Underwriting IPO of Seyad Shariyat Finance

By
Pegasus(Team No. 2)

Team Members:
PiyushSamaria : piyushsmr2@gmail.com
Rishab Bucha : rishab1203@gmail.com
 In d ex

Brief about Islamic bank

About the firm

Market scenario

Valuation

Price band and details about issue

 About Islamic Bank

About Present State Scenario in India

n through the development of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for loan

About Present State Scenario in India

.
slamic banking was undertaken in Egypt under cover without projecting an Islamic image in 1963.
oject became part of Nasr Social Bank which, currently, is still in business in Egypt and is the largest Islamic bank in
countries

About Present State Scenario in India

•No full time Islamic bank available.

•RBI has send out report saying Islamic bank model is not suitable
•Kerala High court has asked CPM govt to be away from the model of Islamic bank

*
Seyad Shariat Finance Limited

Background Businesses Features

q
qSeyad Shariat Finance Ltd. is a non-banking financial company, approved by the Reserve Bank of
India as a Leasing company and registered under the Indian Companies Act, 1956.
qFirst corporate finance institution functioning in Tamil Nadu as per Islamic Economic System.
qRating recently upgraded from MB+ to MA- by ICRA.
q

Background Businesses Features

qOne of the entity of Syed shariat Limited, Others being Seyadu Beedi,Seyad Cotton Mills etc.
qSyed shariat currently works in Leasing, Hire purchase & Venture Financing, Housing and other loans
for Rural Area.

Background Businesses Features

qClose customer interaction and relationship.

qSpecialized Branch network.
qFlexibility in shifting product and liability mix.
qPopular model of Islamic banking
Existing Business of Syed Shariat Finance

LEASING
This permits the company to lease automobiles, equipment, machinery and other business assets
to a lessee on agreed rentals payable every month.
TRUST FINANCE
In trust finance business capital is provided by the company and the profits are shared by the client
and the company according to the contractual terms and conditions.

COST PLUS FINANCE

A contract in which a client wishing to purchase equipment or goods requests the company to
purchase these items and resell them to him at cost plus a reasonable profit (mark-up).

HOUSING FINANCE
Under this scheme, the Company will provide finance for the construction of houses for the
clients on the basis of Rental Sharing Scheme.
VENTURE FINANCE
Under the Joint venture agreement the Company advances funds and participates in the
capital. The income is determined as a percentage of turnover.
 Analysis of Islamic Banking
Strength Weakness

ognition by RBI to operate Øas

need
an NBFC
to set up monitoring cell to keep them informed of the internal function
ical scenario for Islamic bank
ØHighly
looking
trained
up. professional required to design the profit loss scheme.
rational for over 5 years and good know how of the model

Opportunity Threats
Ø“Islamic” bank may have to suffer from the negative perception of terroris
population who can use the facility
Communalization
people follow Sharia law and Øhence can deal onlyofwith
finance sector
Islamic in terms of sharia and non sharia bank
banks
the niche segment
Flow of credit to Muslims by Banks

qLow number of account holders, and amount made available to Muslims.

MUSLIMS OTHER OTHERS

MINORITIES
PRIVATE SECTOR BANKS
Amount 6.6 7.9 85.5
outstanding(%
No.
) of 11.1 10.6 78.2
accounts(%)
PUBLIC SECTOR BANKS
Amount 4.6 6.3 89.1
outstanding(%
No.
) of 12.2 8.1 79.7
accounts(%)
 Flow of credit to Muslims by Banks

nalyzed the three nearby state and the state of bank credit availability for Muslims.

a also has low score on both the parameters but is excluded due to the recent judgement given by Kerala High Court

State MUSLIMS OTHER OTHERS

MINORITIE
S
Karnataka No. of accounts(%) 10.6 3.3 86

Amount outstanding(%) 4.7 2.2 93.2

Andhra Pradesh No. of accounts(%) 7.5 3.6 88.8

Amount outstanding(%) 2.8 1.6 95.6

Tamilnadu No. of accounts(%) 9.6 7.5 82.9

Amount outstanding(%) 6.6 3.9 89.5

 Valuation of the Firm

ash flow to firm as the model for estimation of the value of firm.
of IPO is to allow the firm to open additional branches and raise additional capital for operations
m:-
et target for number of branches to be opened is assumed.
nalyze branch wise profitability and then bring the change in the balance sheet and income statement and final cash
sumption of stable growth after year 6

