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Indian
ICIC
I S
ecurit
ies –
Retail E
quit
y R
esearch
Init
iatin
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overage
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
Vishal Narnolia
Harsh Shah
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
ICICI Securities | Retail Research 3
ICICI Direct Research
Initiating Coverage | Indian Broking Industry
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
Source: NSE, ICICI Direct Research
ICICI Securities | Retail Research 4
ICICI Direct Research
Initiating Coverage | Indian Broking Industry
Exhibit 3: Options forming ~92% of market volume
Source: NSE, ICICI Direct Research
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
Source: NSE, ICICI Direct Research
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
Source: NSE, ICICI Direct Research
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
Source: NSE, ICICI Direct Research
ICICI Securities | Retail Research 5
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
ICICI Securities | Retail Research 6
ICICI Direct Research
Initiating Coverage | Indian Broking Industry
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)
ICICI Securities | Retail Research 7
ICICI Direct Research
Initiating Coverage | Indian Broking Industry
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
Source: Company, ICICI Direct Research
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%
Source: NSE, ICICI Direct Research
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.
ICICI Securities | Retail Research 8
ICICI Direct Research
Initiating Coverage | Indian Broking Industry
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.
ICICI Securities | Retail Research 9
ICICI Direct Research
Initiating Coverage | Indian Broking Industry
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)
Source: Company, ICICI Direct Research
ICIC
I S
ecurit
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Retail E
quit
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esearch
Init
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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
Vishal Narnolia
Harsh Shah
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 Securities | Retail Research 11
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
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.
ICICI Securities | Retail Research 12
ICICI Direct Research Initiating Coverage | Motilal Oswal Financial
Exhibit 21: AUM & income statement
| Crore FY18 FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
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
| Crore FY18 FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
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
| Crore FY18 FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
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.
ICICI Securities | Retail Research 13
ICICI Direct Research Initiating Coverage | Motilal Oswal Financial
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
Source: Company, ICICI Direct Research
Exhibit 26: One year forward PE
0
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CMP 15.0 X 20.0 X 25.0 X 30.0 X
Source: Capital line , ICICI Direct Research
ICICI Securities | Retail Research 14
ICICI Direct Research Initiating Coverage | Motilal Oswal Financial
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
Source: Company, ICICI Direct Research
Exhibit 28: Balance Sheet (| crore)
FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
Exhibit 29: Key Ratios
FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
Exhibit 30: Growth (%)
FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
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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.
Key Financial Summary
Particulars
Amount
Market Capilatisation | 459 crore
Networth | 141 crore
52 week H/L 271/111
Face Value | 10
DII Holding (%) 0
FII Holding (%) 18.2
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
Vishal Narnolia
Harsh Shah
s
FY18 FY19 FY20E FY21E FY22E
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 Securities | Retail Research 16
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
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0
20
40
60
80
100
120
140
160
180
FY17 FY18 FY19 FY20E FY21E FY22E
(%)
| crore
Revenue Revenue Growth
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
Exhibit 33: Aggressive client acquisition aiding strong ADTO growth
2860
8658
22500
28500
34500
0
5000
10000
15000
20000
25000
30000
35000
40000
FY18 FY19 FY20E FY21E FY22E
| c
rore
ADTO
Source: Company, ICICI Direct Research
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 Securities | Retail Research 17
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
Source: Company, ICICI Direct Research
Exhibit 35: Balance Sheet Ratios (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E
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
Application of Funds
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
Source: Company, ICICI Direct Research
Exhibit 36: Key Ratios (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
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CMP: | 38 Target: | 50 (32%) Target Period: 12 months
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.
Key Financial Summary
Particulars
Amount
Market Capitalisation | 1215 crore
Networth | 730 crore
52 week H/L 47.7/19
Face Value | 2
DII Holding (%) 1
FII Holding (%) 23.5
Promoter Holding (%) 29.4
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
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IIFLSec (R.H.S) Nifty (L.H.S)
Source: Reuters, ICICI Direct Research
Research Analyst
Kajal Gandhi
Vishal Narnolia
Harsh Shah
sss
FY18 FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 19
ICICI Direct Research
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%
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
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 (%)
Source: Company, ICICI Direct Research
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 (%)
Source: Company, ICICI Direct Research
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%
Source: Company, ICICI Direct Research
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.
