Indian Brokerage Industrycontent.icicidirect.com/mailimages/IDirect_BrokerageIndustry_IC.pdfThe Indian brokerage industry has now witnessed entry of new category of brokers – discount

Indian

ICIC

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December 23, 2019

Indian Brokerage Industry

Broking twist: Advantage large brokers…

The fragmented Indian broking industry has witnessed an increase in market

share of top brokers in volume terms with top 10 brokers now forming 37%

vs. 22% in 2014. In the past few years, Indian equity markets witnessed

strong rise in average daily turnover (ADTO) at ~34.4% CAGR in FY13-19.

Derivatives witnessed robust traction at 35.4% CAGR from | 155400 crore

in FY13 to | 959000 crore in FY19 while cash ADTO has increased at ~18.1%

CAGR in FY13-19 to | 35200 crore. This has led to a reduction in the cash

segment, declining to only ~3% of total volumes impacting brokers.

The Indian broking industry has a large of number of players, many being

proprietary in nature while large brokers still offer trading and investment

services to customers. In terms of market share, as per active clients, top 10

brokers contribute ~63% in industry size. Among the same, top two brokers

constitute ~15% of market share in active clients, followed by ~46% market

share contributed by the next eight players. Top two players constitute 15%

in ADTO of the market. Indian brokers have progressed from being pure

brokers (bank led brokers & non-bank led full service brokers) to distributors

of financial products and business diversification by forming AMC/PE funds,

lending through NBFC and setting up ARCs.

In the wake of changes experienced in the domestic stock market and

broking industry, evolution in terms of business model was imminent. In our

view, the Indian broking industry is transitioning from a transaction based

model to service or fee based model offering services like wealth

management and investment advisory. A shift towards a fee based model is

already in the works with brokers focusing on building advisory model

(wealth AUM). Apart from advisory services, focus on fund based activities,

including margin funding and loan against shares, is on the rise, enabling

brokers to build sustainable earnings. Cyclicality of income from volatile

markets/volumes is seen abating as pure brokerage income forms ~50-60%

of overall revenue for each player vs. 80-90% few years back. Again, with

SEBI tightening norms on managing client funds as float or pledge on client

shares, direct lending by brokers to clients in the form of allowing overdue

will disappear. Brokers need banks or NBFC tie-up, as they can only take

pledge of client shares to fund the client. Bank led brokerages stand to gain

both as quick enablers of funding and trust on safety of demat holdings.

In a recent circular, SEBI announced new norms on bringing margin for cash

buy/sell order addition. As we notice, online brokers had practiced the same

as clients need to keep margin money before buy order placement and sell

is allowed only from delivery, leading to very negligible impact of new

norms. All these SEBI norms and intense competition have impacted small

brokers while large brokers are expected to gain market share.

Traditional brokers emerge strong on earnings

The Indian broking industry comprises participants with varied business

models from those primarily engaged in capital market activities and others

engaged in other financial activities including lending, AMC and ARC. Given

the dependence on capital market and inherent cyclicality, we assign PE

multiple in range of <15x for peers engaged in capital market. Accordingly,

we value pure brokers like IIFL Securities at 8x FY21E EPS and Geojit BNP

Paribas Financial Services at 12x FY21E standalone EPS. Players with

business models in other financial segments are valued on SoTP basis. We

value JM Financial at 1x FY21E BV (implying 11.5x FY21E EPS), Edelweiss

at 1.4x FY21E BV (implying 16.7x FY21E EPS) and Motilal Oswal at 23x

FY21E EPS. 5Paisa as a startup is valued at 4x FY21E revenue. We initiate

coverage with a BUY rating on IIFL Sec and Motilal Ostwal and HOLD rating

on 5 Paisa, Geojit Financial, Edelweiss Financial Services and JM Financial.

Initiating on…

Motilal Oswal – Buy – TP | 850

(Diversified business model with

presence across capital market

domain, expect to be beneficiary

of stricter SEBI norms and

consolidation in industry)

5 Paisa – Hold – TP | 205

(Start-up discount broker with

aggressive client acquisition,

consistent revenue growth to drive

valuation)

IIFL Sec – Buy – TP | 50

(Pure broker with distribution

strength, relatively cheap on

valuation)

Geojit Fin – Hold – TP | 29

(Marginal player in aggressive

competitive space, high

proportion of cash ADTO remains

strength)

Edelweiss Fin – Hold – TP | 125

(Balance sheet restructuring

underway, minimal contribution of

retail segment in capital market

revenue)

JM Fin – Hold – TP | 94

(Strong performance in capital

market business, exposure to real

estate remains an overhang)

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

ICICI Securities | Retail Research 2

ICICI Direct Research

Initiating Coverage | Indian Broking Industry

Exhibit 1: Valuation

| crore CMP TP Rating Mcap

| | | crore FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

Motil.Oswal.Fin. 730 850 Buy 10803 499 539 14 13 21.6 20.0 3809 4349 2.8 2.5

Edelweiss.Fin. 116 125 Hold 10827 343 656 5 8 31.6 16.5 7994 8656 1.4 1.3

JM Financial 91 94 Hold 7699 582 681 11 12 13.2 11.3 7620 7806 1.0 1.0

IIFL Securities 38 50 Buy 1214 164 205 20 21 7.4 5.9 895 1100 1.4 1.1

Geojit Fin. Ser. 28 29 Hold 655 14 20 9 11 46.9 33.5 515 572 1.3 1.1

5Paisa Capital 180 205 Hold 458 2.8 7.2 3 5 163.3 63.6 151 158 3.0 2.9

PAT (| crore) RoE (%) P/E (x) NW (| crore) P/BV (x)

Source: Company, ICICI Direct Research




Industry Trend

Indian brokerage industry – perspective and structure

The Indian broking industry is very fragmented with large number of

participants (~3755/3099 registered with SEBI in cash/derivative market).

Many of these may be propriety desk, still a large number of brokers offer

trading services to customers. In the last six years, Indian markets have

witnessed a spurt in volumes at ~34.4% CAGR from FY13 to FY19.

Following global trend of higher tilt towards options, derivatives witnessed

robust traction at 35.4% CAGR from | 155400 crore in FY13 to | 959000

crore in FY19, while equity (Cash) ADTO grew only by ~18.1% CAGR in

FY13-19 to | 35200 crore.

The Indian stock market has undergone developments over several years in

terms of yields, products and customer services. In the initial phase, Indian

brokerages were to be divided in two categories – bank led brokers and non-

bank led brokers. Majority of these brokerages were full service brokers with

services spanning from providing platform for trading, settlement services,

investment advisory (research), investment banking and wealth

management.

In order to counter the volatility of markets and thereby business,

brokerages started on the path of diversification – the first step being

distribution of financial products – insurance and mutual funds. Later,

brokerages entered next level of diversification through entry into new line

of business spanning from asset management to credit disbursement

through NBFC.

The Indian brokerage industry has now witnessed entry of new category of

brokers – discount brokers that offer basic transactional service at low fixed

brokerage irrespective of the size of trade quantum. Apart from transactional

service, these brokers provide various product used for analysis and

research services at additional cost.

Exchange volumes skewed towards derivatives in last 5 years

The Indian stock market has been witnessing a continuous rise in volumes

traded in FY15-Q2FY20. However, there has been a growing divergence

between cash and derivatives product segment. While the proportion of

cash segment has remained steady at ~3% of total volumes, option as a

product has been gaining prominence with share in total volume rising from

79% in FY15 to 88% in FY19 and 92% in Q2FY20.

Exhibit 2: Market volume tilting towards options

ADTO in | crore FY17 FY18 FY19 Q1FY20 Q2FY20 Propn

Cash Intraday 16600 23300 26048

Cash Delivery 8100 9600 9152

Cash 24700 33000 35200 33629 34023 2.3%

Futures (NSE) 62361 82959 87564 79951 89734 6%

Stocks (NSE) 44877 63405 65109 55955 61020 4%

Index (NSE) 17484 19555 22455 23996 28714 2%

Options (NSE) 318164 587711 870503 1136812 1339202 92%

Stocks (NSE) 24627 39248 50735 45480 52299 4%

Index (NSE) 293537 548463 819768 1091332 1286903 88%

F&O total 382100 671000 959000 1216763 1428936 97.7%

Total ADTO 406800 704000 993000 1250392 1462959

Source: NSE, ICICI Direct Research

Option segment witnessing higher share at 92%

0.5 0.5 0.6 0.8 0.9 0.8 0.92.6 2.3

3.2

5.7

8.7

11.413.4

0

2

4

6

8

10

12

14

16

AD

TO

in |

lakh crore

Cash Futures Options





Exhibit 3: Options forming ~92% of market volume


Exhibit 4: Internet based trading on the rise in last five years

0

5

10

15

20

25

30

35

FY14 FY15 FY16 FY17 FY18

(%

of total volu

me)

Cash F&O


Exhibit 5: Increase in market share of top five & 10 members

0

5

10

15

20

25

30

35

40

Mar-16 Mar-17 Mar-18 Mar-19 Nov-19

(%

)

Top 5 Top 10


Snapshot of brokerages in India

The Indian broking industry has a large number of players. However, in

terms of number of active clients top 10 brokers contribute to ~63% of the

industry size. Among peers, Zerodha has the highest number of active

clients with ~13% market share, followed by ~51% market share

contributed by next nine players. In terms of active clients, Zerodha has

largest share of active clients, which were at 69%, compared to other players

wherein active clients as a percentage of total was in the range of 24-32%.