Analysis of profit made per branch

The number of employee figure is taken from the K. Ahamed Hussain,ranch Manager,Tirunvelli.
Interest expense from the profit given out in last 3 years (8.2, 7, 9.5)
Profit estimated per branch come out to be 36,46,000 for an year with added asset base for 5.2 crore per branch

P & L of Branch
Projected income statement
qWe project the future income statement for the next 5 years.
qThe scope of activity of the bank is assumed to be same of leasing and buy-hire model.
qBonus payment (read interest payment) assumed at 8.5 % over time

Years 2010 2011 2012 2013 2014 2015

(All figures in crore)            
Income            
Lease Income 2.56 8.91 9.80 10.78 11.86 13.05
Finance charge earned with Hire purchase 4.42 7.42 8.16 8.98 9.88 10.86
Income from other loans 1.63 1.80 1.97 2.14 2.31 2.48
Total 8.61 18.13 19.93 21.90 24.05 26.39
Expense            
Bonus on deposit 4.88 10.27 11.30 12.41 13.63 14.95
Establishment 0.86 1.81 1.99 2.19 2.40 2.64
Adminstration expense 0.58 1.55 1.74 1.93 2.13 2.13
Provision and write off 0.12 0.17 0.22 0.27 0.32 0.37
Total 6.44 13.80 15.25 16.80 18.48 20.09
Profit before depriciation 2.17 4.33 4.68 5.10 5.57 6.30
Less depriciation 0.88 1.48 1.63 1.80 1.98 2.17
PBT 1.29 2.84 3.05 3.30 3.59 4.13
Taxes @ 30 % 0.39 0.85 0.92 0.99 1.08 1.24
Net profit 0.90 1.99 2.14 2.31 2.52 2.89
Cash Profit 1.78 3.47 3.77 4.11 4.49 5.06
Projected Balance sheet for 5 years
qThe increase in equity is due to issue of IPO
qAll profit is added to reserve and no dividend is given out the firm
qBuy-Hire are termed as receivables and Investments as Leasing.

All figures in crore 2010 2011 2012 2013 2014 2015

Liabilities 28.40 55.89 62.71 68.06 73.87 80.32
Issued equity capital 3.83 15.60 15.60 15.60 15.60 15.60
Issued preference capital 0.20 0.20 0.20 0.20 0.20 0.20
Reserves /funds 11.80 13.79 15.93 18.24 20.75 23.64
Borrowings 11.45 23.80 28.24 31.02 34.06 37.38
Current liabilities & provisions 1.12 2.50 2.75 3.00 3.25 3.50
Deferred tax liability 0.00 0.00 0.00 0.00 0.00 0.00
Contingent liabilities 0.00 0.00 0.00 0.00 0.00 0.00
             
Assets 28.40 55.89 62.71 68.06 73.87 80.32
Net fixed assets 5.30 7.80 8.96 10.12 11.28 12.44
Investments 27.80 30.54 33.28 36.02 38.76 41.50
Book value of quoted investments 0.02 0.02 0.02 0.02 0.02 0.02
Receivables 10.70 12.98 15.26 17.54 19.82 22.10
Loans & advances 9.91 2.30 2.72 1.66 1.06 1.11
Deferred tax assets 2.01 0.00 0.00 0.00 0.00 0.00
Cash and bank balance 0.87 2.25 2.48 2.70 2.93 3.15
Miscellaneous expenses not written off 0.00 0.00 0.00 0.00 0.00 0.00
 Comparable firm analysis
qUse financial firms in the range of 68.14 to 6.83 crore.
qWe compare the firm within range of 40 % +/- of book size from our firm to estimate :-
qBeta
qShare price range
qD/E of estimate to de lever the estimate beta