ICICI Securities | Retail Research 20
ICICI Direct Research
Initiating Coverage | IIFL Securities
Financial Summary
Exhibit 43: Profit & Loss (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E
Revenue from operation 834.7 835.1 775.7 776.4 801.7
Other Income 112.40 40.40 44.47 48.92 53.81
Total Income 947.1 875.5 820.2 825.3 855.5
Employee expense 210.9 256.6 256.6 228.0 244.0
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: Company, ICICI Direct Research
Exhibit 44: Balance Sheet (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E
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
Application of Funds
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
Source: Company, ICICI Direct Research
Exhibit 45: Key Ratios (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E
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
No of Shares (crore) 31.9 31.9 31.9 31.9 31.9
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
Source: Company, ICICI Direct Research
Exhibit 46: Growth (%)
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
Source: Company, ICICI Direct Research
ICIC
I S
ecurit
ies –
Retail E
quit
y R
esearch
Init
iatin
g C
overage
December 23, 2019
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).
Key Financial Summary
Particulars
Amount
Market Capitalisation | 651 crore
Networth (FY19) | 409 crore
52 week H/L 48/22
Face Value | 1
DII Holding (%) 1.2
FII Holding (%) 2.6
Promoter Holding (%) 62.1
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
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
20
40
60
80
100
120
140
160
Nov-19
Aug-19
Apr-19
Jan-19
Sep-1
8
Jun-18
Feb-18
Nov-17
Jul-17
Mar-17
Dec-16
Geojit (R.H.S) Nifty (L.H.S)
Source: Reuters, ICICI Direct Research
Research Analyst
Kajal Gandhi
Vishal Narnolia
Harsh Shah
s
FY18 FY19 FY20E FY21E FY22E
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
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 22
ICICI Direct Research
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
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)
ICICI Securities | Retail Research 23
ICICI Direct Research
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
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 25.0 X
Source: Company, Capital line, ICICI Direct Research
ICICI Securities | Retail Research 24
ICICI Direct Research Initiating Coverage | Geojit Financial Services
Financial Summary (Standalone)
Exhibit 51: Profit & Loss (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E
Revenue from operation 304.1 264.9 285.4 331.2 383.9
Other Income 30.1 20.2 10.1 10.1 10.1
Total Income 334.2 285.1 295.5 341.3 394.0
Employee expense 93.1 101.3 106.4 117.0 134.6
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: Company, ICICI Direct Research
Exhibit 52: Balance Sheet (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E
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
Application of Funds
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
Source: Company, ICICI Direct Research
Exhibit 53: Key Ratios (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E
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
No of Shares (crore) 23.8 23.8 23.8 23.8 23.8
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
Source: Company, ICICI Direct Research
Exhibit 54: Growth (%)
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
Source: Company, ICICI Direct Research
ICIC
I S
ecurit
ies –
Retail E
quit
y R
esearch
Init
iatin
g C
overage
December 23, 2019
CMP: | 115 Target: | 125 (9%) Target Period: 12 months
months
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
Source: ICICI Direct Research, Company
Key Financial Summary
Particulars
Amount
Market Capitalisation | 10744 crore
Networth | 8830 crore
52 week H/L 210/67
Face Value | 1
DII Holding (%) 4.9
FII Holding (%) 30.0
Promoter Holding (%) 32.9
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
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
50
100
150
200
250
300
350
400
Dec-1
9
Aug-1
9
Apr-1
9
Jan-1
9
Sep-1
8
Jun-1
8
Feb-1
8
Nov-1
7
Jul-1
7
Apr-1
7
Dec-1
6
EDEL (R.H.S) Nifty (L.H.S)
Source: ICICI Direct Research, Reuters
Research Analyst
Kajal Gandhi
Vishal Narnolia
Harsh Shah
ICICI Securities | Retail Research 26
ICICI Direct Research Initiating Coverage | Edelweiss Financial
Story in Charts
Exhibit 55: Expected business structure by FY22
Source: Company, ICICI Direct Research
Exhibit 56: Expected business structure by FY20
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 27
ICICI Direct Research Initiating Coverage | Edelweiss Financial
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
Near term challenges lie in managing liquidity and
asset quality, with a shift towards advisory & retail
seen improving the granularity of the portfolio.