0.5 0.5 0.6 0.8 0.9 0.8 0.9

2.6 2.33.2

5.7

8.7

11.4

13.4

0

2

4

6

8

10

12

14

16

FY 15 FY 16 FY 17 FY18 FY19 Q1FY20 Q2FY20

AD

TO

in |

lakh crore

Cash Futures Options

Top 10 brokers contribute ~63% of share

(Sep’19)

13%

50%

37%

Zerodha Next top 9 brokers Others



ICICI Direct Research Initiating Coverage | Indian Broking Industry

Exhibit 6: Financials of brokers (FY19)

| crore Kotak Sec HDFC Sec Axis Sec Moti JM Geojit Angel Zerodha

Revenue from operation 1708 782 190 1120 343 288 731 880

Broking Income 868 526 160 668 121 223 501 490

Revenue ex interest income 1236 702 172 1045 298 288 542 712

Revenue ex interest inc/ Total Rev 72% 90% 91% 86% 87% 100% 74% 81%

Total expense 1093 287 142 750 315 230 640 320

PAT 403 330 73 173 23 35 79 400

Total opex/total revenue 64% 37% 75% 70% 92% 80% 88% 36%

Source: Company, Media articles, annual report, DRHP, ICICI Direct Research

Exhibit 7: Proportion of clients remain broadly in a range across brokers

Q2FY20 HDFC Sec Sharekhan Kotak Sec Motilal IIFL Sec Angel* JM Geogit Edelweiss 5 Paisa Zerodha

Total clients ( in Lakh) 21.0 19.0 13.6 12.6 8.3 11.0 NA 10.1 11.0 4.2 15.0

Active clients ( in Lakh) 6.4 4.8 4.6 3.3 2.0 4.3 2.0 1.6 1.2 3.0 10.4

Active % of total clients 31% 27% 32% 32% 24% 39% NA 16% 11% 70% 69%

Source: Company, NSE, media articles & websites, annual report, Angel, DRHP, ICICI Direct Research

Exhibit 8: ADTO and yield of traditional and discount brokers

Zerodha

Q1FY20 Q2FY20 Q1FY20 Q2FY20 Q1FY20 Q2FY20 FY18Q1FY19* Q1FY20 Q2FY20 Q1FY20Q2FY20* Q1FY20*

Total ADTO (| crore) 21207 23800 18900 20600 16934 19161 10890 13169 8205 10748 24619 27638 126900

Derivative (| crore) 17507 20536 17200 19000 15856 18021 9211 11318 7264 9861 23860 26568 123220

Cash (| crore) 3700 3264 1700 1600 1078 1140 1679 1851 941 887 755 1070 3680

Market share total 1.7% 1.6% 1.5% 1.4% 1.3% 1.3% 1.5% 1.3% 0.6% 0.7% 1.9% 2.0% 10.0%

Market share deriv 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.4% 1.5% 0.6% 0.7% 1.9% 1.9% 10.0%

Market share cash 10.0% 9.0% 4.6% 4.4% 2.9% 3.1% 8.8% 10.3% 2.6% 2.4% 2.1% 3.0% 10.0%

5 paisaJMKotak Sec Motilal Sec IIFL Sec Angel Broking

* Angel DRHP, annual reports

Source: Company, NSE, media articles, ICICI Direct Research

Sub-brokers have been integral part of traditional broker

In terms of business model, traditional broker had sub-broker as integral part

of distribution franchise. Motilal Ostwal and Angel have been strong players

in the industry with a large sub-broker franchise. This leads to fillip to

brokerage revenue enabling it as good business model for large traditional

brokers. Going ahead, we expect smaller brokers to become sub-broker of

larger franchise leading to consolidation in industry led by increased

competitive intensity.

Exhibit 9: Broker-wise share of franchise

FY19 Kotak Sec Sharekhan MOSL Angel# IIFL Sec

No of franchise <1100 2600 2500 <11000 500*

Volume share of franchise (ADTO in %) ~10-15 30 70 50 ~20-25

*Operational franchise, # Angel numbers are as per prospectus

Source: Company, media articles, ICICI Direct Research

Scaling of margin funding book to contribute to revenue

Margin funding i.e. providing funding in lieu of securities held by client in his

account is one of the avenues to generate interest based income for Indian

brokers. Traditionally brokers have been providing this facility to their clients

and generating interest income. Brokers provide margin funding on a rolling

basis for different tenures. Therefore, actual interest generating margin




funding book is seen at 1.5-2x of the closing balance as depicted in the

Exhibit below. This avenue remains attractive as yields generated from

margin funding book ranges between 12% and 18% on a rolling basis.

Exhibit 10: Margin funding book broker-wise as reported in balance sheet (FY19)

581

227

450

103

660686

2452

78

0

100

200

300

400

500

600

700

800

Kotak Sec HDFC Sec Sharekhan Axis Sec Moti Angel 5Paisa Geojit IIFL

Securities

Source: Company, annual report, DRHP ICICI Direct Research

Exhibit 11: Interest as percentage of total income rising….

54

74

86

51

65

77

56

80

44

28

914 12

30

8

27

03

0

20

40

60

80

100

Brokergae Income/ Total Income Interest Income/ Total Income

Source: Company, Annual reports, DRHP, ICICI Direct Research

Exhibit 12: Share of broking income moderating

51

67

84

55

69

80

56

76

44

28

1016 14

2620 19

36

0

20

40

60

80

100

Brokergae Income/ Total Income Interest Income/ Total Income

Source: Company Annual reports, DRHP,, ICICI Direct Research

Business model to shift to advisory to sustain revenues

In the western stock market, entry of discount brokers have led to traditional

brokers mould their business model towards fee based income. Recently,

brokers including Charles Schwab, TD Ameritrade, E-Trade have dropped

trading fees and are offering nearly zero commission to clients. Accordingly,

the aim is to generate revenue from service offering including ETF and

advisory services rather than earlier regime of transaction based

commission.

In the wake of changes undertaken in domestic stock market and broking

industry, evolution in terms of business model is imminent. In our view, the

Indian broking industry is set to witness a gradual shift from transaction

based model to service or fee based model offering services like wealth

management and investment advisory. A shift towards fee based model is

already in foray with brokers focussing on building non transaction - wealth

AUM (refer Exhibit below). Apart from advisory services, focus on fund

based activities including margin funding and loan against shares, which the

brokers are currently engaged, is seen further increasing, enabling brokers

as sustainable avenue of contribution to earnings.

Funding book is in the range of 1.5-2x of what is

reported as closing balance

As of September 2019, majority of players have

witnessed decline in margin funding book due to lack

of funding options (e.g.: commercial papers)




Exhibit 13: Business model to focus on generation of AUM

AUM (| crore) Motilal Edelweiss IIFL Wealth JM

AMC 38,500 35,900 23,420

Wealth 18,100 26,950 48,041

DP/Custodian assets 60,100 21500# 28,907

Distribution 9,900 80850* 72,730

Total 126,600 165,200 173,098 14,037

*Includes retail demat AUM, # comprises fully of custodian & clearing assets


Bank led brokerages maintain top slot amid competition

Emergence of discount brokers offering low brokerage on per order basis

has led to a shift in market share in terms of active clientele. Market share of

top 10 brokers in terms of number of clients moderated to ~63% in

September 2019 vs. ~65% in July 2019. Gaining market share, RKSV and

5Paisa are new additions in top 12 list of brokers in terms of clientele. Both

have climbed three places in ranking to nine and 11, respectively.

Exhibit 14: Active clients of top brokers

Active Clients (in '000) FY14 FY15 FY16 FY17 FY18 FY19 Jul-19 Sep-19 Nov-19 Mkt share

Zerodha 18 30 62 166 541 981 1008 1045 1113 12.3%

ICICI Securities 501 595 560 618 798 881 895 906 935 10.3%

HDFC Securities 279 348 408 483 602 651 647 635 648 7.1%

Sharekhan 275 343 336 366 535 505 501 481 486 5.4%

Kotak Securities 223 268 247 274 369 447 456 463 485 5.3%

Axis Securities 77 120 184 259 405 390 377 338 311 3.4%

Angel Broking 140 160 171 230 364 427 432 432 455 5.0%

Motilal Oswal 123 153 166 207 308 326 330 326 333 3.7%

RKSV Securities 188 277 376 4.1%

Karvy 126 172 167 181 245 267 268 265 283 3.1%

5 Paisa Capital Ltd 158 234 295 3.3%

SBI CAP Securities 68 114 126 169 214 212 213 213 220 2.4%

IIFL Securities 201 199 2.2%

Geojit Financial Services 157 157 1.7%

Edelweiss Broking 115 117 1.3%


Among discount players, Zerodha has been one of the prominent player

witnessing continuous increase in market share to ~12.3% in November

2019. Apart from Zerodha, RKSV and 5Paisa are next upcoming discount

brokers gaining market share. In addition, new players like Bajaj Financial

Securities (Bajaj Financial Services has launched subscription based

brokerage plans) and Paytm are also in row to formally launch fixed

brokerage plans. One of the peculiarity witnessed in terms of clientele is that

discount brokers have a large proportion to the extent of 60-70% of first time

investors in the age bracket of 25-40 years.

With focus on engaging with incremental or new investors entering stock

markets, traditional brokers have started to offer fixed brokerage products

mainly in the derivative segment. As depicted in the Exhibit below,

traditional brokers including Angel Broking, Edelweiss and Axis Securities

has launched fixed brokerage plans.




Revenue model of discount brokers is based on fixed brokerage per order

rather than percentage of trade value. Players like Zerodha cater to ~20-40

lakh order/trade per day, though ~50% of orders generate revenue (Zerodha

charges nil brokerage on cash delivery trades). Similarly 5Paisa caters to ~2-

3 lakh order per day and charges flat brokerage on per order basis. Increase

in clientele and orders provides with the top-line in terms of brokerage fees,

however, sustainability of this growth is yet to be seen. While low cost

enables discount brokers to maintain business parity, sustainable rise in

volumes remains most key driver for discount brokers to make meaningful

profitability.

Exhibit 15: Broking plans - traditional players moving to fixed plans

Brokers Angel Edelweiss Axis Sec Zerodha Upstox 5 Paisa

Discount plans I Trade Prime Edelweiss Lite Trade @ 20*

Brokerage

Equity Delivery Nil ₹10 or 0.01% whichever lower |. 20 Nil Nil |. 10

Equity Intraday |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 20 |. 10

Equity Futures |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 20 |. 10

Equity Options |. 20 |. 10 |. 20 |. 20 |. 20 |. 10

Currency Futures |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 10

Currency Options |. 20 |. 10 |. 20 |. 20 |. 10

Source: NSE, company websites, media articles, ICICI Direct Research

Traditional brokers had started with the business model encompassing

online & offline model. Hence, requirement of headcounts have been higher

compared to discount brokers. Therefore, as seen in the exhibit below,

number of employees for traditional brokers stands higher on relative basis.

