Group companies’ past violation of regulations and acquisition of business from scam-tainted entity reflect poorly on the promoters.
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PRUDENT CORPORATE OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Nil |
| Offer for Sale | 85,49,340 equity shares (Rs 538.61 Cr) |
| Face Value | Rs 5 |
| Price Band | Rs 595 – 630 |
| Bid Lot | 23 Nos. |
| Implied M-Cap | Rs 2609 Cr |
| Equity Cap | Rs 20.70 Cr |
| Free Float | 43.22% |
| Lead Manager | ICICI Sec, Axis Cap and Equirus Cap |
| Registrar | Link Intime |
| Listing At | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening : 10-May-2022 | Closing : 12- May-2022 |
| Allotment : 18-May-2022 | Refunding : 19-May-2022 |
| Demat Credit : 20-May-2022 | Trading : 23-May-2022 |
The Offer
Ahmedabad-registered but Mumbai head-quartered Prudent Corporate Advisory Services Ltd is entering the capital market with an offer for sale of 85,49,340 equity shares (about Rs 539 Cr at the cap price) from two existing shareholders. Global investment firm Wagner is offloading 8,281,340 shares (Rs 522 Cr) and the company’s Whole-time Director-cum-CEO, Shirish Patel, is offering 268,000 shares (Rs 17 Cr). The offer is being made through the book-building route with a price band of Rs 595-630 for Rs 5 paid-up share. The objects of the offer are to achieve the benefits of listing of the shares on the Stock Exchanges and to facilitate the offer for sale of shares by the selling shareholders.
Applicants should bid for a minimum lot of 23 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on May 23, 2022. ICICI Securities, Axis Capital and Equirus Capital are acting as book running lead managers to the offer and Link Intime has been roped in as the registrar to the issue. The bidding opens on Tuesday, May 10 and closes on, Thursday, May 12, 2022.
Lineage
Promoted by Sanjay Shah (54) in 2003, Prudent Corporate is presenting itself as an independent retail wealth management services group in India. It claims to be amongst the top mutual fund distributors in terms of average assets under management (AAUM) and commission received. According to the offer document, though the company was incorporated in 2003, the promoters had started offering financial services in the name ‘Prudent Fund Manager’ in the year 2000. The company reportedly obtained the approval for Mutual Fund Distribution (MFD) services in 2003 and launched Partner Network in the year 2006.
The company claims to have launched Property Advisory /Distribution services in 2010 and obtained SEBI RIA license to provide Investment Advisory services in the year 2016. The company reportedly obtained RERA Real Estate Agent License in Gujarat and Maharashtra in 2017. Same year it also launched online paperless empanelment for Mutual Fund Distributors. It launched Fundzbot on Fundzbazar.com in 2018 and Prudent Private Wealth in 2019. The company launched Creditbasket (www.creditbasket.com) in 2020 and also obtained registration from SEBI to act as a stock broker. In 2021 it launched stock broking on Fundzbazar.
In fiscal 2019, when the capital base was just Rs 1.03 Cr, Wagner, a member of TA Associates, a global investment fund , purchased an aggregate of 412,500 equity shares of face value of Rs 10 each representing 39.91% of the equity capital of the company from Shirish Patel, Harshida Patel and certain members of the promoter group for an aggregate consideration of about Rs 249 Cr and subscribed to 1,567 compulsorily convertible preference shares for an aggregate consideration of approximately Rs 0.95 Cr. Wagner holds 40 % of the share capital on fully diluted basis, as on the date of the Red Herring Prospectus. Thus the promoters and their associates, whose cost of acquisition was less than par value, sold a part of their stake at a huge amount of premium while the company received a paltry premium of only less than Rs 1 Cr from the conversion of preference shares.
The quality of Prudent’s management and some of its moves are far from convincing. Last year Prudent acquired the MF folio/AUM of the scam-tainted Karvy Stock Broking Ltd (KSBL) through a bidding process for an amount of Rs 151 Cr. For this, the company took an unsecured loan of Rs 76 Cr from Sanjay Shah at the rate of 8% per annum. The merger of the mutual fund folios/AUM of KSBL was completed by November 28, 2021. Post acquisition of KSBL MF AUM, Prudent has received a show-cause notice for not complying with the tax liabilities of KSBL!
Prudent subsidiary, PBSPL has in the past been penalized by SEBI for pledging of securities in excess of client obligations, mis-utilization of client funds and irregularities in client registration process. Further, PBSPL, has, in the past, received warning letters in December 2012, January 2019 and August 2020 advising it to improve compliance standard and address recurrence of deficiencies in processes including failure to settle credit balances of clients, mismatch in stock reconciliation, irregularities in respect of use of client funds, instances of pledging of client securities and lapses in implementation of KYC formats as directed by SEBI.