ICICI Securities | Retail Research 28
ICICI Direct Research Initiating Coverage | Edelweiss Financial
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
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 29
ICICI Direct Research Initiating Coverage | Edelweiss Financial
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
Source: Company, ICICI Direct Research
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
ICICI Securities | Retail Research 30
ICICI Direct Research Initiating Coverage | Edelweiss Financial
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
Source: Company, ICICI Direct Research
Exhibit 67: Balance Sheet (| crore)
FY18 FY19 FY20E FY21E
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
Source: Company, ICICI Direct Research
Exhibit 68: Key ratios
FY18 FY19 FY20E FY21E
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
Source: Company, ICICI Direct Research
Exhibit 69: Growth (%)
FY18 FY19 FY20E FY21E
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
Source: Company, ICICI Direct Research
ICIC
I S
ecurit
ies –
Retail E
quit
y R
esearch
Init
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overage
December 23, 2019
CMP: | 91 Target: | 94 (3%) Target Period: 12 months
months
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.
Key Financial Summary
Particulars es
Amount
Market Capitalisation | 7675 crore
Networth | 5214 crore
52 week H/L 110/73
Face Value | 1
DII Holding (%) 4
FII Holding (%) 20.3
Promoter Holding (%) 62.1
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
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
50
100
150
200
Dec-1
9
Aug-1
9
May-1
9
Jan-1
9
Sep-1
8
Jun-1
8
Feb-1
8
Nov-1
7
Jul-1
7
Apr-1
7
Dec-1
6
JM Fin (R.H.S) Nifty (L.H.S)
Source: ICICI Direct Research, Reuters
Research Analyst
Kajal Gandhi
Vishal Narnolia
Harsh Shah
sseses
FY18 FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 32
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
Source: Company, ICICI Direct Research
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
FY18 FY19 H1FY20 FY20E FY21E FY22E
(| crore)
Derivative Cash
Source: Company, ICICI Direct Research
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
FY18 FY19 H1FY20 FY20E FY21E FY22E
(| crore)
Real Estate Capital market Structured Finance SME
Source: Company, ICICI Direct Research
Loan book growth to remain slow amidst real estate
woes
ICICI Securities | Retail Research 33
ICICI Direct Research Initiating Coverage | JM Financial
Exhibit 73: Change in borrowing franchise from FY18
30%
39%
27%
2%2%
CP NCD Term Loans Short termloans from Banks Others
Source: Company, ICICI Direct Research
Exhibit 74: …to H1FY20
15%
55%
27%
1% 2%
CP NCD Term Loans Short termloans from Banks Others
Source: Company, ICICI Direct Research
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
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 34
ICICI Direct Research Initiating Coverage | JM Financial
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
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 35
ICICI Direct Research Initiating Coverage | JM Financial
Financial Summary
Exhibit 78: Profit & Loss (| crore)
FY18 FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
Exhibit 79: Balance Sheet (| crore)
FY18 FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
Exhibit 80: Key Ratios (| crore)
FY18 FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
Exhibit 81: Growth (%)
FY18 FY19 FY20E FY21E FY22E
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
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 36
ICICI Direct Research Initiating Coverage | JM Financial
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
ICICI Securities | Retail Research 37
ICICI Direct Research Initiating Coverage | JM Financial
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
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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Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number – INH000000990. ICICI Securities Limited Sebi Registration is INZ000183631 for stock broker. ICICI
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The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly
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