Exhibit 16: Broker-wise headcounts

0

1000

2000

3000

4000

5000

6000

Sharekhan Kotak Sec Motilal* HDFC Sec Angel Zerodha 5 Paisa * Geojit

No of employees

Source: Company, annual report, media articles, ICICI Direct Research

SEBI tightens rules on clients funds; large brokers could gain

In June 2019, SEBI released a circular tightening rules for usage of client’s

funds by brokers. As per the new rules, brokers need to transfer securities

to their client accounts within one day of receiving payment and not put to

any other use. In case, where the client defaults on payment, brokers have

been asked to hold the securities up to five days post which the broker can

liquidate securities in the market and recover their dues.

Further, SEBI has mandated that securities with brokers for non-receipt of

payment from clients is not be used as collateral for any of proprietary trades

or can be pledged with financial institutions. Post this circular, brokers will

not be able to use client stock as collateral thereby impacting revenue

stream of few brokers.




In a recent announcement, NSE has suspended Karvy Stock broking license

due to non-compliance of regulatory provisions of the exchange. As per

media sources, market regulator estimates that the broker has misused

client securities worth ~| 2800 crore, pledging the securities with financial

institutions. Currently, NSE has appointed EY India Ltd to conduct a forensic

audit and findings of the same is awaited. However, such events act as trust

deficit and can lead to large brokers gaining market share.

In a recent circular, SEBI announced new norms on bringing margin for cash

buy/sell order addition. As we notice, online brokers had practiced the same

as clients need to keep margin money before buy order placement and sell

is allowed only from delivery, leading to very negligible impact of new

norms. All these SEBI norms and intense competition have impacted small

brokers while large brokers are expected to gain market share.

Emergence as top discount broker - Zerodha

Zerodha has introduced disruptive pricing model offering low flat brokerage

to clients. Currently, Zerodha is serving to ~17 lakh customers (of which

close to 12 lakhs are active clients) with order/trades per day at 20-40 lakhs

as per the management. Accordingly, Zerodha has clocked revenue of ~|

800-900 crore in FY19. Nearly 2.5-3 lakh traders trade on their terminal on a

daily basis.

Management ascribes transparency and nimbleness as their core strengths

apart from low pricing.

Announcement of zero brokerage on delivery based cash transaction in

December 2015 and adoption of e-KYC post demonetisation were game

changing moves for the company which led to significant addition in

customer base. Launch of newer products has enabled garnering

incremental revenue

Valuation

Traditional brokers emerge strong on earnings

The Indian broking industry comprises participants with varied business

models from those primarily engaged in capital market activities and others

engaged in other financial activities including lending, AMC and ARC. Given

the dependence on capital market and inherent cyclicality, we assign PE

multiple in range of <15x for peers engaged in capital market. Accordingly,

we value pure brokers like IIFL Securities at 8x FY21E EPS and Geojit BNP

Paribas Financial Services at 12x FY21E standalone EPS. Players with

business models in other financial segments are valued on SoTP basis. We

value JM Financial at 1x FY21E BV (implying 11.5x FY21E EPS), Edelweiss

at 1.4x FY21E BV (implying 16.7x FY21E EPS) and Motilal Oswal at 23x

FY21E EPS. 5Paisa as a startup is valued at 4x FY21E revenue. We initiate

coverage with a BUY rating on IIFL Sec and Motilal Ostwal and HOLD rating

on 5 paisa, Geojit Financial, Edelweiss Financial Services and JM Financial.

Exhibit 17: Valuation

| crore CMP TP Rating Mcap

| | | core FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

Motil.Oswal.Fin. 730 850 Buy 10803 499 539 14 13 21.6 20.0 3809 4349 2.8 2.5

Edelweiss.Fin. 116 125 Hold 10827 343 656 5 8 31.6 16.5 7994 8656 1.4 1.3

JM Financial 91 94 Hold 7699 582 681 11 12 13.2 11.3 7620 7806 1.0 1.0

IIFL Securities 38 50 Buy 1214 164 205 20 21 7.4 5.9 895 1100 1.4 1.1

Geojit Fin. Ser. 28 29 Hold 655 14 20 9 11 46.9 33.5 515 572 1.3 1.1

5Paisa Capital 180 205 Hold 458 2.8 7.2 3 5 163.3 63.6 151 158 3.0 2.9

PAT (| crore) RoE (%) P/E (x) NW (| crore) P/BV (x)


ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

Init

iatin

g C

overage

December 23, 2019

CMP: | 729 Target: | 850 (16.5%) Target Period: 12 months

months

Motilal Oswal Financial (MOTOSW)

BUY

Particulars

Amount

Market Capitalisation | 10804 crore

Networth (Q2FY20) | 3310 crore

52 week H/L 855/480

Face Value | 1

Promoter (%) 69.9

DII Holding (%) 1.7

FII Holding (%) 13.2

Others (%) 15.1

Key Highlights

Rich experience in capital market &

inclination to scale up wealth &

home finance business bodes well

for the company’s long term vision

At current valuation, stock is fairly

valued. Accordingly, we initiate

coverage with BUY rating and target

price of | 850

Price movement

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Nov-1

9

Jul-1

9

Mar-1

9

Nov-1

8

Jul-1

8

Mar-1

8

Nov-1

7

Jun-1

7

Feb-1

7

Oct-1

6

MOFSL (R.H.S) Nifty (L.H.S)

Source: ICICI Direct Research, Reuters

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

Cyclicality of business to moderate…

MOSL is the eighth largest retail broker in India based on active client base

of 3.3 lakh with a total client base of 12.6 lakh. With an average daily turnover

(ADTO) of | 20600 crore, it enjoys 1.4% market share as on September 2019.

The consolidated entity includes asset management (MF), distribution,

wealth management apart from broking & investment banking in its overall

business arena. It maintains its own treasury worth | 2650 crore.

Overall revenue has grown at 14%, 23% CAGR in the last 10 years, five

years, respectively, depicting MOSL’s consistency in diversifying & building

revenue streams. EBIDTA, PAT have grown at 14%, 6% and 61%, 48%

CAGR in nine, five years, respectively. Losses in home finance & fund based

segments in the last year have impacted earnings. We expect revenues to

grow at 4% CAGR boosted by growth in fund based revenues & PAT growth

at 26% CAGR in FY19-22E led by lower provisions & tax reduction.

Leading traditional broker, presence in retail, institutional, IB

Motilal Securities has been a strong player in the capital markets with a

presence across business segments. It has seen a declining trend in ADTO

market share to 1.4%, down from highs of over 4% in FY09. However, it has

tried to maintain share in the high yielding cash segment in last few years.

Latest profits remained healthy growing 14% YoY, 58% QoQ in Q2FY20 post

FY19 reported PAT growing 18% YoY to | 173 crore. It runs a lending book

of ~| 1274 crore currently with pure margin funding at around | 348 crore.

Strong presence in broking, enables it to spread wings

Over the years, MOSL has successfully built a pan-India distribution

network. It has over 211 branches and 2400 franchises. The company enjoys

advantage of access to the rich experience and network of promoters and

broking client relationships to expand even in other business segments.

AMC, wealth management, P/E and home finance are its key segments.

Vast experience – new business lines augur well, initiate with BUY

The experience of promoters and management remains rich in the capital

market segment. We believe the wealth management and AMC businesses

would reduce the impact of cyclicality of capital markets in earnings. We

expect revenues, PAT to grow at 4%, 26% CAGR, respectively, in FY19-22E.

Housing losses are turning around with other businesses picking up. We

expect RoE to gradually improve from 9% in FY19 to 13-14% by FY20-21E.

Factoring in AMC business commands higher multiple, we value MOSL

slightly higher than pure brokers. We value company on SOTP basis

implying multiple of 23x FY21E PAT, providing a target price of | 850. We

initiate coverage with BUY rating on the stock.

FY18 FY19 FY20E FY21E FY22E

ADTO (| crore) 13,700 17,400 19,314 20,859 22,528

Market Share (%) 2.0 1.8 1.6 1.4 1.3

Total Revenue (| crore) 2,935 2,677 2,624 2,783 2,993

Net Profit (| crore) 622 294 499 539 594

EPS (|) 43 20 34 37 41

P/E (x) 17 36 21 20 18

P/BV (x) 3.6 3.4 2.8 2.4 2.2

RoE (%) 9.6 14.0 13.2 12.8

s

Key Financial Summary


ICICI Direct Research Initiating Coverage | Motilal Oswal Financial

Story in charts & rationale

Exhibit 18: Diversified revenue mix

62

4538 42 44 44 43 42 41

20

24

2627

30 29 30 32 32

320 30 23

24 22 23 23 23

14 106 9

2 5 4 3 3

0%

20%

40%

60%

80%

100%

FY15 FY16 FY17 FY18 FY19 H1FY20 FY20E FY21E FY22E

Capital Market Asset & wealth Management Housing finance Fund Based


Exhibit 19: Segment wise return on equity

RoE (%) % of NW RoE (%) % of NW RoE (%) % of NW

Capital Market 96 9 89 10 66 9

Asset & wealth Management 141 5 127 3 108 5

Housing finance -13 23 -17 27 1 25

Fund Based -5 63 3 60 11 60

Consolidated RoE (%) 6 10 18

FY18 FY19 H1FY20


Broking

Motilal Securities has been a strong player in the capital markets with a

presence across business segments. It has seen a declining trend in ADTO

market share to 1.4%, down from highs of over 4% in FY09. However, it has

tried to maintain share in the high yielding cash segment over the years.

Latest profits remained healthy growing 14% YoY, 58% QoQ in Q2FY20 post

FY19 with reported PAT growing 18% YoY to | 173 crore. It runs a lending

book of ~| 1274 crore currently with pure margin funding ~| 348 crore as

on Sept 2019. We expect broking segment earnings to grow marginally

higher from here led by lower volume growth and contained costs, along

with lower taxes at 25%.

Exhibit 20: Broking P&L

| Crore FY18 FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 FY20E FY21E FY22E

Total Revenues 1,121 1,133 294 270 281 278 302 1,102 1,147 1,221

Operating Cost 762 750 188 188 193 181 195 710 739 786

PAT 147 173 51 34 36 40 56 187 195 220


AMC

As of September 2019, AMC AUM was at | 38500 crore (up 6% YoY), with

MF AUM at | 19900 crore (up 5% YoY), PMS AUM at | 15800 crore (up 7%

YoY) and alternative investment fund (AIF) AUM at | 2600 crore. The group

has built a strong recurring revenue item from scratch. The growth

continues to remain healthy except last year. MF equity market share is

1.9%. It reported revenue & PAT of | 579 crore & | 150 crore, respectively,

in FY19 and grew 22% YoY in Q2FY20 benefiting from lower taxes.



