CRISIL Research Ier Report Jm Financial 2011

8/3/2019 CRISIL Research Ier Report Jm Financial 2011

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JM Financial Ltd

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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process

Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental

grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The

valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to

grade 1 (strong downside from the CMP).

CRISILFundamental Grade

Assessment CRISILValuation Grade

Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (


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CRISIL EQUITIES | 1

January 27, 2011Fair Value Rs 45CMP Rs 28

Fundamental Grade 4/ 5 (Superior fundamentals)

Valuation Grade 5/ 5 (Strong upside)

Indu stry Capital Markets

JM Financial LtdRiding on a buoyant market

JM Financial Ltd is one of the leading players in the financial services sector

with business interests in investment banking, equity broking, wealth

management, lending, asset management and alternative asset management.

These diversified offerings have helped JM Financial establish itself as a one

stop financial shop and develop strong relations with clients. Accordingly, we

maintain the fundamental grade of 4/ 5, indicating that JM Financialsfundamentals aresuperiorrelative to other listed securities in India.

Buoyant capital markets drive investment banking and brokingbusinessDomestic capital markets are registering strong growth riding on buoyant

economic conditions. This has resulted in strong growth in JM Financials

broking revenues. The investment banking business has also benefitted from

increase in primary market activities. JM Financial has a strong pipeline of

equity capital and M&A deals which should continue to drive investmentbanking fees.

Intense completion and pressure on broking yieldsIntense competition in the broking business and preference for low-yielding

options vis-a-vis the cash segment has put significant pressure on brokerage

yields. JM Financials is focusing on the high yield cash segment which should

help it report stable yields going forward. Further, its emphasis on expanding

its business through a cost-effective franchise-based model should help it to

report strong operational performance.

Strong balance sheet supports securities funding and other businessesJM Financial holds a strong balance sheet with low gearing of 1.08x at the

group level and ~3x at the NBFC level which should support lending and other

businesses. The securities funding book is registering strong growth with therun-up in primary and secondary markets. The asset reconstruction business is

witnessing strong growth with a book size of Rs 12 bn. The strong balance

sheet should help the company support its lending and other businesses.

Expect two-year revenue CAGR of 11%CRISIL Equities expects the companys revenue to grow at a CAGR of 35.9% to

Rs 11 bn during FY10 to FY12, buoyed by the expected strength in the capital

markets. PAT is expected to increase at a CAGR of 30.5% to Rs 1.9 bn over

FY10 to FY12. EPS is expected to be Rs 1.8 in FY11 and Rs 2.6 in FY12.

Valuations: Strong upside from current levelsWe continue to value JM using the sum-of-the-parts method and maintain the

fair value at Rs 45 per share. The stock price has corrected by 30% since our

previous update report dated November 03, 2010. Hence, we are revising ourvaluation grade to5/5.

KEY FORECAST(Rs mn) FY08 FY09 FY10 FY11E FY12E

Operating income 8,319 4,679 5,988 8,278 11,060

EBITDA 4,074 1,480 2,317 3,940 5,264

Adj Net income (1,876) 474 1,132 1,320 1,926

Adj EPS-Rs (2.5) 0.6 1.5 1.8 2.6

EPS growth (%) NM NM 138.7 16.7 45.9

PE (x) (21.1) 32.5 25.0 16.0 11.0

P/BV (x) 2.0 0.8 1.4 1.0 1.0

RoCE (%) 19.3 5.4 7.5 9.1 10.0

RoE (%) (13.9) 2.5 5.9 6.5 9.1

EV/EBITDA (x) 9.6 7.3 16.5 9.8 8.7

NM: Not meaningful; CMP: Current Market Price

Source: Company, CRISIL Equ it ies es t imate

CFV MATRIX

KEY STOCK STATI STICS

NIFTY / SENSEX 5687/18969

NSE / BSE ticker JMFINANCIL

Face value (Rs per share) 1

Shares outstanding (mn) 750

Market cap (Rs mn)/(US$ mn) 21,144/460

Enterprise value (Rs mn)/(US$ mn) 38,127/829

52-week range (Rs) (H/L) 49/26

Beta 1.45

Free float (%) 44.0%

Avg daily volumes (30-days) 2,055,805

Avg daily value (30-days) (Rs mn) 74.53

SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKETReturns

1-m 3-m 6-m 12-mJM Financial -10% -31% -19% -33%

NIFTY -5% 7% 17% 17%

ANALY TICAL CONTACTChetan Majithia (Head) [email protected]

Amit Kawle [email protected]

Vishal Rampuria [email protected]

Client servicing desk+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

FundamentalGrade

Poor

Fundamentals

Excellent

Fundamentals

Strong

Downside

Strong

Upside

66% 66% 66% 66% 66%

9% 9% 9% 10% 10%

0.4% 0.4% 0.0% 0.0% 0.0%

24% 24% 24% 24% 23%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

Promoter FII DII Others


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CRISIL EQUITIES | 2

JM Financial Ltd

Table: 1 JM Financial: Business environment

Parameters Investment

banking andsecurities business

Securities

funding andfund-basedactivities

Alternative assetmanagement

Asset management Others

Segment offerings Equity broking,

institutional broking,

wealth management,

investment banking

IPO financing,

margin funding,

loan against

shares, Fixed

Income trading,

promoter funding,

special situations

fund

Private Equity,

Real Estate funds

Asset management Treasury

Geographic presence India India India India India

Market position Fragmented industry;JM is one of the

leading players in the

industry

Fragmented

industry

Fragmented

industry

Fragmented industry Fragmented

industry

Revenue contributionFY10 - FY12

52%

51%

23%

26%

6%

6%

5%

3%

14%

14%

Revenue CAGR(FY10-12)

30% 39% 51% -4% 31%

Key competitors India Infoline (4%

market share by

trading volume),

Indiabulls Securities

(~ 2.4%), Motilal

Oswal (2.9%),Edelweiss Capital, and

Reliance Capital

Indiabulls

Financials,

Religare

Enterprises,

Motilal Oswal,

India Infoline etc.