Also, there is an outstanding criminal case in which the Economic Offences Wing had issued notices to Prudent Comder Private Ltd (since merged with PBSPL), promoter of Prudent Corporate and a director of its subsidiary and there is an outstanding SEBI matter against PBSPL, which if determined in an adverse manner, may result in a loss of license of PBSPL and consequently may adversely impact the public company’s future operations, reputation and profitability.
SEBI had issued show cause notice to Prudent Comder alleging that Prudent Comder, which was a member of NSEL had facilitated or participated in trading on the NSEL platform in ‘paired contracts’ in contravention of provisions of the erstwhile Forward Contracts (Regulation) Act and Government notification. SEBI had further observed that Prudent Comder violated the SEBI (Stock Broker and Sub Broker) Regulations and therefore, was no longer a “fit and proper person” for holding the certificate of registration as an intermediary in the securities market.
Key Management
Promoter Sanjay Shah is the Chairman and Managing Director of the company. He holds a bachelor’s degree in business administration from Sardar Patel University and is a qualified chartered accountant. One of the selling-shareholder Shirish Patel (44) is a Whole-time Director and the Chief Executive Officer of the company. Prior to joining Prudent, he has worked with Leading Edge, ICICI Bank, ICICI Capital Services, Citibank, etc. and has approximately 22 years of experience in wealth management.
One of the original promoters of Prudent’s subsidiary Gennext, Chirag Shah (44), is another Whole-time Director of the company. This qualified chartered accountant has been associated with the Prudent Group since 2004 and is currently serving on the board of Gennext, managing and developing the insurance business. Additionally, he is also responsible for the human resource, administrative and compliance functions of the Prudent Group. He has previously been associated with National Securities Depository Ltd and has approximately 17 years of experience across the insurance and compliance sectors.
Stakeholders
Of the present equity of Rs 20.74 Cr (414.07 lakh shares), promoter Sanjay Shah is holding 43.36% and 10 other shareholders belonging to the promoter group are holding 13.43%.Wagner is holding 40% at an average cost of Rs 150.94 a share and the company’s CEO, Shirish Patel, is having 13.04 lakh shares (3.15%) at an abysmal cost of 13 paise per share. Post-offer for sale, the promoter will continue to hold the same quantity virtually at nil cost. The selling shareholder Wagner and Shrish Patel will control 82.81 lakh shares (20%) and 10.36 lakh (2.5%) shares respectively at an extremely negative cost as against the present offer price of Rs 630 (upper band).
Business Track
Prudent Corporate claims to offer a technology enabled, comprehensive investment and financial services platform with end-to-end solutions critical for financial products distribution and presence across both online and offline channels. As on December 31, 2021, the company reportedly provided wealth management services to 1,351,274 unique retail investors through 23,262 MFDs on its B2B2C platform spread across 110 locations in 20 states.
The company claims to have grown faster among national distributors (amongst the top 10 mutual fund distributors) in terms of commission and AAUM with a CAGR of 34.4% and 32.5% respectively for the five year period ending fiscal 2021. As on December 31, 2021, its assets under management from the mutual fund distribution business stood at Rs 48,411 Cr, with no single AMC contributing more than 15% of the AUM. Among national distributors, on commission received basis, Prudent’s market share has reportedly increased from around 4% in fiscal 2015 to around 12% in fiscal 2021. Its equity AUM of Rs 44,605 Cr as on December 31, 2021, represented 2.39% of total equity AUM of mutual fund industry.
Financial Track
Prudent has posted a highly encouraging performance in recent years. The company’s top line has steadily increased adding more than Rs 100 cr in less than four years. Operating margin too has shot up from 13.9% in fiscal 2018 to 25.4% in fiscal 2022. Net profit has more than doubled in last four years. The company’s asset base has bulged from Rs 26 Cr in fiscal 2021 to Rs 177 Cr in fiscal 2022 mainly on account of the newly acquired Karvy’s broking business.
On October 21, 2021, the company was selected as the highest bidder for acquiring the mutual fund folio of Karvy Stock Broking Ltd. On October 27, 2021, the company reportedly paid Rs 151 Cr (excluding taxes) for the above transaction. The management has concluded that the transaction did not qualify as a “Business” as per the definition provided in Ind AS 103 “Business Combination”. Consequently, the transaction was accounted for as an asset acquisition and the company has proposed to amortize the acquisition cost over a 10 year period on a straight line basis. A disturbing aspect of Karvy’s transaction is that Prudent has been served a `Show Cause Notice’ in January 2022 for the tax liabilities not complied by Karvy for the financial year 2014-15!