Exhibit 21: AUM & income statement


AUM 35,600 38,900 36,402 37,400 38,900 38,809 38,501 41,623 45,785 50,364

Total Revenues 520 579 154 137 140 144 136 595 659 725

Operating Cost 349 348 93 83 86 88 85 379 418 460

PBT 170 231 61 54 53 56 50 223 245 274

PAT 110 150 39 34 36 36 48 167 184 206


IB and wealth management

Wealth management is the recent addition to the kitty with AUM of | 18100

crore and quarterly revenue of | 28 crore. However, the potential to expand

the business and build recurring revenues remains high. The IB business

remains lumpy.

Exhibit 22: Wealth management income statement


AUM 14,700 17,500 15,485 16,400 17,500 18,008 18,141 18,375 20,213 22,234

Total Revenues 98 109 32 25 26 22 28 103 113 125

Operating Cost 66 88 24 21 21 21 26 93 100 103

PBT 31 20 8 4 4 1 1 7 11 14

PAT 21 14 6 3 3 1 1 5 9 11


Aspire Housing Finance renamed Motilal Oswal Housing Finance

Aspire was the housing finance arm of MOFSL. The entity had faced losses

in the last two years due to asset quality issues. The management has done

write-offs in Q2FY20 and significantly reduced the GNPA and NNPA ratios

to 2.39% and 1.82% from a high of 10.4% and 7.8%, respectively. PCR is at

62%. These lower NPLs will help them to further boost lender’s confidence

and bring down incremental cost of funds. We expect housing loan growth

to pick up moderately to | 4280 crore in FY21E with asset quality concerns

subsiding.

Exhibit 23: Housing finance income statement


NII 238 231 70 52 51 58 54 225 235 257

Other Income 22 13 3 3 4 2 2 10 11 11

Total Revenues 261 244 73 56 55 60 57 235 246 268

Operating cost 99 104 26 27 24 24 25 108 113 123

PPoP 162 141 47 28 32 36 32 127 133 145

Provisions 137 352 101 178 22 11 49 70 70 70

PBT 25 -212 -54 -150 9 25 -18 57 63 75

PAT 19 -137 -36 -97 8 17 -12 40 44 52


Exhibit 24: Housing finance key data

FY18 FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 FY20E FY21E FY22E

AUM 4860 4360 4600 4400 4360 4300 3850 3927 4280 4666

NIM (%) 4.1 4.8 4.6 4.85 4.8 5.2 5.1 5.7 5.5 5.5

GNPA (%) 4.5 9.3 7 8.68 9.3 10.4 2.4

NNPA (%) 3.3 7.2 5.6 6.97 7.2 7.8 1.8


MOFSL has an equity treasury book of ~| 1,100 crore with MTM valuations

of | 1550 crore as on September 2019. Apart from these, there are

liquid/debt funds of | 300 crore and sponsor investments in Private Equity

and Real Estate funds to the tune of ~| 450 crore.



Valuation

The experience of promoters and management remain rich in the capital

market segment. We believe the wealth management and AMC businesses

would reduce the impact of cyclicality of capital markets in earnings. We

expect revenues, PAT to grow at 4%, 26% CAGR, respectively, in FY19-22E.

Housing losses are turning around with other businesses picking up. We

expect RoE to gradually improve from 9% in FY19 to 13-14% by FY20-21E.

Factoring in AMC business commands higher multiple, we value MOSL

slightly higher than pure brokers. We assign 23x FY21E PAT, providing a

target price of | 850. We initiate coverage with a BUY rating on the stock.

Exhibit 25: SOTP valuation

Business Segment Value (| crore) |/share

AMC 6,704 460

Broking & IB 3,562 245

PE & other business 2,416 166

Home Finance 1,895 130

Holding company discount 15% 15%

Value per share 12,391.2 850


Exhibit 26: One year forward PE

0

200

400

600

800

1000

1200

1400

1600

Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

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Apr-16

Jul-16

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Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

| crore

CMP 15.0 X 20.0 X 25.0 X 30.0 X

Source: Capital line , ICICI Direct Research



Financial Summary

Exhibit 27: Income Statement (| crore)

FY19 FY20E FY21E FY22E

Total Revenue 2,677 2,624 2,783 2,993

Operating Cost 1,543 1,400 1,383 1,471

EBITDA 937 1,014 1,178 1,253

Interest Expense 517 470 446 433

PBT 396 666 719 792

Tax 10 17 18 20

PAT 294 499 539 594


Exhibit 28: Balance Sheet (| crore)


Sources of Funds

Equity

Net-worth 3050 3809 4349 4943

Borrowings 5160 4472 4420 4332

Minority Interest 40 30 30 30

Total Liabilities 8250 8281 8769 9275

Application of Funds

Fixed assets 300 330 330 330

Investment 2690 2700 2720 2720

Loans and Advances 4880 4677 5098 5554

Working Capital (net) 360 514 561 611

Deferred tax assets (net) 20 60 60 60

Total Assets 8250 8281 8769 9275


Exhibit 29: Key Ratios


No of Eq Shares (Crore) 14.57 14.57 14.57 14.57

EPS (|) 20.2 34.3 37.0 40.8

Book Value(|) 212 261 298 339

BVPS (|) 209 261 298 339

P/E (x) 36.1 21.3 19.7 17.9

P/B (x) 3.5 2.8 2.4 2.2

RoE (%) 9.6 14.0 13.2 12.8

ADTO (| crore) 17400 19314 20859 22528

Market Share (%) 1.8 1.6 1.4 1.3

Yield (%) 0.015 0.014 0.013 0.013


Exhibit 30: Growth (%)


Total Asset 0.4 5.9 5.8

Total Income -2.0 6.1 7.5

ADTO 11.0 8.0 8.0

Expences -9.3 -1.2 6.4

Net Profit 69.7 8.0 10.2

Book Value 24.9 14.2 13.7

EPS 69.7 8.0 10.2


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CMP: | 180 Target: | 205 (14%) Target Period: 12 months

months

5paisa Capital (5PACAP)

HOLD

Sustainable revenue growth; pivotal for PAT visibility…

5paisa Capital is a leading discount stock broker backed by Nirmal Jain led

IIFL group. It started operations in March 2016 with 3652 active clients as of

FY17. Over the years, aggressive customer acquisition and competitive

pricing have aided in superior active client growth to 2.64 lakh as on October

2019. The company has become the third largest discount broker. However,

the company plans to make itself a financial platform and differentiator with

offerings like P2P lending platform apart from discount broking with a

product suite (free plan/ |249 plan & |499 plan) to select from.

Increasing active clients; market share set to rise

On the back of its lower fixed brokerage and user friendly mobile apps &

systems, the company has been constantly acquiring active clients. This led

to market share gains to 1.4% in Q2FY20. As of October 2019, number of

active clients was at 264712 vs. 3652 in March 2017 implying growth at 455%

CAGR for the period. Led by lower brokerage, active client to total client is

expected to be better than traditional brokers. Further, average daily

turnover (ADTO) witnessed 200% growth to | 8658 crore in FY19 vs. | 2860

crore in FY18. Going ahead, increasing pace of customer acquisition &

improving market share is seen improving ADTO growth to 59% CAGR to

| 34500 crore by FY22E. Market share is seen improving to 2% by FY22E.

Superior revenue growth to aid improvement in CI ratio

The company witnessed strong revenue growth of 189% CAGR to | 62.6

crore in FY19 (| 7.5 crore in FY17), largely led by improving ADTO &

increasing client base. We expect revenues growth at 36% CAGR in FY19-

22E, led by operating leverage which is seen driving CI ratio lower to 89%

in FY22E. 70-75% of opex is acquisition cost. Accordingly, it is poised to

post FY22E PAT of ~| 12.8 crore vs. loss of ~| 17 crore in FY19.

Return ratios to improve, fairly valued

Post years of losses, the company is expected to post a profit from FY20E

on the back of operating leverage. Accordingly, return ratios are expected

to turn from negative to positive, reporting RoE of ~8% in FY22E. The

company focuses on increasing business growth led by aggressive pricing

and strong client acquisition compared to peers. Accordingly, an increase in

operating leverage is anticipated. Revenue growth holds key. With expected

PAT of ~| 12.8 crore by FY22E, we believe the stock to be looked at as a

start-up story. As a large number of clients are new to stock markets without

long experience, burnout ratio or leakage is to be watched. The stock is

currently trading at 66x FY21E PAT and 3.6x revenues. With the stock fairly

valued, we initiate coverage on the stock with a HOLD rating and a target

price of | 205/share, implying 4x revenues and 73x FY21E.


Particulars

Amount

Market Capilatisation | 459 crore

Networth | 141 crore

52 week H/L 271/111

Face Value | 10

DII Holding (%) 0


Promoter Holding (%) 34.6

Others (%) 47.2

Key Highlights

Third largest discount broker with

active clients base of 2.64 lakh as of

October 2019

With the stock fairly valued, we

initiate coverage on the stock with a

HOLD rating and a target price of |

205/share

Price movement

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5 Paisa (R.H.S) Nifty (L.H.S)

Source: Reuters, ICICI Direct Research

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

s


ADTO (| crore) 2860 8658 22500 28500 34500

Market Share (%) 0.4 0.9 1.8 1.9 2.0

Revenue from operation (| crore) 19.7 62.6 103.9 129.8 158.1

Net Profit (| crore) -25.3 -16.6 2.8 7.2 12.8

EPS (|) -19.9 -13.0 1.1 2.8 5.0

P/E (x) -9.1 -13.8 163.5 63.7 35.8

RoE (%) -33.5 -30.3 2.8 4.7 7.8

Source: ICICI Direct Research, Company


ICICI Direct Research Initiating Coverage | 5paisa Capital

Story in Charts

Exhibit 31: Superior revenue growth

7

20

63

104

130

158

163

219

66

25

22

0

50

100

150

200

250

0

20

40

60

80

100

120

140

160

180

FY17 FY18 FY19 FY20E FY21E FY22E

(%)

| crore

Revenue Revenue Growth


Exhibit 32: Improving CI ratio seen ahead

319

269

136

96 93 89

0

50

100

150

200

250

300

350

FY17 FY18 FY19 FY20E FY21E FY22E

(%)

Cost To Income Ratio


Exhibit 33: Aggressive client acquisition aiding strong ADTO growth

2860

8658

22500

28500

34500

0

5000

10000

15000

20000

25000

30000

35000

40000


| c

rore

ADTO


Valuation

Post years of losses, the company is expected to post profit from FY20E on

the back of operating leverage. Accordingly, return ratios are expected to

turn from negative to positive, reporting RoE of ~8% in FY22E.