Edelweiss Capital,

JM Financials,

Motilal Oswal,

Enam, foreign

brokers

Reliance Capital (15.3%

market share by mutual

fund AUM), HDFC AMC

(13.2%), ICICI

Prudential AMC (10%),

Birla Sunlife (9.4%), UTIAMC (9.4%),SBI MF

(5.6%), Kotak Mahindra

AMC (3.9%), etc.

Many

Revenue drivers Capital market

conditions, retail

participation

Economic

conditions,

interest rates,

consumer

sentiments

Economic

conditions, capital

market activities

Consumer sentiment,

economic conditions

Capital market

conditions,

economic

conditions,

interest rates,

consumer

sentiments

Source: Company, CRISIL Equit ies


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CRISIL EQUITIES | 3

JM Financial Ltd

GRADING RATIONALE

Economic revival supporting capital market players

The Indian economy has grown at a strong pace over the past few years

supported by favourable demographic conditions and regulatory environment.

The economic slowdown in FY09 following the global financial crisis resulted inhuge outflow of capital, withdrawal by retail participants and reduced activities

in primary and secondary capital markets which impacted capital market

players. With the revival in economic activities, the capital markets are

witnessing increased participation by FIIs and domestic investors. FIIs have

made net investments of US$30.2 bn in FY10 and US$38.8 bn to date in FY11.

The economic revival also encouraged corporate fund raising, which amounted

to Rs 576 bn through equity issuance in FY10. The secondary markets recorded

a 56% y-o-y increase in turnover to Rs 2.3 tn in FY10. Based on the overall

revival, capital market players reported strong financial performance in FY10.

With the economy on an upswing, we expect capital market activities to remain

strong and lead to healthy performances by capital market intermediaries.

Figure 1: Registered FII s in India on the rise Figure 2: FII s investments in India

S o u r c e : S E B I S o u r c e : S E B I

Figure 3: Secondary market turnover Figure 4: Market capitalization of BSE and NSE

S o u r c e : S E B I S o u r c e : S E B I

882997

1,319

1635 1713

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

FY06 FY07 FY08 FY09 FY10

FII

10 10.4 9.4 6.8 16.4

-9.8

30.3 38.8

4%

-10%

-28%

141%

-160%

-409%

28%

-500%

-400%

-300%

-200%

-100%

0%

100%

200%

-10

0

10

20

30

40

FY04

FY05

FY06

FY07

FY08

FY09

FY10

YTDFY11

(Rs bn)

Net FII Investments y-o-y growth (RHS)

239 290

513

385

552482

742

1,333

1,102

1,766

721

1,032

1,846

1,487

2,318

0

500

1,000

1,500

2,000

2,500


(Rs bn)

Cash F&O Total

302355

514

309

617

281337

486

290

601

0

100

200

300

400

500

600

700


(Rs bn)

BSE NSE

FII s have made net

investments of US$30.2

bn in FY10 and US$38.8

bn to date in FY11


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CRISIL EQUITIES | 4

JM Financial Ltd

One-stop shop in the financial services domain

JM Financial enjoys a major advantage as it is an integrated player whose

service offerings range from broking, investment banking, portfolio management

and asset management services. It caters to both corporate and retail clients.

The diversified offerings and years of experience has enhanced JMs ability to

retain clients and generate cross-selling opportunities. This also results in cost-

efficiencies, thus improving the profitability of the company. These combined

with a strong track record act as key competitive strengths for the company.

Investment banking business benefits from strongprimary market activities

The improved economic conditions have led to an uptick in corporate fund

raising activities which has supported JM Financials investment banking

business. JM Financial holds a strong position in the domestic investment

banking business, and has developed long-term relations with several large and

medium companies. The company has been ranked amongst the top 10

investment bankers in the country. In FY10, its market share was affected as it

intentionally stayed away from managing certain large issues which offered low

fees. JM Financial held ~ 3% share of the domestic equity issuance during

1HFY11. It has also started operations in Mauritius and is looking to expand

operations in other international markets to offer India-focussed investment

banking services to international clients.

Going forward, with continued strong economic growth and resurgence in capital

market transactions, corporate will also increase their fund raising activities. JM

Financial has a strong deal pipeline both on the equity issuance front and on the

M&A front, which should support investment banking fees and improve market

share. We expect the investment banking revenues to increase at a two CAGR of

27% over FY10-FY12

Figure 5: Funds raised from primary markets

Figure 6: JMs ranking and market share of

domestic equity offering

S o u r c e : S E B I S o u r c e : B l o o m b e r g L e a g u e T a b l e s

0

200

400

600

800

1,000

1,200

FY07 FY08 FY09 FY10

(Rs bn)

IPO FPO Rights Issue QIP Total

4 6 13 12

10.0%

7.0%

3.0%3.3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

2

4

6

8

10

12

14

FY08 FY09 FY10 1HFY11

Ranking (LHS) Market Share (RHS)

JM Financial held ~ 3%

share of the domestic

equity issuance during

1HFY11.