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Prudent Corp Consolidated Financials (in Cr) |
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| Period Ended |
Dec-21 |
Mar-21 | Mar-20 | Mar-19 |
Mar-18 |
| Months |
9 |
12 | 12 | 12 |
12 |
| Revenue |
321.22 |
286.51 | 234.83 | 221.98 |
221.44 |
| Operating Profit |
81.5 |
61.91 | 46.67 | 38.21 |
30.73 |
| OPM% |
25.4 |
21.6 | 19.9 | 17.2 |
13.9 |
| Other Income |
6.78 |
8.39 | 1.39 | 3.07 |
10.28 |
| EBIDTA |
88.27 |
70.3 | 48.06 | 41.28 |
41.02 |
| EBIDTA % |
26.9 |
23.8 | 20.3 | 17.6 |
17.7 |
| Interest |
1.89 |
1.66 | 2.68 | 3.09 |
1.79 |
| Depreciation |
8.69 |
8.12 | 7.95 | 7.62 |
1.35 |
| Net Profit |
57.63 |
45.3 | 27.85 | 21.02 |
25.44 |
| Equity |
20.70 |
20.70 | 20.70 | 1.03 |
1.03 |
| Reserves |
194.1 |
194.1 | 194.1 | 82.06 |
64.77 |
| Borrowing |
33.00 |
2.61 | 7.76 | 22.87 |
24.24 |
| Fixed Assets |
177.10 |
26.40 | 27.50 | 24.30 |
18.70 |
Valuation
Prudent Corporate reserves contain share premium of less than Rs 1 Cr. The cost of holding for the promoter group is negligible. Cost of residual holding for the non-promoter shareholders is extremely negative. Yet, the selling shareholders are asking for a price of Rs 630 for Rs 5 paid up share. About six month ago, another leading mutual fund distributor in the country, Anand Rathi Wealth (ARW), enabled its shareholders to make an offer for sale at Rs 550 for a similar paid up share. ARW is currently traded around Rs 630 which discounts the company’s earnings about 58 times and book value 7.6 times. Prudent’s P/E is already on par with ARW and its P/BV is as costly as 12.1x which leaves little room for capital appreciation.
In fact, ICICI Securities, which has diversified business interests including MF distribution, is currently available at a P/E of 15.4x and its Price-Book Value is only 7.6x. Another diversified brokerage firm, IIFL Securities, is available at a P/E of 11x and P/BV of 2.1x. Considering these lower valuation, Prudent Corporate, which faces uncertainties on account of the past omissions and commissions of its subsidiary as well as Karvy Share Broking, looks costly at Rs 630.
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HOW PRUDENT CORP COMPARES WITH SELECT LISTED PEERS |
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Financials |
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| (Amount in Cr) |
Prudent Corporate |
ICICI Securities | Anand Rathi Wealth |
IIFL Securities |
| Market Cap |
2609 |
16482 | 2618 |
2435 |
| Revenue |
287 |
2586 | 265 |
791 |
| Other Income |
8 |
0 | 14 |
77 |
| EBIDTA |
70 |
1592 | 84 |
380 |
| Interest |
2 |
107 | 3 |
50 |
| Net Profit |
45 |
1068 | 45 |
221 |
| Equity Cap |
21 |
161 | 21 |
61 |
| Reserves |
194 |
2269 | 323 |
1121 |
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Stock Features |
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| Current Price (Rs) |
630 |
510 | 629 |
80 |
| Face Value (Rs) |
5 |
5 | 5 |
2 |
| Book Value |
52 |
75 | 83 |
39 |
| Promoter Stake % |
57 |
75 | 49 |
31 |
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Profitability |
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| OPM % |
21.6 |
61.6 | 26.3 |
38.4 |
| Net Margin % |
15.4 |
41.3 | 16.1 |
25.5 |
| Cash EPS |
12.90 |
34.77 | 14.98 |
8.79 |
| Earnings Per Share |
10.94 |
33.09 | 10.83 |
7.28 |
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Return |
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| RONW % |
25.5 |
43.9 | 13.1 |
18.7 |
| ROCE % |
34.6 |
63.3 | 17.6 |
22.7 |
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Discounting |
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| Price/Earnings |
57.6 |
15.4 | 58.1 |
11.0 |
| Price/Cash EPS |
48.8 |
14.7 | 42.0 |
9.1 |
| Price/Book Value |
12.1 |
6.8 | 7.6 |
2.1 |
| Price/EBIDTA |
37.1 |
10.4 | 31.2 |
6.4 |
| Price/Revenue |
9.1 |
6.4 | 9.9 |
3.1 |
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Distribution |
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| Dividend % |
25 |
430 | 100 |
50 |
| Yield % |
0.2 |
4.2 | 0.8 |
1.3 |
| Pay-out % |
11.4 |
65 | 101.5 |
13.7 |