LKP Merchant Finance-A RARE Entry

CMP Rs 176
12 Month Target : Rs 500


The Mahindra Doshi owned LKP Merchant Finance will soon put forth a re-organisation of its business operations. This re-organisation will pave the way for the entry of Mumbai’s most prominent bull to make a Rare entry into the LKP stock-with the grapevine claiming a stake sale of 20 per cent in two tranches for an undisclosed amount.

This is what LKP Merchant Finance does at present

It is a holding company for two wholly owned subsidiaries LKP Shares and Securities which owns a broking card for the BSE and LKP Forex which is the second largest Forex changer in the nation after Thomas Cook.

What will the re-structuring/re-organisation do?

The shareholders of LKP Merchant will get equal shares in LKP Shares and Securities and LKP Forex, and both companies will be automatically listed on the BSE. The strategic investor who has had past successes in stocks like Pantaloon, Provogue, Apollo Hospitals, Crisil, BEML, Viceroy Hotels and a string of other units, will be given a 20 per cent stake split into two tranches of 10 per cent each. This will be the strategic investor’s first ownership of a currency changing operation in the country and will bring in additional capital to allow LKP Forex grow. At the same time, the grapevine has it that the management has cleared all past dues of the Oriental Bank of Commerce through a one-time settlement. Thus making LKP Merchant debt free, allowing it to proceed with the re-structuring. The promoters-the Doshi family has already infused money into the stock broking operations making it even larger and stronger. The third phase of the re-structuring/re-organisation will involve merging LKP Securities-which holds a broking ticket of the NSE and which is presently an unlisted concern to be merged with LKP Shares and Securities.

So what will the shareholders get?

For each share held in LKP Merchant, they will get equivalent shares in LKP Forex and LKP Shares and Securities and both concerns will be separately listed. Investors would note that by way of volumes LKP Shares and Securities is amongst the top five brokers of the BSE and a de-merger and a consequent merger with LKP Securities (the NSE broking arm) will bring in more value for the shareholders. Also LKP Shares and Securities owns/operates out of as many as 170 branches/franchises across the length and breadth of the country, thus a listing will bring in immense benefits. On the other hand, LKP Forex which runs as many as 300 branches/franchises throughout the length and breadth of the country, and is the second largest currency changer after Thomas Cook should fetch high PE multiples post the listing. Concenterated Ownership As a prelude to such moves, the promoters have consolidated their stake to as much as 60 per cent and a couple of FIIs have also picked up about 3 per cent of the Equity. The public interest is about 25 per cent.

To me the sum of the parts valuation works out to Rs 500 per share, should everything proceed as per schedule and the de-merger gets completed by December 2006. The stock is relevant only for high-risk aggressive investors who can see the whipsaw movement on the exchanges and yet see through the whole process of unlocking value