The company focuses on increasing business growth led by aggressive

pricing and strong client acquisition compared to peers. Accordingly, an

increase in operating leverage is expected. Revenue growth holds key. Also,

with expected PAT of ~| 12.8 crore by FY22E, we believe the stock should

be looked at as a start-up story. The stock is currently trading at 66x FY21E

PAT and 3.6x revenues. With the stock fairly valued, we initiate coverage on

it with a HOLD rating and a target price of | 205/share, implying 4x revenues

and 73x FY21E.


ICICI Direct Research Initiating Coverage | 5paisa Capital

Financial Summary

Exhibit 34: Profit & Loss Ratios (| crore)

Particulars FY18 FY19 FY20E FY21E FY22E

Revenue from operation 19.7 62.6 103.9 129.8 158.1

Other Income - - - - -

Total Income 19.7 62.6 103.9 129.8 158.1

Employee expense 19.3 25.8 31.0 37.2 40.9

Finance cost 0.8 6.8 6.8 7.6 9.1

Depreciation 0.7 1.4 2.2 3.0 4.2

Other expenses 32.1 51.0 60.2 72.2 86.7

Total Expense 52.9 85.1 100.1 120.1 140.9

Profit Before Tax -33.2 -22.5 3.8 9.7 17.2

Tax -7.9 -5.9 1.0 2.5 4.4

Profit After Tax -25.3 -16.6 2.8 7.2 12.8

EPS (-19.9) (-13.0) 1.10 2.83 5.03


Exhibit 35: Balance Sheet Ratios (| crore)


Source of Funds

Equity Capital 12.7 12.7 25.5 25.5 25.5

Reserve& Surplus 50.2 33.6 125.6 132.8 145.6

Networth 62.9 46.4 151.1 158.3 171.1

Borrowings 16.1 92.0 96.6 101.4 106.5

Other Liability 52.2 143.2 128.8 141.7 155.9

Total 131.3 281.5 376.5 401.5 433.5


Fixed Asset 2.1 2.3 2.3 2.4 2.5

Investment 2.1 2.1 5.3 5.8 6.4

Advances 36.4 36.8 40.5 47.8 52.6

Cash 27.9 113.0 90.4 94.9 102.5

Other Asset 62.7 127.3 238.1 250.5 269.5

Total 131.3 281.5 376.5 401.5 433.5


Exhibit 36: Key Ratios (| crore)


ADTO (| crore) 2860 8658 22500 28500 34500

Market Share (%) 0.4 0.9 1.8 1.9 2.0

Yield (%) 0.002 0.003 0.002 0.002 0.002

ROE (%) -33.5 -30.3 2.8 4.7 7.8

No of Shares (crore) 1.3 1.3 2.5 2.5 2.5

EPS (|) -19.9 -13.0 1.1 2.8 5.0

PE (x) -9.1 -13.8 163.5 63.7 35.8

Book Value (|) 49.4 36.4 59.3 62.1 67.2

P/BV (x) 3.6 4.9 3.0 2.9 2.7

Pat margin (%) -128.7 -26.5 2.7 5.6 8.1

CI Ratio (%) 269.0 135.9 96.4 92.5 89.1

Mcap/Sales (x) 23.4 7.3 4.4 3.5 2.9


Exhibit 37: Key Ratios (%)

Growth (%) FY18 FY19 FY20E FY21E FY22E

Total Asset 20 115 34 7 8

Advances 539 1 10 18 10

Borrowing 0 470 5 5 5

Total Income 163 219 66 25 22

Operating expense 122 61 18 20 17

Net profit -116 35 117 -157 -78

Book Value -29 -26 63 5 8

EPS -38 34 108 -157 -78


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months

IIFL Securities (IIFSEC)

BUY

Holding its ground…

Started in 1995 as capital markets player, IIFL has emerged as a financial

conglomerate engaged in various businesses from broking, wealth

management to lending. In September 2019, the company got demerged

and IIFL Securities (IIFL Sec) got listed separately. It is engaged in retail and

institutional broking, distribution of financial products and investment

banking. Currently, the company caters to a retail client base of 8.25 lakh

and more than 600 institutional clients. In terms of active client base, the

company is at 11th rank while in terms of ADTO market share, IIFL Sec has

1.3% share as on Q2FY20 (| 19191 crore).

Client acquisition, higher volume to increase ADTO

IIFL Sec caters to various client segments across spectrum including affluent

customers (~1.75 lakh), millennial (~4 lakh) and small retail customer (~2.5

lakh). In the recent past, IIFL Sec has witnessed a decline in ADTO market

share from 2% in FY18 to 1.3% in Q2FY20, led by higher volatility in markets

and rising share of options. Share in the cash segment saw a decline from

3.9% in FY18 to 3.4% in Q2FY20. Client base has seen an increase from 7.66

lakh in FY18 to 8.23 lakh in Q2FY20. With focus on client acquisition and

increase in volume of activity, average daily turnover (ADTO) is expected to

increase at ~15% CAGR to | 21000 crore in FY19-22E. Hence, we expect

brokerage revenues to increase at 10% CAGR to | 414 crore in FY22E.

Building of AUM to enable shift toward fee based model

In initial phase, earning fee based income through selling financial products

(MF & insurance) remained the key focus. Likewise, AUM has increased at

27% CAGR in FY17-19 to | 26900 crore. Distribution AUM rose at ~103%

CAGR in FY17-19 to | 8300 crore. However, a gradual shift towards AUM

based business model and margin funding is anticipated catering to higher

fee based income. Led by fee-based income, we expect revenues/PAT to

grow at 12%/11 CAGR in FY20-22E to | 874 crore/188 crore.

Valuation discount to persist; current lower valuation offers upside

Focus on increasing business growth led by client acquisition and increasing

market activity remain key catalysts for the base business. Focus on building

AUM bodes well for a gradual shift towards the fee-based business model.

We expect the topline to increase at 12% CAGR to | 855 crore in FY22E while

earnings are seen at | 198 crore, growing at 10% CAGR. We believe as the

wealth management and discount broking are already separately listed in

group, hence the discount in valuation vs. peers may remain. However, the

stock is currently trading cheap at 6.4x FY21E EPS, which is at a steep

discount compared to peers. We initiate coverage on the stock with a BUY

rating and a target price of | 50/share, implying ~8x FY21E EPS.


Particulars

Amount



52 week H/L 47.7/19

Face Value | 2

DII Holding (%) 1



Others (%) 45.9

Key Highlights

Traditional broker with retail &

institutional business and

distribution of financial products

Building AUM at | 26900 crore – to

enable gradual shift to fee based

model

Initiate coverage with BUY rating

and target price of | 50

Price movement

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IIFLSec (R.H.S) Nifty (L.H.S)


Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

sss


ADTO (| crore) 8415 13988 17709 20000 24000

Market Share (%) 1.2 1.4 1.4 1.3 1.4

Revenue from operation (| crore) 834.7 835.1 775.7 820.4 828.1

Net Profit (| crore) 180.6 171.5 163.8 204.8 203.9

EPS (|) 5.7 5.4 5.1 6.4 6.4

P/E (x) 6.7 7.1 7.4 5.9 6.0

RoE (%) 29.0 25.3 20.2 20.5 17.0

s




Initiating Coverage | IIFL Securities

Snapshot of company

Exhibit 38: Revenue streams

| crore FY17 FY18 FY19 1HFY20

Proportion

(1HFY20)

Broking

Retail 236.3 282.9 240.3 105.3 28%

Institutional 123.6 138.5 130.8 68.1 18%

Distribution 102.7 154.4 180.4 68.8 19%

IB 36.1 82 33.4 10 3%

Others 289.3 290.6 117.7 32%

Total 947.1 875.5 369.9 100%


Exhibit 39: Brokerage income (retail & institutional business)

236.3

282.9

240.3

105.3

123.6138.5

130.8

68.1

0

50

100

150

200

250

300

FY17 FY18 FY19 1HFY20

| crore

Retail Institutional


Exhibit 40: ADTO & market share (cash segment)

1154 1155

1078

1140

1020

1040

1060

1080

1100

1120

1140

1160

1180

0

1

2

3

4

5

FY18 FY19 Q1FY20 Q2FY20

| crore

(%

)

Cash ADTO Market Share (%)


Exhibit 41: ADTO & market share (overall)

13988

1770916934

19161

0

5000

10000

15000

20000

25000

0

0.5

1

1.5

2

2.5

FY18 FY19 Q1FY20 Q2FY20

| crore

(%

)

Total ADTO Market Share (%)


Exhibit 42: Break up of AUM

| crore FY17 FY18 FY19 1HFY20 CAGR (FY17-19)

DP 15900 20800 20800 18600 14%

Financial products 1900 5500 7800 8300 103%

Total AUM 17800 26300 28600 26900 27%


Valuation

Focus on increasing business growth led by client acquisition and increasing

market activity remain key catalysts for the base business. Focus on building

AUM bodes well for a gradual shift towards the fee-based business model.

We expect the topline to increase at 12% CAGR to | 855 crore in FY22E while

earnings are seen at | 198 crore; growing at 10% CAGR. We believe that as

the wealth management and discount broking are already separately listed

in group, hence the discount in valuation vs. peers may remain. However,

the stock is currently trading cheap at 6.4x FY21E EPS, which is at a steep

discount compared to peers. We initiate coverage on the stock with a BUY

rating and a target price of | 50/share, implying ~8x FY21E EPS.