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CRISIL EQUITIES | 5

JM Financial Ltd

Figure 7: JMs major investment banking deals

DealType

Book Size(Rs mn)

FY10

Adani Power Ltd IPO 30,170

Oil India Ltd IPO 27,270

Pipavav Shipyard Ltd IPO 4,990

IL&FS Transport Networks Ltd IPO 7,000

Rural Electrification Corporation Ltd IPO 35,300

HCL Info System Ltd QIP 4,730

Parsvnath Developers Ltd QIP 1,680

JSL Ltd QIP 2,470

DealType

Book Size(Rs mn)1HFY11

Standard Chartered Bank IDR IPO 24,560

Jaypee Infratech Ltds public offerings IPO 22,620

SJVN Ltd IPO 10,630

Nitesh Estates Ltd IPO 4,050

Orient Green Power Company Ltd IPO 9,000

Deewan Housing Finance Corporation Ltd QIP 3,750

Indusind Bank QIP 11,730

Shriram Transport Finance Company Ltd NCD 5,000

S o u r c e : C o m p a n y , C R I S I L E q u i t i e s

Strong capital market volumes to drive brokeragerevenues

The capital markets are witnessing increased trading volumes, which has

supported JM Financials brokerage revenues. It primarily caters to the HNI

segment in the broking business and is a relatively small player compared with

other large broking entities. The company is focussing on expanding its retail

presence and is looking at the franchise route to expand its market share. We

view this retail expansion positively as the retail segment accounts for ~ 52% of

market volume and there is significant growth opportunities considering the low

level of house-hold investments in stock. JM Financial presently operates

through a network of 25-owned branches and 375 franchises, and plans to

further expand its franchise base. The franchisee route offers a low-cost

operating model and could support profitability during a downturn.

Sw i f t l y ramp ing up ins t i tu t iona l b rokerage bus iness

JM Financial has quickly scaled up its institutional equities business, post its split

from Morgan Stanley. JM continues to increase its research coverage, now over

139 stocks, which helps it to cater to the requirements of institutional clients.

The institutional business is gaining traction with JM Financial presently offering

trading services to 116 institutional clients. The company has also started

offering F&O services to institutional clients and is witnessing strong volume

growth. The business is still in an investment phase and will take at least 12 to

15 months before it starts contributing to the bottom line.

Secur i t ies b rok ing - dec l in ing y ie lds and in tense compet i t ion

The overall securities broking industry has been impacted by a rapid shift in the

market trading pattern towards options, which constituted 53% of total turnover

in Q2FY11 compared with 35% in Q2FY10. While the overall market turnover

has increased by 35.2%, it is attributable solely to the increase in option trading

volume. The brokerage charges for options are far lower than the cash

segments, leading to a decline in average brokerage yields, which has impacted

the performance of broking players. JM Financial continues to focus on the high-

yield cash segment and its presence in the low-yield F&O segment remains low,

The company is

focussing on expanding

its retail presence and is

looking at the franchise

route to expand its

market share.

Securities broking

industry has been

impacted by a shift in

trading pattern towards

options, which constituted

53% of total turnover in

Q2FY11


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CRISIL EQUITIES | 6

JM Financial Ltd

which should help it report stable broking yields going forward. We expect

revenues from the broking business to expand at a CAGR of 31% during FY10-

FY12.

Figure 8: Market volumes skewed towards options trading

S o u r c e : BS E , N S E

Strong balance sheet supports securities fundingbusiness

JM Financial, through its subsidiary JM Financial Products Pvt. Ltd, offers IPO

financing and margin funding services to its clients. It has also forayed into

wholesale lending under which it provides promoter funding, corporate lending

and loans to real estate companies. With a revival in the capital market, the

securities funding business is gaining momentum. JMs securities funding book

increased to Rs 16 bn as of 1HFY11 from Rs 8.9 bn as of FY09. With continued

strength in the capital market conditions, LAS and wholesale lending business

are also expected to get a boost. The strong balance sheet continues to support

the funding business. The NBFC has a comfortable leverage of ~ 3x while at the

group level the leverage remains a low of 1.08x.

Figure 9: Securities lending book


16%16%20%24%26%28%23%25%25%

31%31%28%26%28%

31%33%36%

39%39%44%

43%45%48%

53%60%64%63%60%

53%51%44%

37%35%29%

34%30%27%

16%9%8%11%11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q2

FY11

Q1

FY11

Q4

FY10

Q3

FY10

Q2

FY10

Q1

FY10

Q4

FY09

Q3

FY09

Q2

FY09

Q1

FY09

Q4

FY08

Q3

FY08

Q2

FY08

Q1

FY08

Options Futures Cash

5,369

13,275

8,876

15,776 16,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

FY07 FY08 FY09 FY10 1HFY11

(Rs mn)

LAS

JM Financial maintains a

strong balance sheet

with low leverage of

1.08x


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CRISIL EQUITIES | 7

JM Financial Ltd

Focus on the distressed asset business

JM Financial has also entered the asset reconstruction business. The economic

downturn has resulted in a sharp rise in domestic distressed loans, creating

strong opportunities in the asset reconstruction business. The company is

aggressively building its distressed assets portfolio under the asset

reconstruction business. As of 1HFY11, JM Financial has acquired ~ Rs 12 bn

worth of assets for ~ Rs 1.3 bn. Crisil Equities expects a large proportion of

loans restructured by banks to slip to non-performing assets (NPAs) in the next

two years which will provide huge opportunities for the distressed assets

business. With the business still in an evolutionary phase and regulations still

evolving, we believe it will take two-three years for the business to be start

contributing to profitabilty.

