Indiabulls' Gehlaut : An eye for opportunities

First, a caveat. Writing about stockbrokers in India is risky business. On fickle-but, more often, treacherous-Dalal Street, yesterday's poster boys have a way of turning up in tomorrow's rogues gallery. Remember Harshad Mehta and Ketan Parekh? One-time stock market bulls, they were eventually caught out for what they really were: scamsters. So, it's with some circumspection that one approaches Indiabulls Financial Services (IFS), the Johnny-come-lately of securities brokerage that now claims to be one of the largest in the business, with daily average trading volume of Rs 1,200 crore, revenues of Rs 168 crore, net profits of Rs 57 crore, and a market cap of Rs 2,000 crore.

The company attracted our attention for two reasons: One, it has been attracting a spate of investments from global investors. Last month, a US-based global hedge fund, Amaranth Advisors, coughed up Rs 130.9 crore for a 42.5 per cent stake in Indiabulls Finance Company Private Ltd, a subsidiary recently formed to provide secured lending. Earlier, over the last two years, Farallon Capital, the world's largest hedge fund with $12.5 billion, or Rs 55,000 crore, under management, invested Rs 180 crore in three tranches in the parent company, its subsidiary Indiabulls Credit Services and the real estate JV, Indiabulls Properties. That apart, Wall Street biggies like Merrill Lynch (Capital) and Goldman Sachs have recently upped their holdings in IFS to 5.5 per cent and 5.14 per cent, respectively.

The other reason is even more compelling. The six-year-old IFS is valued at an eye-popping Rs 2,000 crore, something no other brokerage firm has managed to achieve, despite being around much longer than the upstart IFS. That makes IFS more valuable than companies like Apollo Tyres (market cap: Rs 931 crore), Ballarpur Industries (Rs 1,810 crore), and even East India Hotels (read: Oberoi hotels; Rs 1,889 crore). That also makes IFS' promoters, Sameer Gehlaut, 31, Saurabh Mittal, 31 and Rajiv Rattan, 32-all engineers from IIT Delhi and who together own 36 per cent-very rich young men. Incidentally, when the company was listed in September 2004, it had a market cap of just Rs 250 crore. Given IFS's last year net profits of Rs 57 crore, the current market value works out to 35 times its earnings.

And just in case anybody needed a third reason, here is one. When part of National Textile Corporation's (NTC) mill land in Mumbai was put on the block early this year, no one thought an upstart would end up snagging it. But in March this year, Indiabulls Properties Private Ltd, a 51:49 JV between Farallon and IndiaBulls, did. It forked out Rs 277 crore for 11 acres of NTC's Jupiter Mills land in Mumbai. Going by the sale price of the mill's second lot of land-16 acres of it snapped up by Delhi-based realty giant, DLF, for Rs 702 crore-Indiabulls' acquisition is already dearer by Rs 200 crore in just four months. (Indiabulls Properties' per sq. ft. cost works out to Rs 3,623 compared to DLF's Rs 7,500).

The Boys From Nowhere

Clearly, the young men have a story to tell. It isn't the classic rags-to-riches story, but one of well-heeled professionals turning billionaires in India's chaotic business of securities brokerage. It's the story of three young IITians from Delhi who, with no previous experience in securities trading, made it big in a business traditionally dominated by Mumbai-based broking houses. So how did they do it?

When Gehlaut, son of a CRPF officer, started Indiabulls in 2000, he was only 26. After working with the mining division of Halliburton in the US, he had come down to India to start an earth moving and mining business called Mackenna Minerals. But Gehlaut's true calling lay elsewhere (the mining business is now run by his brother). He acquired a Delhi-based stock broking company Inorbit Securities with the money he had saved from the Halliburton job and the mining business. Gehlaut, whose 18.8 per cent stake is now worth Rs 376 crore, roped in two of his IIT friends-Saurabh Mittal, son of a paediatrician at Delhi's LNJP Hospital, and Rajiv Rattan, his senior, and whose parents were school teachers. Rattan is now president and CFO of Indiabulls, while Mittal is a partner at the us-based hedge fund, Noonday. The two own about 18 per cent in Indiabulls that's worth Rs 400 crore. Says Gehlaut, Chairman and CEO: "Before our entry in 2000, the market was served by unorganised, single-product companies that hardly bothered about customers."

Indiabulls' Co-founder & CFO Rattan: One of the three "bull"

Combining products and services with the help of information technology (it was among the first to adopt online trading), and acquiring a national footprint at a speed that nobody had done before, Indiabulls grew at a furious pace. It continuously tweaked its business model by adding new product lines like personal loans, distribution of financial products and, now, real estate. Most importantly, it moved fast. In just five years, the company, its officials claim, has built up a customer base of 110,000, and a presence spanning 135 offices in 95 cities-a position that 14-year-old Kotak Securities, by contrast, has just attained. Says a Mumbai-based competitor: "A lot of old players did not put in capital to expand. Whoever did it has succeeded."

So today, Indiabulls is among the top five brokers in the country, with a daily average trading volume of Rs 1,200 crore, compared to Rs 1,100 crore or so of Kotak Securities. However, the competition between the two is more in terms of revenues than customer profiles. Kotak serves the upper end of the market and Indiabulls, the lower end, where customers typically have Rs 2-3 lakh to invest per annum. How does one, then, explain Indiabulls' inordinate profits? Says the CEO of a leading online trading company: "Most of their money comes from margin (money) lending and not so much from brokerage commission." But Gagan Banga, Head (Marketing), Indiabulls, begs to differ: "80 per cent of our revenue comes from broking, and the rest from interest income on loans and fee."

Another striking feature of Indiabulls is its ability to raise money. In 2000, it had managed to raise venture capital from Infinity Ventures, Harish Fabiani of Transatlantic, and LN Mittal Internet Ventures, all of whom put in a total of Rs 43 crore. The next rounds happened in 2004 and 2005, when Farallon and Amaranth brought in a total of Rs 310 crore. Now Indiabulls is clearly among the top 100 capitalised companies, with Rs 700 crore in equity capital.

Not surprisingly, investors in Indiabulls speak highly of the young management team. Says Gaurav Dalmia of Infinity Ventures: "We were backing the team. What they lacked in experience, they made up by their attitude." In other words, says Dalmia, they demonstrated aggression and speed at a time when most brokers were taking it easy. Now, of course, even traditional brokerage houses like SSKI and Motilal Oswal are on overdrive. Newer ones like India Infoline, a broking company founded by another entrepreneur Nirmal Jain five years before Indiabulls, have gone public. IL&Fs, a three-way JV between HDFC, Central Bank of India and UTI, has just announced an IPO. Yet, none of them has been able to replicate Indiabulls' spectacular success.

Needless to say, there are sceptics. "What the Bhansalis (of Enam), the Kotaks and the Morakhias (Shripal Morakhia of SSKI) haven't been able to do in decades, Indiabulls has done in a short span. How is it possible?" asks a competitor. Indiabulls' answer? "Regulations have changed. You can't take anybody for a ride. Companies like Indiabulls are constantly audited by bodies like SEBI, NSDL, NSE, BSE and RBI," says Banga.

If some people find it hard to digest Indiabulls' spectacular growth so far, one wonders what they would have to say about its fantastic target for 2010: a market cap of $5 billion (Rs 22,000 crore). Middle of 2005, it seems laughable. But that's exactly the sentiment that greeted Gehlaut & Co. five years ago. One thing is for sure: One way or another, Indiabulls is a firm to watch.