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CRISIL IER Independent Equity Research
Enhancing investment decisions
JM Financial Ltd
Detailed Report
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).
CRISIL
Fundamental Grade Assessment
CRISIL
Valuation 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 (<-25% from CMP)
Research Analysts
Bhaskar Bukrediwala
Pratik Chheda
Arun Venkatesh
Client servicing desk
+91 22 3342 3561
JM Financial Ltd
Lending business continues to gain strength
Fundamental Grade: 4/5 (Superior fundamentals) Valuation Grade: 5/5 (CMP has strong upside)
Industry : Capital Markets Fair Value: ₹70 CMP: ₹51
June 27, 2016
For detailed initiating coverage report please visit: www.crisil.com
CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.
JM Financial Ltd registered healthy growth across verticals in the past 12 months, led by its
lending business. Despite a challenging environment, the lending business’ assets increased
34% in FY16 and gross non-performing assets (GNPAs) slipped below 1%. In the investment
banking (IB) business, the company has strengthened its competitive position. It featured
among leading merger and acquisition (M&A) advisory firms in 2015, executing several
marquee deals. While regulatory revisions could moderate the internal rate of return (IRR) in
the asset reconstruction business, the company is well positioned, given a strong IB franchise.
After subdued performance over a sustained period, the asset management business’ asset
inflow recently surged, driving up profitability. Linkage to the inherently volatile capital markets,
regulatory risks, and competition from banks and NBFCs limit the fundamental grade to 4/5.
Lending business: Key growth engine
The lending business’ remains upbeat, as the assets under management (AUM) increased
34% y-o-y to ₹72 bn in FY16, driven by real estate and margin funding portfolios.
Notwithstanding the slowdown in the real estate sector, the company’s real estate lending
business - primarily managed by the new NBFC subsidiary - has doubled over the last one
year, albeit over a small base. Risk management has been robust. Given its strong risk
management focus, JM Financial is one of the few companies whose asset quality has not
been impacted even in the current stressed environment. GNPAs were stable at 0.3% in
H2FY16, after remaining steady at 0.8% in H1FY16. While the business is sufficiently
capitalised for growth in the medium term, with a capital adequacy ratio (CAR) of ~30% and
low leverage of 1.9x, GNPA level is a monitorable, amid subdued real estate demand and stiff
competition from NBFCs.
IB and brokerage: Sustained activity in capital markets should drive growth
Driven by strong traction in M&A activity, JM Financial featured amongst top players in league
tables in 2015. The company has been involved in a few large transactions. However, the IB
and securities business’ revenue declined 5% in FY16, as the broking revenue was subdued.
The company has indicated a robust pipeline of M&A advisory deals - seen as a key growth
driver, though it is likely to remain volatile as in the past.
Asset reconstruction business: Recovery to be key to future success
While the ARC industry growth has slowed down following tightening of regulations, JM Asset
Reconstruction Company (JMARC) continues to be competitively well positioned owing to the
support of a strong IB franchise. It has managed to recover some of the Hotel Leela assets
following the venture’s sale of its hotel in Goa for ₹7.25 bn. Continued success in recovery
efforts in the Leela assets is likely to fetch high returns, which will help the ARC business build
investor confidence and attract more funds to expand. Presence of Class A SRs and high
discount rates will be the key to success of future deals besides faster recovery cycles.
Fair value at ₹70 per share
We have used the sum-of-the-parts (SoTP) method to value JM Financial at ₹70 per share,
with the lending business contributing ~55% to the valuation. At the current market price of
₹51, the valuation grade is 5/5.