Figure 10: Gross NPAs and restructured assets as a

percentage of total advances

S o u r c e : C R I S I L R e s e a r c h

Regulatory headwind persists in AMC business

JM Financial holds a marginal presence in the AMC business with AUM of Rs 65.2

bn and a market share of ~ 1% as of September 2010. The AMC business is

witnessing intense pressure on account of regulatory changes with SEBI

banning mutual funds from charging entry loads to investors. This has resulted

in increased marketing cost for fund houses and affected their ability to scale up

AUM. JM Financial has registered a moderation in its asset management

business with AUM slipping to Rs 65.2 bn in September 2010 from Rs 80 bn in

FY10. This has significantly impacted the profitability of the AMC business,

resulting in losses which are in line with the majority of the players in the

industry. We expect it to take some time for JM Financial to adjust the AMC

business model profitabily in line with the regulatory changes.

519 506 567 701 1086 1512

3.3%

2.5%2.3%

2.3%

3.1%

3.6%

2.5%

3.4%

1.7%

0

200

400

600

800

1000

1200

1400

1600

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 E Mar-11 P

Absolute GNPA Gross NPAs Restructured assets

As of 1HFY11, JM has

acquired Rs 12 bn worth of

distressed assets for ~ Rs

1.3 bn.

The AMC business is

witnessing intense

pressure on account of

regulatory changes w ith

SEBI banning mutual

funds from charging

entry loads to I nvestors.


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CRISIL EQUITIES | 8

JM Financial Ltd

Figure 11: JM Financials AUM


Alternative asset management enjoys strongtraction

JM Financial is witnessing strong opportunities in the alternative investment

management business under which it operates private equity and real estate

funds for institutional investors, corporates and high networth individuals. The

company has launched a private equity, real estate and special situations fund

under its alternative asset management arm. As of 1HFY11, the combined AUM

of the private equity fund, real estate fund, and special situations group stands

at around Rs.1,725 crore and is fully drawn. With the India growth story on a

strong momentum, JM Financial is witnessing strong investment opportunities inthe alternative asset management space and is in the process of launching a

second fund with AUM of US$225 million by March 2011.

55 70 78 77 87 88 88 89 89 90 95 80 86 90 57 60 71 65

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

0

10

20

30

40

50

60

70

80

90

100

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

(% )(Rs bn)

JM F inancial AUM ( LHS) Marke t share (RHS)

JM Financial is in the

process of launching a

second Alternative Asset

Management fund


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CRISIL EQUITIES | 9

JM Financial Ltd

Key Risks

Inherent volatility in the businesses due to linkagesw ith the equity market

The business prospects of the company are invariably related to the level of

trading activity in the equity markets. The capital markets are inherently

volatile, driven by economic and political factors as well as public sentiment.

Moreover, global factors also influence the fortunes of the market. Though the

companys diversified business portfolio and healthy market position in each of

them is likely to provide some elbowroom, investment banking, wholesale

financing and asset management are also essentially linked to the performance

of the equity markets. Thus CRISIL Equities believes that the companys

business will continue to be driven by the state of the equity market whereby

any instability in the equity markets will significantly impair its ability to deliver

strong earnings growth.


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CRISIL EQUITIES | 10

JM Financial Ltd

Financial Outlook

Revived capital market activities to boost revenue

CRISIL Equities expects the companys revenue to grow at a CAGR of 35% to Rs

11 bn during FY10 to FY12, buoyed by the expected strength in the capital

markets. Investment banking and securities business would continue to be chief

contributor to the overall revenue supported by the resurgence in primary and

secondary capital market activities. However, the brokerage rates would remain

under pressure as the segment is highly fragmented. The securities funding

business would continue to surge with the anticipated run up in capital markets.

The AMC business is expected to report muted performance on account of the

regulatory changes and competition.

Figure 12: Two-year revenue CAGR of 35% likely Figure 13: Segmental break-up of revenues

S o u r c e : C o m p a n y , C R I S I L E q u i t i e s S o u r c e : C o m p a n y , C R I S I L E q u i t i e s

Pro fitability to improve on increased revenues andcost rationalisation

On the operating side, the companys margins are likely to improve to around

47.6% in the next two years. JM Financial is expected to benefit from its

business expanisons through the franchise route, which offers a low cost

operating model. Though the employee cost is expected to rise from the current

levels (on account of expanding its research strength on the institutional side), it

will be largely set off by the benefits arising from rationalisation of

administrative expenses and other expenses. Adjusted PAT is expected to

increase at a CAGR of 30.5% to Rs 1.9 bn in FY10-FY12. EPS is expected to

improve from Rs 1.8 in FY10 to Rs 2.6 in FY12.

