3 billion through 82 deals in the same period last year, according to a Hong Kong-based investment banking deal tracking firm, Dealogic. 

 The sentiments in Indian loan syndication market have remained high. The corporate are increasingly tapping the loan syndication route. Many Indian companies are still under- leveraged and corporate still prefer the loan route to fund their expansion plans. Hence the loan syndication market now can expect further big ticket deals in the days ahead. 

 Sumedha is a major player in loan syndication business for the small and medium enterprises and is now eyeing big ticket deals from bigger corporate.

Buying Strategies Suggested [Always buy in SIP ways]

 1^st Phase  : Buy at the current price range Rs 35 – 36 [50% of investment]

 2^nd Phase : Add if the price falls down to Rs 28 - 30 [50% of investment]

Expect at least 4-5 times return in next 2 years from now!!!

For companies info on intellectuals behind SFSL, Income statement, balance sheet, etc. please visit the website http://www.sumedhafiscal.com/index.asp

This report is prepared by me to help retail investors & to educate people to pick quality stocks. Stock market is designed to transfer the money to the patient. I am not asking you to buy it. One must do there own research and than take the decision to buy or not to buy the stock.

A gift is pure when it is given from the heart to the right person at the right time and at the right place, and when we expect nothing in return.

Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.

The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase.

Happy Investing!!!