Comparable Beta analysis

lie in the range of 1-1.5 range of beta

se beta of 1.43 slightly higher than mean due to higher business risk of Islamic bank

Debt/Equity for the firm

qFirms D/ E range from -3.6 to 7.8 with most firm having D/E of .6
qOur firm has a D/E of ~ .89
qEstimating de leveraged beta we obtain Beta for our firm as:-
Beta(Unlevered) = (1.43 * .6)/1.6 = 0.33
Beta Firm = Beta Unlevered * (1 + .89) = 1.98 ~ 1.1
Free cash Flow to Firm Analysis
qAssumption of terminal growth at 4 %
qCost of debt as the payment for borrowing i.e 8.5 %
qUse of CAPM model for cost of equity
qWACC to be 10.30 %

All figures in crore            

  2010 2011 2012 2 013 20 14 2015
             
Net Income before t a x 0.88 1.48 1.63 1.80 1.98 2.17
Add back Depreciation & Amortization 1.29 2.84 3.05 3.30 3.59 4.13
EBIT 2.17 4.33 4.68 5.10 5.57 6.30
Less:Tax (B) 0.39 0.85 0.92 0.99 1.08 1.24
Less:Working Capital Movement (C) 0.23 0.28 0.33 0.38 0.43 0.48
Less:Capital Expenditure (D) 0.30 0.37 0.44 0.51 0.58 0.65
FCFF ( A - B - C - D ) 1.25 2 . 82 3.00 3 . 22 3 . 48 3 . 93
             
Cost of debt (%) After tax 8.50          
Beta value 1.10          
Risk Free Rate (Bloomberg data, 10yr bond) 7.63          
Market Risk Premium 5.78          
Cost of Equity (%) 13.99          
Debt Equity Ratio 0.89          
Tax Rate (%) 30.00          
After tax cost of Debt 5.95          
WACC (%) 10.20          
             
Discounted Value   2 . 56 2.47 2 . 40 2 . 36 2 . 42
             
Explicit Forecast Period Value 12.21          
Terminal Value (@ 4% Terminal Growth) 18.39          
Enterprise Value 30.60          
No of shares (in mn) 6500000          
Fair Value 47.08          
             
Branches 6 10 16 18 20 22
Sensitivity analysis
qValue of share range from 43-49 at various WACC.
qThe risk involved with the firm will reduce with further years of operation thereby reducing the cost of capit

    WACC

    8.50 9.00 10.30 12.00 13.00

1.00 49.33 47.31 46.32 45.04 43.05

Terminal
Growth 1.50 49.39 47.37 46.38 45.10 43.11

2.00 49.46 47.43 46.44 45.16 43.17

2.50 49.52 47.49 46.50 45.22 43.23

3.00 49.58 47.55 46 . 56 45.28 43.29

3.50 49.64 47.61 46 . 62 45.34 43.35

4.00 49 . 70 47 . 67 47 . 08 45 . 40 43 . 41

  4.50 49.77 47.73 46 . 74 45.46 43.47

  5.00 49.83 47.79 46 . 80 45.52 43.53

 Issue Details:-
qWe propose to provide a discount of 20 % for the share, as the firm is not very popular and hence lack of marke
qThe issue price comes out to be about 35-40 rupee.
qOut of 6.5 lakh shares, 4 Lakh to be issue to public allowing in flow of about 14 crore

Comparable price band of NBFC/Financial Institues

e band for investor lie between first and second band and it is here that about 50 % of stock lie which have similar bo
in the range and hence should be attractive for investors.
References

qSocial, economic and educational status of Muslim in India, by Prime Minister committee 2008
qProwess database for stock related details
qSeyad Shariat annual report, 2007, 2008, 2009,
qAswath Damodaran on Valuation
qAswath Damodaran on Evaluation of Finacial services

Information from Firm

qTelephonic interview was done for Mr K. Ahamed Hussain - Deputy General Manager,
qProvided information on staff and operation
qProfit % paid over the period
qFuture plan of the firm
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Questions?????
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