8,319

4,679

5,988

8,278

11,06070%

-44%

28%

38%34%

-60%

-40%

-20%

0%

20%

40%

60%

80%

0

2,000

4,000

6,000

8,000

10,000

12,000

FY08 FY09 FY10 FY11E FY12E

(Rs bn)

Revenues [ LHS] Growth (y -o-y ) [RHS]

0

2000

4000

6000

8000

10000

12000

14000


(Rs bn)

Investment Banking and Securities

Securities Funding and Fund based activities

Asset Management

Alternative Asset Management

Others


13/24


JM Financial Ltd

Figure 14: Adj. PAT and PAT margin trend Figure 15: Trend in RoE and RoCE


-1,876

4741,132 1,320

1,926

-23%

10%

19%16% 17%

-30%

-20%

-10%

0%

10%

20%

30%

-3,000

-2,000

-1,000

0

1,000

2,000

3,000


(Rs bn)

Adj PAT [LHS] PAT Margin [RHS]

-13.9

2.5 5.9 6.59.1

19.3

5.47.5

9.1 10.0

-21

-14

-7

0

7

14

21

28


(% )

ROE (%) ROCE (%)


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JM Financial Ltd

Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of

management quality, apart from other key factors such as industry and business

prospects, and financial performance.

Experienced management and established trackrecord

JM Financial, led by Mr. Nimesh Kampani, offers financial services, which

includes investment banking, broking (retail and institutional), wealth

management, non-banking financing, and asset management. The company

mainly operates through subsidiaries, joint ventures and associate companies.

Each of these businesses is headed by experienced professionals having an in-

depth understanding of the financial markets and their relevant business

segments. Mr. Nimesh Kampani himself has over three decades of experience in

the Indian capital market, and has played a pivotal role in not only making JM

Financial an integrated player but also fostered the development of the financial

market. CRISIL Equities expects the strong relationships fostered by the

experienced senior management will hold JM Financial in good stead in the

financial services space.

Competent second-ine management

JM Financial possesses a reasonably experienced second-level management who

support the business built by the promoters. Several members of the senior

management, who lead various business segments and manage day-to-day

operations of the company, have been with the company for more than a

decade. This has provided a strong degree of stability to the firms operations.

The respective business units enjoy sufficient autonomy in decision making,

which enhances operational flexibility. However, in new businesses such as

alternative asset management (encompassing private equity and real estate

investments and investments in listed securities) and asset reconstruction, the

companys mettle is as yet, unproven.


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JM Financial Ltd

Corporate Governance

CRISILs fundamental grading methodology includes a broad assessment of

corporate governance and management quality, apart from other key factors

such as industry and business prospects, and financial performance. In this

context, CRISIL Equities analyses the shareholding structure, board composition,

typical board processes, disclosure standards and related-party transactions.

Any qualifications by regulators or auditors also serve as useful inputs while

assessing a companys corporate governance.

Overall, corporate governance at JM Financials presents good practices

supported by a strong and fairly independent board, good and relevant

experience and board processes and structures broadly conforming to minimum

standards.

Board composition

JM Financials board consists of well-qualified directors having experience in

various fields. Based on our discussions and the companys disclosure levels, we

are of the opinion that the boards structure, processes and disclosure conform

to the required standards.

JM Financials board consists of seven members, six of whomare non-executive

directors. Of the six, five are independent directors. This is well above the

minimum stipulated standards set in the SEBI listing guidelines. The audit

committee is chaired by an independent director, Mr E A Kshirsagar, and has

two other independent directors on board.

The independent directors have an excellent reputation and standing in the

business community. Many of them also serve on the boards of other large

corporations. We believe that their diverse experience and profile adds strength

to board dynamics and processes at JM Financial

Board processes: Based on discussions, we believe that processes being

followed by the company related to board meetings, agenda papers,

documentation etc are good, and the level of engagement of independent

directors is high.


16/24


JM Financial Ltd

Valuation Grade: 5/ 5

We continue to value JM Financial based on the sum-of-the-parts valuation

method. Based on our valuation, we have fundamentally value the company at

Rs 45 per share. This fair value implies P/E multiples of 25.5x FY11E and 17.4x

FY12E earnings. The stock price has corrected by 30% since our previous update

report dated November 03, 2010. Hence, we are revising our valuation grade to

5/ 5, indicating that the fair value hasstrong upsi defrom the current level.

Key elements of our valuation

We have used the P/E multiple to value JM Financials investment banking and

broking business. We have assigned the business a forward P/E multiple of 13

times based on FY12 earnings. We have used the P/BV multiple to value its

securities funding business. We have valued the business at 1.5x the book value

of the NBFC. The asset management business and the alternative asset

management business are valued using the percentage of AUM method. Other

Investments and Cash are valued at book value. Overall the business is valued

at FY12 P/BV of 1.6x

Business Parameter Multiple RemarksValuation(Rs mn)

Investment Banking and Securities Price/Earnings (P/E) 13 In line with average market P/E 8,515

Securities Funding and Fund based

activities Price/Book Value (P/BV) 1.5

In line with other NBFCs 12,204

Asset Management * % of AUM 2% Asset Management 130

Alternative Asset Management % of AUM 4% Alternative assets - average fund valuation 680