Initiating Coverage | IIFL Securities

Financial Summary

Exhibit 43: Profit & Loss (| crore)



Other Income 112.40 40.40 44.47 48.92 53.81

Total Income 947.1 875.5 820.2 825.3 855.5


Finance cost 144.5 114.5 111.4 56.8 66.2

Depreciation 36.5 41.9 46.1 50.7 55.8

Other expenses 275.9 200.9 183.2 223.5 219.3

Total Expense 667.8 613.9 597.3 559.0 585.3

Profit Before Tax 279.3 261.6 222.9 266.3 270.3

Tax 92.9 86.6 59.1 70.6 71.6

Profit After Tax 180.6 171.5 163.8 195.7 198.7

Exceptional Item 0.0 0.0 87.2 0.0 0.0

PAT post excp item 180.6 171.5 251.0 195.7 198.7

EPS 5.67 5.38 5.14 6.14 6.23




Source of Funds

Equity Capital 63.7 63.8 63.8 63.8 63.8

Reserve& Surplus 559.5 667.1 830.9 1035.7 1239.6

Networth 623.2 730.9 894.7 1099.5 1303.4

Borrowings 1012.8 660.5 60.5 378.5 473.2

Other Liability 1225.8 1658.5 1675.1 1691.8 1708.8

Total 2861.8 3049.9 2630.3 3169.9 3485.3


Fixed Asset 583.9 469.8 493.3 468.6 421.8

Investment 159.5 139.6 153.6 168.9 185.8

Advances 81.6 433.2 519.8 623.8 779.8

Cash 855.3 1065.0 465.0 688.5 764.2

Other Asset 1181.6 942.3 998.6 1220.0 1333.8

Total 2861.8 3049.9 2630.3 3169.9 3485.3




ADTO (| crore) 8415 13988 17709 20000 24000

Market Share (%) 1.2 1.4 1.4 1.3 1.4

Yield (%) 0.025 0.015 0.009 0.008 0.006

ROE (%) 29.0 25.3 20.2 20.5 17.0


EPS (|) 5.7 5.4 5.1 6.4 6.4

PE (x) 6.7 7.1 7.4 5.9 6.0

Book Value (|) 19.6 22.9 28.0 34.5 40.9

P/BV (x) 1.9 1.7 1.4 1.1 0.9

Pat margin (%) 19.1 19.6 20.0 23.6 23.1

CI Ratio (%) 70.5 70.1 72.8 67.9 68.5

Mcap/Sales (x) 1.3 1.4 1.5 1.4 1.4



Growth (%) FY19 FY20E FY21E FY22E

Total Asset 7 -1 5 10

Advances 431 20 20 25

Borrowing -35 -45 5 25

Total Income -8 -6 1 4

Operating expense -8 -3 -6 5

Net profit -5 -4 19 1

Book Value 17 33 12 18

EPS -5 -4 19 1


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CMP: | 27.3 Target: | 29 (6%) Target Period: 12 months

months

Geojit Financial Services (GEOBNP)

HOLD

Marginal player in competitive environment…

Geojit Financial services (GFS) is a leading retail financial services company

in India with a growing presence domestically and in the Middle East.

Established in 1987, the company offers a wide portfolio of savings and

investment solutions to over 10.2 lakh clients through a countrywide

network of over 469 offices, phone services & dedicated customer care

centres. The company also has a strategic presence in Middle East region in

the form of joint ventures and partnerships.

Higher cash market share in tough environment

Increased competitive intensity led by large brokers has weighed on the

company’s market share & positioning. GFS has lost 26200 active customers

in the last 30 months, with corresponding market share dwindling from 0.5%

in FY15 to 0.21% in Q2FY20. ADTO over this time frame has grown to | 1936

crore at a subdued CAGR of 11%, vastly underperforming the industry’s

42% pace. Despite loss in active clients & slower ADTO growth, GFS has

been able to maintain share in cash segment (FY19- | 448 crore, 23% of

ADTO) in total ADTO compared to its peers (Avg~10% for peers).

Moderation in revenue, higher cost to weigh on earnings

Revenues grew to | 265 crore in FY19, with growth in FY16-19 limited to 7%

CAGR. Topline growth has remained a laggard despite robust 32% CAGR in

distribution income in the past 36 months (financialisation of savings effect)

as brokerage income (76% of revenues) grew meagrely by 4% in this period.

Combined with a quicker rise in costs, the ensuing cost to income ratio

surged ~1000 bps in FY19 to 80% (70% in FY18), thus dragging earnings.

PAT witnessed a 6% CAGR decline in FY16-19. Going ahead, earnings are

seen being supported by a shift to lower tax rates and modest improvement

in CI ratio against any meaningful uptick in brokerage revenues.

Awaiting growth triggers; initiate coverage with HOLD

GFS’ current business strategy appears to be hampered by a moderation in

yield and loss of active clients, with revenues and market share suffering as

a result. Simultaneously, cost overhangs also limit visibility on the

profitability front. In our opinion, GFS is in dire need of re-strategizing to be

able to compete better with large brokers. We expect earnings to remain

muted with the benefit of lower tax rate aiding profitability, going ahead.

With earnings strength a key point of concern, the company’s competitive

position appears threatened. GFS is currently trading at at 11.5x FY21E

standalone EPS (9.5x FY21E on consolidated basis). In our view, limited

growth visibility caps upside, though higher share of cash segment stays its

forte. We initiate coverage with HOLD rating and a target price of | 29,

valuing it at 12x FY21E standalone EPS (10x FY21E on consolidated basis).


Particulars

Amount


Networth (FY19) | 409 crore

52 week H/L 48/22

Face Value | 1

DII Holding (%) 1.2

FII Holding (%) 2.6


Others (%) 34.1

Key Highlights

Increasing competition from large

brokers taking a toll on business

growth

Initiate coverage with HOLD rating

and target price of | 29

Price movement

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4,000

6,000

8,000

10,000

12,000

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Jul-17

Mar-17

Dec-16

Geojit (R.H.S) Nifty (L.H.S)


Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

s


ADTO (| crore) 1994 1936 2250 2775 3450

Market Share (%) 0.28 0.19 0.18 0.19 0.20

Revenue from operation (| crore) 304 265 285 331 384

Net Profit (| crore) 67.5 29.2 40.8 57.0 67.1

EPS (|) 2.8 1.2 1.7 2.4 2.8

P/E (x) 9.6 22.3 15.9 11.4 9.7

RoE (%) 16.2 6.9 8.8 10.5 11.1




Initiating Coverage | Geojit Financial Services

Story in charts

Exhibit 47: Average daily turnover (ADTO) growth over the years

426 369 394 496 448 450 500 552

868760

956

1498 14881800

2276

2898

0

500

1000

1500

2000

2500

3000

3500

4000

FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

(| crore)

Cash Derivative


Exhibit 48: Active clients and lower turnover impacting market share

0.53

0.40

0.33

0.28

0.190.18 0.19 0.20

0.00

0.10

0.20

0.30

0.40

0.50

0.60

FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

(%)

Market Share


Exhibit 49: Revenue break-up

| Crore FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Brokerage Income 182 204 242 202 219 256 302

Distribution Income 18 24 45 43 47 51 57

Others 36 38 47 41 31 35 37


Cash ADTO grew at a meagre pace of 1% during

FY15-19 while derivatives grew at 14% CAGR during

the same period

Continuous loss of active clients and lower turnover

are impacting market share, which has halved to

0.19% in FY19 vs. 0.53% in FY15

Declining yield & market share led to muted growth

in brokerage income (4% CAGR) while increased

financialisation aided distribution growth (32%

CAGR)



Initiating Coverage | Geojit Financial Services

Valuation

GFS’ current business strategy appears to be hampered by a moderation in

yield and loss of active clients, with revenues and market share suffering as

a result. Simultaneously, cost overhangs also limit visibility on the

profitability front. In our opinion, GFS is in dire need of re-strategizing to be

able to compete better with large brokers. We expect earnings to remain

muted with the benefit of lower tax rate aiding profitability, going ahead.

With earnings strength a key point of concern, the company’s competitive

position appears threatened. GFS is currently trading at at 11.5x FY21E

standalone EPS (9.5x FY21E on consolidated basis). In our view, limited

growth visibility caps upside, though higher share of cash segment stays its

forte. We initiate coverage with HOLD rating and a target price of | 29,

valuing it at 12x FY21E standalone EPS (10x FY21E on consolidated basis).

Exhibit 50: One year forward PE

0

20

40

60

80

100

120

140

Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

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Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

|

CMP 5.0 X 10.0 X 15.0 X 20.0 X 25.0 X

Source: Company, Capital line, ICICI Direct Research


ICICI Direct Research Initiating Coverage | Geojit Financial Services

Financial Summary (Standalone)




Other Income 30.1 20.2 10.1 10.1 10.1

Total Income 334.2 285.1 295.5 341.3 394.0


Finance cost 0.4 0.7 0.8 0.8 1.0

Depreciation 12.4 13.7 15.1 16.6 18.6

Other expenses 126.9 113.9 118.4 130.3 149.8

Total Expense 232.7 229.6 240.7 264.8 304.0

Profit Before Tax 101.4 55.5 54.8 76.6 90.0

Tax 34.0 18.8 14.0 19.5 23.0

Profit After Tax 67.5 29.2 40.8 57.0 67.1

EPS 2.8 1.2 1.7 2.4 2.8




Source of Funds

Equity Capital 23.8 23.8 23.8 23.8 23.8

Reserve& Surplus 411.8 385.0 490.9 547.9 615.0

Networth 435.6 408.9 514.7 571.8 638.8

Borrowings 4.6 2.4 3.7 5.1 6.7

Other Liability 227.6 292.2 306.9 322.2 338.3

Total 667.8 703.6 825.2 899.1 983.8


Fixed Asset 55.3 66.4 69.7 76.6 84.3

Investment 114.7 45.0 67.4 74.2 81.6

Advances 155.9 172.5 175.9 184.7 203.2

Cash 188.0 204.9 348.4 383.2 421.5

Other Asset 153.8 214.8 163.8 180.3 193.1

Total 667.8 703.6 825.2 899.1 983.8




ADTO (| crore) 1994 1936 2250 2775 3450

Derivative (| crore) 1498 1488 1800 2276 2898

Cash (| crore) 496 448 450 500 552

Market Share (%) 0.3 0.2 0.2 0.2 0.2

Yield (%) 0.046 0.040 0.037 0.035 0.033

ROE (%) 16.2 6.9 8.8 10.5 11.1


EPS (|) 2.8 1.2 1.7 2.4 2.8

PE (x) 9.6 22.3 15.9 11.4 9.7

Book Value (|) 18.3 17.2 21.6 24.0 26.8

P/BV (x) 1.5 1.6 1.3 1.1 1.0

Pat margin (%) 20.2 10.2 13.8 16.7 17.0

CI Ratio (%) 69.6 80.5 81.4 77.6 77.2

Mcap/Sales (x) 1.9 2.3 2.2 1.9 1.7



Growth (%) FY18 FY19 FY20E FY21E FY22E

Total Asset 5 5 17 9 9

Advances 37 11 2 5 10

Borrowing 0 -47 50 40 30

Total Income 25 -15 4 16 15

Operating expense 21 -1 5 10 15

Net profit -76 57 40 40 18

Book Value 9 -6 26 11 12

EPS 74 -57 40 40 18


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Edelweiss Financial (EDEFIN)

HOLD

Growth pauses; balance sheet in restructuring mode

Edelweiss Financial Services (Edelweiss) has successfully transformed itself

from a pure investment banking advisor (65% of PBT in FY10) to a financial

conglomerate with businesses spanning three scalable and profitable

business segments: 1) credit (retail & corporate) (| 31289 crore) & ARC

(| 38200 crore), 2) advisory (wealth management -| 107800 crore, asset

management- | 34900 crore & capital markets custodian asset | 21500 crore

and 3) life & general insurance (| 218 crore premium).