Other investments and cash Valued at Book Value 12,077

Total valuation 33,606

No of shares (nos. million) 750

Fair Value/ share 45

Peer comparison

CompaniesM Cap Net Profit (Rs mn) EPS Price/ earnings (x) Price/ book (x)

(Rs mn) FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

JM Financial 24,593 1,132 1,450 2,021 1.51 1.76 2.57 25.0 16.0 11.0 1.4 1.0 1.0

PeersMotilal Oswal

Financial Services 23,856 424 1,722 1,987 3.0 10.8 13.0 55.4 14.2 11.7 4.98 NA NA

India Infoline 24,719 1,520 2,241 2,842 5.4 7.5 9.5 21.3 11.8 9.5 2.9 1.3 1.2

Religare

Enterprises Ltd 64,555 923 126 2,523 12.3 0.9 18.9 64.0 NM 25.7 2.5 2.5 2.3

We have arrived at a fair

value of Rs 45 per share

based on the SoTP

method


17/24


JM Financial Ltd

Figure 16: One-year forward P/ E band Figure 17: One-year forward P/ BV band

S o u r c e : N S E , C R I S I L E q u i t i e s S o u r c e : N S E , C R I S I L E q u i t i e s

Figure 18: P/ E premium / discount to NIFTY Figure 19: P/ E movement

S o u r c e : N S E , C R I S I L E q u i t i e s S o u r c e : N S E , C R I S I L E q u i t i e s

0

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Jul-08

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(Rs)

J M Financial Ltd. 12x 15x

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Apr-10

Jul-10

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Jan-11

(Rs)

J M Financial Ltd. 0.5x 1.0x

1.5x 2.0x 2.5x

-100%

0%

100%

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400%

Apr-08

Jul-08

Oct-08

Jan-09

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Premium/Discount to NIFTY Median premium/discount to NIFTY

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Apr-08

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1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev


18/24


JM Financial Ltd

EARNINGS REVISION SUMMARY

Based on our interaction with the management, we have revised our earnings

estimates for JM Financials. The management indicated that they have started

making provisions for employee bonuses on a quarterly basis as against the

earlier process of provisioning in the fourth quarter, which has been included in

the employees salaries. We had assumed one time provisioning cost to be made

in the fourth quarter and assumed higher levels of empoyee cost. To reflect this

change we have lowered our employee expense estimates. As a result, the

estimated EBITDA margin has increased to 47.6% for FY11 and FY12 from

43.6%. In line with this PAT estimates have been revised upwards by 3.9% and

4.2% respectively for FY11 and FY12.

ParticularsFY11E FY12E

Unit Old New % change Old New % change

Operating income (Rs mn) 8,295 8,278 -0.21% 11,105 11,060 -0.41%

EBITDA (Rs mn) 3,570 3,940 10.35% 4,777 5,264 10.20%

EBITDA margin % 43.0% 47.6% 460 bps 43% 47.60% 459 bps

PAT (Rs mn) 1,271 1,320 3.9% 1,849 1,926 4.2%

PAT margin % 15% 17.50% 252 bps 17% 18.30% 128 bps

EPS Rs 1.7 1.8 3.9% 2.5 2.6 4.2%


19/24


JM Financial Ltd

Company Overview

Incorporated in 1975, JM Financial is an integrated financial services player

offering a range of products and services across the capital market space to

corporates, HNIs and retail investors. The company has interests in investment

banking, broking institutional and retail, institutional equity sales and trading,

commodity broking, wealth management, portfolio management, asset

management, NBFC activities, private equity and asset reconstruction business.

These businesses are managed as strategic business units and organised as a

separate company headed by a team of professionals. The years of experience

and ability to offer financial solution meeting the requirements of its clients have

helped JM establish itself as a leading player in the Indian capital markets.

JM Financial organisation structure


Business overview

JM offers a range of capital market products and services through its several

subsidiaries/joint ventures and associate companies. The businesses are broadly

grouped as follows.

JM Financial

Limited

JM FinancialAsset

ManagementPvt. Ltd.

JM Financial

Products Pvt.Ltd.

JM Financial

InvestmentManagers Ltd.

JM Financial

ConsultantsPvt. Ltd.

JM FinancialHoldings

(Mauritius)Limited

JMF-BRInvestment

Holdings(Mauritius)

Limited

JM Financial

Ventures Ltd.

Infinite IndiaInvestment

ManagementPvt. Ltd.

JM FinancialSecurities Pvt.

Ltd.

JM FinancialServices Pvt.

Ltd.

JM FinancialInstitutionalSecurities

JM FinancialOverseas

Holdings Pvt.Ltd.

Oracle

EnterprisesPvt. Ltd.

JM FinancialCommtrade

Ltd.

JM FinancialInsurance

Broking Pvt.Ltd.

PersepolisInvestment

Ltd.

Persepolis PIPE& Investment

Ltd.


20/24


JM Financial Ltd

JM Financial break-up of businesses


Milestones

1975 Establishment of JM Financial & Investment Consultancy Services Pvt. Ltd

1986 Ventured into stock broking and securities broking business

1997 Joint venture with Morgan Stanley to offer investment banking andsecurities broking services

2006 Launch of private equity fund, JM Financial India Fund, with US-based OldLane Partners, LP

2007 Termination of Joint Venture with Morgan Stanley

Acquired 60% stake in ASK securities specialised in institutional broking

business

Launch of Real Estate Fund

2008 Acquired the remaining 40% stake in ASK securities and was

rechristened as JM Financial Institutional Securities Pvt. Ltd.

2010 Strategic co-operation with Rand Merchant Bank of South Africa to offerM&A advisory services to Indian and African corporates.

JM FINANCIAL

InvestmentBanking and

Capital Raising

Securities Fundingand Fund Based

AlternativeInvestment

Asset Management

M/A and

Restructuring

Priavte Equity

Advisory

Stock Broking

IPO funding

Private Wealth

Management

Depository

Services

Portfolio

Management

Loan against

securities

Sponsor funding

Securitisation

Asset

Reconstruction

Real Estate Fund

Private Equity

Fund

Special

Situations Fund

Mutual Fund


21/24


JM Financial Ltd

Annexure: Financials

Source: CRISIL Equit ies

Income statement Balance Sheet

(Rs mn) FY08 FY09 FY10 FY11E FY12E (Rs mn) FY08 FY09 FY10 FY11E FY12E

Operating income 8,319 4,679 5,988 8,278 11,060 Liabilities

EBITDA 4,074 1,480 2,317 3,940 5,264 Equity share capital 300 750 750 750 750

EBITDA margin 49.0% 31.6% 38.7% 48.0% 47.6% Reserves 18,029 16,725 17,819 18,638 19,832

Depreciation 98 121 120 121 118 Minorities 1,381 1,244 1,271 1,271 1,271EBIT 3,977 1,359 2,197 3,818 5,145 Net worth 19,710 18,719 19,840 20 ,65 8 21 ,85 3

Interest 1,297 604 588 1,755 2,270 Convertible debt - - - - -

Operating PBT 2,679 755 1,609 2,063 2,875 Other debt 10,235 1,340 18,420 25,459 34,552

Other income - - - - - Total debt 10,235 1,340 18,420 25 ,45 9 34 ,55 2

Exceptional inc/(exp) 15,211 (1,553) 409 - - Deferred tax liability (net) 1,137 1,009 988 988 988

PBT 17,890 (799) 2,019 2,063 2,875 Total liabilities 31,082 21,068 39,247 47 ,10 5 57 ,39 2

Tax provision 4,555 281 478 743 949 Assets

Minority interest - - - - - Net fixed assets 306 386 333 224 136

PAT (Reported) 13,335 (1 ,0 79) 1,5 41 1,320 1,926 Capital WIP 31 24 12 39 49

Less: Exceptionals 15,211 (1,553) 409 - - Total fixed assets 337 410 344 263 185

Adjusted PAT (1,875.6) 474.1 1,131.5 1,320.3 1,926.4 Investments 5,787 4,107 4,944 5,444 5,944

Current assets

Ratios Inventory 49 789 7,462 12,473 13,635

FY08 FY09 FY10 FY11E FY12E Sundry debtors 2,666 428 1,143 3,402 4,545

Growth Loans and advances 14,744 8,891 17,654 21,210 27,210

Operating income (%) 69.6 (43.8) 28.0 38.2 33.6 Cash & bank balance 9,024 5,246 4,854 3,988 5,579

EBITDA (%) 69.2 (63.7) 56.6 70.0 33.6 Marketable securities 3,111 1,919 5,015 5,315 5,515

Adj PAT (%) (252.4) (125.3) 138.7 16.7 45.9 Total current assets 29,593 17,274 36,128 46 ,38 8 56 ,48 4

Adj EPS (%) (252.4) (125.3) 138.7 16.7 45.9 Total current liabilities 5,766 2,320 3,777 6,597 6,828

Net current assets 23,828 14,954 32,351 39 ,79 1 49 ,65 5

Profitability Intangibles/ Misc. expenditure 1,130 1,597 1,608 1,608 1,608

EBITDA margin (%) 49.0 31.6 38.7 47.6 47.6 Total assets 31,082 21,067 39,247 47 ,10 5 57 ,39 2

Adj PAT Margin (%) (22.5) 10.1 18.9 16.0 17.4

RoE (%) (13.9) 2.5 5.9 6.5 9.1 Cash flow

RoCE (%) 19.3 5.4 7.5 9.1 10.0 (Rs mn) FY08 FY09 FY10 FY11E FY12E

RoIC (%) 295.9 (15.7) 13.0 9.4 10.3 Pre-tax profit 17,890 (799) 2,019 2,063 2,875

Total tax paid (3,403) (409) (499) (743) (949)

Valuations Depreciation 98 121 120 121 118

Price-earnings (x) (21.1) 32.5 25.0 16.0 11.0 Working capital changes (8,379) 3,905 (14,695) (8,005) (8,074)

Price-book (x) 2.0 0.8 1.4 1.0 1.0 Net cash from operations 6,205 2,819 (13,055) (6,563) (6,029)

EV/EBITDA (x) 9.6 7.3 16.5 9.8 8.7 Cash from investments

EV/Sales (x) 4.8 2.4 7.0 4.7 4.1 Capital expenditure (1,301) (661) (65) (40) (40)

Dividend payout ratio (%) 6.6 (16.3) 28.5 32.5 32.5 Investments and others (6,481) 2,871 (3,932) (800) (700)

Dividend yield (%) 2.2 1.1 1.6 2.0 3.0 Net ca sh from inve stme nts (7,781) 2,210 (3,998) (840) (740)