The recent resolution of Essar Steel has benefitted Edelweiss ARC that had

the second largest exposure at ~| 8307 crore of which 85% has been

recovered. Edelweiss Tokio Life Insurance continued to generate minor

losses of | 28 crore in Q2FY20 while premium growth was healthy at 21%

YoY to | 218 crore. Breakeven is expected by FY23E. Major concerns remain

its high exposure to real estate of | 11000 crore spread across 162 projects

while 30-35 of them are stressed with risk of higher provisions ahead.

Credit business contributes 73% of the consolidated PAT post minority

interest (MI) in Q2FY20. Concentration within real estate/wholesale sector

has impacted ratings, earnings scenario. Post the September 2018 liquidity

crisis, Edelweiss has cautiously started unwinding wholesale book and

focused on scaling up retail & advisory business. It is expected to continue.

Notably, in Q2FY20, the company on-boarded two large investors in the

advisory business, reflecting its ability to raise capital even in a challenging

period. However, we are three to four quarters away from witnessing an

improvement. Post a muted FY20E, consolidated profits are expected to pick

up in FY21E to | 617 crore, though lower than | 1044 crore in FY19.

Advisory – wealth, ARC hold key, fairly valued

The company’s strong positioning in institutional, investment banking

continues while market share in pure retail broking business has gradually

reduced. Overall market share may have reduced from 6.5% (actual) in FY09

to under 2% now (estimates basis active clients). The advisory business

including wealth management is expected to maintain healthy traction.

Advisory AUM of | 107800 crore includes 26% advisory, 74% distribution,

including retail demat balances. The management raised funds in a

challenging period bringing new partners and has been increasing focus on

advisory and retail businesses. It is moving towards a capital light, fee based

model. Real estate & wholesale books are expected to move to fund based

models while co-lending model has been worked out with five banks to keep

the balance sheet light. Factoring in balance sheet restructuring would take

at least a year, we initiate coverage on the stock with a HOLD rating. We

assign SoTP based target price of | 125/share (implying 16.7x FY21E EPS).

es

FY17 FY18 FY19 FY20E FY21E

Revenue from operation (| crore) 3383 4443 5275 4290 4780

Net Profit (| crore) 609 838 991 343 656

EPS (|) 7.3 10.1 11.4 3.9 7.5

P/E (x) 15.8 11.4 10.1 29.2 15.3

Book Value 51.5 72.9 83.8 85.3 92.4

P/B (x) 2.2 1.6 1.4 1.3 1.2

RoE (%) 15.2 15.0 14.3 4.7 8.5

RoA (%) 1.5 1.5 1.6 0.6 1.3



Particulars

Amount



52 week H/L 210/67

Face Value | 1

DII Holding (%) 4.9



Others (%) 32.2

Key Highlights

Higher-than-expected recovery

from Essar Steel and on boarding of

new investors provides comforts.

Factoring in muted FY20E and

expected revival in earnings in

FY21E, we initiate coverage with

HOLD rating & target price of | 125

Price movement

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EDEL (R.H.S) Nifty (L.H.S)


Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]


ICICI Direct Research Initiating Coverage | Edelweiss Financial

Story in Charts

Exhibit 55: Expected business structure by FY22


Exhibit 56: Expected business structure by FY20


Exhibit 57: Loan book break-up

| crore FY15 FY16 FY17 FY18 FY19 Q1FY20 Q2FY20

Credit Business 13810 18118 25837 40589 41120 37812 35110

Wholesale 9622 12097 13875 19525 18055 16987 16178

Structured Credit 5,991 6,750 6,763 9,352 6,456 5,566 5,144

Real Estate 3,631 5,347 7,112 10,173 11,599 11,421 11,034

Retail Loans 4,187 6,021 11,962 21,064 23,065 20,825 18,932

Retail Mortgages 2,081 2,641 3,614 6,672 8,996 8,726 8,075

LAS & Others 1,162 1,940 2,328 4,640 4,089 3,998 2,943

SME & Agri Financing 944 1,440 3,010 4,876 4,990 4,257 4,093

SME 0 0 2,138 3,677 4,591 3,844 3,821

Agri & Rural 0 0 872 1,199 399 413 272

ARC Asset 0 0 4,781 6,297 7,380 8,631 8,765

Total Loan Book 13810 18118 30618 46886 48500 46443 43875

Proportion (%)

Credit Business 100 100 84 87 85 81 80

Wholesale 70 67 45 42 37 37 37

Retail Loans 30 33 39 45 48 45 43

ARC Asset 0 0 16 13 15 19 20

Total Loan Book 100 100 100 100 100 100 100




Exhibit 58: Revenue break-up

FY16 FY17 FY18 FY19 Q1FY20 Q2FY20

Net Interest Income - Credit (adjusted

for BMU/Corporate)

1,651 2,135 2,305 3,142 710 504

Income from non-credit business 697 1,061 1,330 1,310 509 460

Capital Markets revenue 455 556 620 342

Management Fees from Mutual fund 0 52 130 243

Management Fees from Wealth 242 453 580 725

Net Revenue 2,348 3,196 3,635 4,452 1,219 965


Exhibit 59: Return ratios to improve going ahead

1.9 2.1 2.12.7

1.62.4

14.5

16.6

15.5

18.9

9.2

12.0

6.87.2

7.78.1

6.67.0

0

1

2

3

4

5

6

7

8

9

0.0

5.0

10.0

15.0

20.0

FY16 FY17 FY18 FY19 FY20E FY21E

(%)(%)

RoA RoE (RHS) NIM


Exhibit 60: Pressure on asset quality to persist in near term

1.401.59

1.751.87

2.94

3.87

0.470.60

0.700.83

0.19 0.24

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

FY16 FY17 FY18 FY19 FY20E FY21E

(%)

GNPA NNPA


Exhibit 61: Wealth Management snapshot

As on 30th Sept 2019 No of Clients AUA (| crore) Number of RM

Ultra HNI 2410 83500 161

Affluent Investor 525300 24300 781


Near term challenges lie in managing liquidity and

asset quality, with a shift towards advisory & retail

seen improving the granularity of the portfolio.



Exhibit 62: Break up of Wealth AUM (| 107800 crore )

73 74 70 71 74

27 26 30 29 26

0%

20%

40%

60%

80%

100%

FY17 FY18 FY19 Q1FY20 Q2FY20

Distribution Asset Advisory Asset


Exhibit 63: Snapshot of ARC business

| crore Q1FY20 Q2FY20

AUM 47463 47029

EOP Capital employed 8631 8765

EOP Equity 2158 2236

Net Interest Income 204 179

Credit Cost 26 17

PAT 105 73

Net Interest Margin (%) 11.2 8.3

Cost To Income (%) 22 28

RoA (%) 5.8 3.4

RoE (%) 22.3 13.1




Valuation

The management raised funds in a challenging period bringing new partners

and has been increasing focus towards advisory and retail businesses, it is

moving towards capital light and fee based model. Real estate & wholesale

books are expected to move to fund based models and co-lending model is

worked out with 5 banks to keep balance sheet light. Factoring balance sheet

restructuring to take at least a year, we initiate coverage on the stock with a

HOLD rating. We assign SoTP - based target price of | 125 per share

(implying 15.3x FY21E EPS).

Exhibit 64: SoTP Valuation

Company Value (| crore) Value/share

Credit Business

Wholesale Credit 3,147 34

Retail Credit 3,343 36

Distressed Credit 1,537 16

Franchise Business

Wealth Management 1,724 18

Asset Management 1,433 15

Capital Markets 554 6

Total Value 11,738 125

CMP 10,744 115

Upside/Downside(%) 9


Exhibit 65: 1 Year Forward PE chart

0

100

200

300

400

Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

|

CMP 10.0 X 15.0 X 20.0 X 25.0 X 30.0 X

Source: ICICI Direct Research, Capital Line



Financial Summary

Exhibit 66: Income Statement (| crore)

FY18 FY19 FY20E FY21E

Net Interest Income- Credit Business2,305 3,142 3,212 3,551

Income from non credit business 1,330 1,310 1,078 1,230

Other operating Revenue 81 82 0 0

Net Revenues 4,443 5,275 4,290 4,780

Operating Expences 2,530 3,144 2,972 3,375

Operating Profit 1,913 2,131 1,319 1,405

Provisioning 616 512 838 512

PBT (ex- insurance) 1,297 1,618 481 893

Gain/(loss) from insurance business 53 -157 -127 -132

PBT 1,350 1,740 550 1,009

Tax 512 699 182 303

Consol PAT (ex-minority int) 838 1,040 369 706

Minority Interest -27 49 26 50

Consol PAT 838 991 343 656




Share capital 87 89 94 94

Reserves and surplus 6,796 7,588 7,901 8,563

Shareholders' Equity 6,883 7,677 7,994 8,656

ex-insurance 6,328 7,143 7,525 8,254

Minority interest 2,719 3,298 27,191 27,191

Borrowings 48,031 45,217 38,949 35,486

Other liabilities 7,630 10,612 76,299 76,299

Total liabilities 63,487 64,544 55,582 56,965

Fixed assets 577 548 657 789

Cash and bank balances 4,562 6,455 4,467 3,690

Investments 7,887 8,799 7,490 6,551

Loans 38,439 38,408 34,361 36,899

Other assets 12,022 10,333 8,606 9,036

Total assets 63,487 64,544 55,582 56,965


Exhibit 68: Key ratios


Valuation

No of equity Shares 92 92 94 94

EPS (|) 10.1 11.4 3.9 7.5

BV (|) 72.9 83.8 85.3 92.4

P/E (x) 11.1 9.9 28.5 14.9

P/BV (x) 1.5 1.3 1.3 1.2

Margin

NIM (%) 7.7 8.1 6.6 7

Quality & Efficiency

GNPA (%) 1.7 1.9 2.9 3.9

NNPA (%) 0.7 0.8 0.2 0.2

ROA (%) 1.5 1.6 0.6 1.3

ROE (%) 15.0 14.3 4.7 8.5




Total Asset 1.7 -13.9 2.5

Advances -0.1 -10.5 7.4

Borrowing -5.9 -13.9 -8.9

Total Income 18.7 -18.7 11.4

Total Expense 24.3 -5.5 13.6

Net Profit 18.2 -65.4 91.5

EPS 12.4 -65.4 91.5

Book Value 14.9 1.9 8.3


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JM Financial (JMFINA)