Cash from financing

B/S ratios Equity raised/(repaid) (36) (1) - - -

Inventory days NM NM NM NM NM Debt raised/(repaid) 6,334 (8,895) 17,080 7,039 9,092

Creditors days NM NM NM NM NM Dividend (incl. tax) (878) (176) (439) (502) (732)

Debtor days NM NM NM NM NM Others (incl extraordinaries) (15,179) 1,818 (390) 0 -

Working capital days NM NM NM NM NM Net cash from financing (9,759) (7,254) 16,251 6,538 8,360

Gross asset turnover (x) 13.7 5.9 6.9 9.5 12.4 Change in cash positon 8,339 (3,778) (392) (866) 1,591

Net asset turnover (x) 34.7 13.5 16.7 29.7 61.5 Closing cash 9,024 5,246 4,854 3,988 5,579

Sales/operating assets (x)

Current ratio (x) 5.1 7.4 9.6 7.0 8.3 Quarterly financials

Debt-equity (x) 0.5 0.1 0.9 1.2 1.6 (Rs mn) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11

Net debt/equity (x) (0.1) (0.3) 0.4 0.8 1.1 Net Sales 1,747 1,571 1,715 1,930 2,328

Interest coverage 3.1 2.2 3.7 2.2 2.3 Change (q-o-q) -25% -10% 9% 13% 21%EBITDA 1,004 587 476 807 1,254

Per share Change (q-o-q) -20% -42% -19% 70% 55%

FY08 FY09 FY10 FY11E FY12E EBITDA margin 57.5% 37.4% 27.8% 41.8% 53.9%

Adj EPS (Rs) (2.5) 0.6 1.5 1.8 2.6 PAT 578 352 212 304 564

CEPS (2.4) 0.8 1.7 1.9 2.7 Adj PAT 578 352 212 304 564

Book value 26.3 25.0 26.5 27.6 29.1 Change (q-o-q) 2% -39% -40% 43% 86%

Dividend (Rs) 1.2 0.2 0.6 0.6 0.8 Adj PAT margin 33.1% 22.4% 12.4% 15.8% 24.2%

Actual o/s shares (mn) 749.8 749.8 749.8 749.8 749.8 Adj EPS 0.76 0.48 0.28 0.41 0.77


22/24


JM Financial Ltd

Focus Charts

FII Investments in India on the rise Funds raised from primary markets


JMs ranking and market share of domestic equity

offering

Two-year revenue CAGR of 35% likely


PAT and PAT margin trend Shareholding pattern over the quarters


10 10.4 9.4 6.8 16.4

-9.8

30.3 38.8

4%

-10%

-28%

141%

-160%

-409%

28%

-500%

-400%

-300%

-200%

-100%

0%

100%

200%

-10

0

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20

30

40

FY04

FY05

FY06

FY07

FY08

FY09

FY10

YTDFY11

(Rs bn)

Net FII Investments y-o-y growth (RHS)

0

200

400

600

800

1,000

1,200

FY07 FY08 FY09 FY10

(Rs bn)

IPO FPO Rights Issue QIP Total

4 6 13 12

10.0%

7.0%

3.0%3.3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

2

4

6

8

10

12

14

FY08 FY09 FY10 1HFY11

Ranking (LHS) Market Share (R HS)

8,319

4,679

5,988

8,278

11,06070%

-44%

28%

38%34%

-60%

-40%

-20%

0%

20%

40%

60%

80%

0

2,000

4,000

6,000

8,000

10,000

12,000


(Rs bn)

Revenues [LHS] Growth (y -o-y ) [RHS]

-1,876

4741,132 1,320

1,926

-23%

10%

19%16% 17%

-30%

-20%

-10%

0%

10%

20%

30%

-3,000

-2,000

-1,000

0

1,000

2,000

3,000


(Rs bn)

Adj PAT [LHS] PAT Margin [RHS]

66% 66% 66% 66% 66%

9% 9% 9%10% 10%

0% 0% 0% 0% 0%

24% 24% 24% 24% 23%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

Promoter FII DII Others


23/24

CRISIL I ndependent Equity Research Team

Mukesh Agarwal Director +91 (22) 3342 3035 [email protected]

Tarun Bhatia Director, Capital Markets +91 (22) 3342 3226 [email protected]

Chetan Majithia Head, Equities +91 (22) 3342 4148 [email protected]

Sudhir Nair Head, Equities +91 (22) 3342 3526 [email protected]

Nagarajan Narasimhan Director, Research +91 (22) 3342 3536 [email protected]

Ajay D'Souza Head, Research +91 (22) 3342 3567 [email protected]

Manoj Mohta Head, Research +91 (22) 3342 3554 [email protected]

Sachin Mathur Head, Research +91 (22) 3342 3541 [email protected]

Sridhar C Head, Research +91 (22) 3342 3546 [email protected]

CRISILs Equity Offerings

The Equity Group at CRISIL Research provides a w ide range of services including:

Independent Equity Research

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White Labelled Research

Valuation on companies for use of Institutional Investors, Asset Managers, Corporate

Other Services by the Research group include

CRISINFAC Industry research on over 60 industries and Economic Analysis

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Customised research content for Information Memorandum and Offer documents


24/24

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CRISIL Research Ier Report Jm Financial 2011

Documents

Transcript of CRISIL Research Ier Report Jm Financial 2011