HOLD

Capital market business positive; real estate caps upside

JM Financial is a diversified financial group engaged in various businesses

providing a host of services including mortgage lending (wholesale and

retail), distress asset management (ARC), investment banking, wealth

management and securities (IWS) and AMC. As of September 2019, the

advances book was at | 13810 crore, comprising | 9167 crore and | 639

crore of wholesale & retail mortgage, respectively, | 1100 crore for capital

markets and | 2904 crore in corporate/promoter funding. Apart from lending

ARC AUM was at | 14037 crore. In capital markets, JM Financial has a market

share in overall ADTO at 0.74% with 2.42% share in cash ADTO. In terms of

active client base, the company has ~36661 customers as of Sep’19.

Real estate woes keep lending on slower track

JM Financial is engaged in wholesale and retail mortgage lending as well as

lending to capital markets. Primary exposure in real estate is towards large

developers in metros. Given the slowdown in the real estate sector,

advances to the real estate sector witnessed de-growth in H1FY20 to | 9367

crore. Moderate growth in real estate advances and maintaining higher

liquidity would keep NIM, earnings under pressure. Several measures taken

by government for real estate remain positive, asset quality risk still persist.

Capital market business to remain key driver

The capital market has been a major contributor in terms of topline as well

as bottomline at ~45%. Investment banking has remained a strong point for

the entity. Apart from investment banking, JM Financial has been focusing

on institutional as well as HNI customers with limited presence in the retail

domain. In terms of active clients, JM Financial has ~36661 customers as of

September 2019 and contributes ~0.74% market share in overall ADTO.

However, the company has ~2.42% market share in cash ADTO at | 887

crore in Q2FY20. Going ahead, we expect focus on capital market business

to continue and contribute a substantial proportion in future performance.

Strong promoter, management to sustain valuations

Given the current subdued environment in the real estate sector, the lending

business is seen staying on the slower track. We expect advances growth to

remain moderate at 6.7% CAGR in FY20-22E. Business growth is seen being

led by focus on capital market activities ahead. The recent reduction in tax

rate would benefit earnings momentum ahead. Board approval for capital

raising of ~| 850 crore boosts confidence. Earnings are expected to grow at

~10% CAGR in FY20-22E to | 748 crore. The stock is currently trading at

11.6x FY21E EPS and ~1 P/BV on FY21E. We initiate coverage on the stock

with a HOLD rating and a target price of | 94 (using SOTP valuation),

implying a multiple of ~11.5x on FY21E EPS.


Particulars es

Amount



52 week H/L 110/73

Face Value | 1

DII Holding (%) 4



Others (%) 13.9

Key Highlights

Focus on capital markets activities to

support performance ahead

Slowdown in real estate sector to

keep advance growth moderate in

near term

Initiate coverage with HOLD rating

and price target of | 94

Price movement

0

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0

50

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8

Nov-1

7

Jul-1

7

Apr-1

7

Dec-1

6

JM Fin (R.H.S) Nifty (L.H.S)


Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

sseses


NII (| crore) 1957.0 2133.0 2055.3 2213.7 2309.3

Net Profit (| crore) (Ex MI) 600.0 573.0 582.1 681.2 747.6

EPS (|) 7.2 6.8 6.9 8.1 8.9

P/E (x) 12.7 13.3 13.1 11.2 10.2

P/BV (x) 1 1 1 1 1

P/ABV (x) 1.31 1.07 1.02 0.99 0.97

RoE (%) 17.3 15.6 11.5 12.3 12.9

RoA (%) 3.9 3.7 3.8 4.0 4.0s



ICICI Direct Research Initiating Coverage | JM Financial

Snapshot of company

Exhibit 70: Credit business & capital market to remain key revenue contributor

1724 1635

750

1500 1644 1711

12611851

924

19162047

2202

112

94

38

76

87101

-50

450

950

1450

1950

2450

2950

3450

3950

4450

FY18 FY19 H1FY20 FY20E FY21E FY22E

(| crore)

Investment Banking, Securities and Wealth Credit business Asset management Others


Exhibit 71: Market share in ADTO to witness gradual uptick

4797 4834

9861 9673

11608

133491175 986

887 1075

1290

1483

0

2000

4000

6000

8000

10000

12000

14000

16000


(| crore)

Derivative Cash


Exhibit 72: Loan book break-up

9,26810,131

9,167 9,0319,934

10,928

2,334 1,0781,100 1,095

1,204

1,325

2,7052,317

2,904 2,874

3,161

3,477

464581 639 684

753

828

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000


(| crore)

Real Estate Capital market Structured Finance SME


Loan book growth to remain slow amidst real estate

woes



Exhibit 73: Change in borrowing franchise from FY18

30%

39%

27%

2%2%

CP NCD Term Loans Short termloans from Banks Others


Exhibit 74: …to H1FY20

15%

55%

27%

1% 2%

CP NCD Term Loans Short termloans from Banks Others


Exhibit 75: Marginal stress witnessed in asset quality

0.6 0.50.7 0.7

0.9

1.3

0.5 0.40.6 0.6

0.8

1.1

0.7

1.4

1.6

1.3

3.6

2.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20

(%

)

GNPA NNPA SMA 2




Valuation

Given the current subdued environment in the real estate sector, lending

business is seen staying on slower track. The board has approved capital

raising of ~| 850 crore, which will boost confidence. We expect advances

growth to remain moderate at 6.7% CAGR in FY20-22E. However, increasing

business growth led by focus on capital market activities would continue

ahead. The recent reduction in tax rate would benefit earnings momentum

ahead. Earnings is expected to grow at ~10% CAGR in FY20-22E to | 748

crore. The stock is currently trading at 10.6x EPS and ~1x P/BV on FY21E.

We initiate coverage on the stock with HOLD rating and a target price of

| 94 (using SOTP valuation), implying a multiple of ~10.5x on FY21E EPS.

Exhibit 76: P/E band

0

50

100

150

200

250

Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

|

CMP 5.0 X 10.0 X 15.0 X 20.0 X

Source: Capital Line, ICICI Direct Research

Exhibit 77: SoTP valuation

Business Segment JM's stake (%) |/share

JM Financial Credit Soln 50.0 14

JM Financial Products 99.3 18

JM Financial ARC 50.0 11

Wealth Management 100.0 47

AMC 59.5 4

AIF 100.0 1

Value per share of JM 94




Financial Summary



Intrest Income 3,096 3,579 3,488 3,774 4,010

Interest Expense 1,139 1,446 1,432 1,561 1,700

Net Interest Income 1,957 2,133 2,055 2,214 2,309

Operating Expences 759 815 766 792 801

Employee Exp 391 422 414 420 416

Other Exp 368 393 353 372 384

Operating Profit 1,198 1,318 1,289 1,422 1,508

Provisioning 34 35 123 120 116

PBT 1,164 1,283 1,166 1,302 1,393

Tax 382 446 315 351 376

PAT (ex-minority int) 782 837 851 950 1,017

Minority Interest 182 264 269 269 269

Adjusted PAT 600 573 582 681 748




Shareholders' Equity 4,502 5,079 5,298 5,298 5,298

Minority interest 1,395 2,150 2,322 2,508 2708

Total Equity 5,897 7,229 7,620 7,806 8,007

Share of security receipt holder523 484 489 494 499

Borrowings 14,988 13,991 13,563 14,919 16,411

Other liabilities 746 879 1,064 1,276 1531.57

Total liabilities 22,154 22,583 22,736 24,496 26,448

Loan Book 14,768 13,999 13,684 15,052 16,557

Distressed Asset book 3,026 4,194 4,160 4,368 4,587

Cash 1,469 1,737 2,084 2,064 2,043

Other Investment 1,004 842 884 928 975

Arbitrage & Trading 198 312 328 360 396

Fixed Asset 377 372 417 458 504

Other Asset 1,312 1,127 1,179 1,264 1,386

Total Asset 22,154 22,583 22,736 24,496 26,448




Valuation

No of equity Shares 83.79 83.99 84.11 84.11 84.11

EPS (|) 7.2 6.8 6.9 8.1 8.9

BV (|) 70.4 86.1 90.6 92.8 95.2

ABV (|) 69.4 85.2 89.6 91.7 93.9

P/E (x) 12.7 13.3 13.1 11.2 10.2

P/BV (x) 1.29 1.06 1.00 0.98 0.96

P/ABV (x) 1.31 1.07 1.02 0.99 0.97

Margin

Yield (%) 15.1 17.0 16.5 16.6 16.3

Cost of Fund (%) 7.6 10.3 10.6 10.5 10.4

Spread (%) 7.5 6.6 5.9 6.1 6.0

Quality & Efficiency

GNPA (%) 0.63 0.68 0.77 0.80 0.84

NNPA (%) 0.56 0.55 0.62 0.65 0.68

ROA (%) 3.9 3.7 3.8 4.0 4.0

ROE (%) 17.3 15.6 11.5 12.3 12.9




Total Asset 2 1 8 8

Advances -5 -2 10 10

Borrowing -7 -3 10 10

Total Income 16 -3 8 6

Operating expense 7 -6 3 1

Net Profit (ex-MI) 7 2 12 7

Book Value 22 5 2 3

EPS -5 1 17 10




RATING RATIONALE

ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]



RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Strong Buy,

Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]

ANALYST CERTIFICATION

We /I, Kajal Gandhi, CA, Vishal Narnolia, MBA and Harsh Shah, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this

research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the

specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in

the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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