KEY FORECAST
(₹ mn) FY13 FY14 FY15 FY16# FY17E
Operating income 10,416 10,020 13,984 16,847 20,425
EBITDA 6,426 6,050 9,554 12,252 14,712
Adj PAT 1,849 2,116 3,312 4,005 4,740
Adj EPS-₹ 2.5 2.8 4.2 5.1 6.0
Dividend yield 1.8 1.2 2.7 2.4 2.4
RoCE (%) 10.9 10.0 14.1 13.3 13.7
RoE (%) 9.1 9.9 13.9 14.7 15.5
PE (x) 20.9 18.4 12.1 10.0 8.5
P/BV (x) 1.7 1.6 1.2 1.1 1.0
# Abridged financials;
Source: Company, CRISIL Research estimates
CFV MATRIX
KEY STOCK STATISTICS
NIFTY/SENSEX 8095/26403
NSE/BSE ticker JMFINANCIL/
JMFINAN
Face value (₹ per share) 1
Shares outstanding (mn) 789.0
Market cap (₹ mn)/(US$ mn) 40,199/592
52-week range (₹)/(H/L) 58/33
Beta 1.3
Free float (%) 34.3%
Avg daily volumes (30-days) 1,065,257
Avg daily value (30-days) (₹ mn) 52.8
SHAREHOLDING PATTERN
PERFORMANCE VIS-À-VIS MARKET
Returns
1-m 3-m 6-m 12-m
JM Financial 11% 28% 30% 15%
Nifty 500 0% 6% 2% -2%
1 2 3 4 5
1
2
3
4
5
Valuation Grade
Fu
nd
am
en
tal G
rad
e
Poor
Fundamentals
Excellent
Fundamentals
Str
on
g
Do
wn
sid
e
Str
on
g
Up
sid
e
65.7% 65.7% 65.7% 65.7%
13.6% 13.8% 13.5% 13.8%
3.0% 3.0% 3.2% 3.2%
17.9% 17.6% 18.4% 17.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jun-15 Sep-15 Dec-15 Mar-16
Promoter FII DII Others
2
Table 1: JM Financial - Business environment
Parameters
Investment banking
and securities
business
Securities funding
and fund-based
activities
Asset
reconstruction
business Asset management Others
Segment offerings IB, brokerage and
wealth management
Margin funding, IPO
financing, promoter
funding, commercial
real estate lending,
loan against shares
Asset
reconstruction Asset management
Market position
JM Financial is a
leading domestic
investment banker. In
2015, it was among the
leading M&A advisors in
India
A relatively small player
in the equity brokerage
industry, India Infoline
Finance Ltd (IIFL) is
one of the leading
players with ~3% share
A fragmented industry
with diversified lending
exposure, but JM
Financial is relatively
more focused on
commercial real estate
and capital market
lending
JM Financial is
the third largest
player based
on AUM
JM Financial is a
small player with a
market share of ~1%
in terms of mutual
fund AUM of ₹158 bn,
as of H1FY16
Revenue
contribution*
FY15
FY17E
34%
29%
52%
59%
NM
(consolidated
as an
associate)
3%
4%
9%
7%
Revenue growth
(FY17E) 13% 25% NM 38% 0%
Key competitors
Global and domestic
investment banks such
as Citi, Macquarie, Axis
Capital and Edelweiss
Capital, among others
Equity brokerage firms
such as IIFL, Motilal
Oswal and Edelweiss
Capital; foreign
brokerage houses such
as CLSA and Credit
Suisse
HDFC, Indiabulls
Housing Finance,
Religare Enterprises,
Edelweiss Capital, IIFL,
Pirmal Fund
Management, etc.
ARCIL,
Edelweiss ARC JM Financial is a
relatively small player
compared with other
large AMCs, including
HDFC AMC, ICICI
Prudential AMC,
Reliance, Birla Sun
Life AMC, UTI AMC,
SBI MF, Franklin
Templeton AMC
* Total revenue, including inter-segment sales, is used to calculate revenue contribution of segments
Source: Company, CRISIL Research
3
Grading Rationale
Healthy performance across key segments with lending
business in the vanguard...
JM Financial’s key businesses reported strong growth in the past one year, driving revenue
up 20%. The lending business performed well across key parameters of asset growth, net
interest margin (NIM) and asset quality. The company is well positioned in the IB business,
where it leverages its long industry presence and relationships with Indian companies. The
company was involved in key fund-raising transactions in 2015, including the recent ₹50 bn
HDFC QIP and the Adani Group restructuring. Asset management revenue has doubled,
benefitting from a strong inflow in equity schemes. Overall profitability has been robust too,
with TTM profit soaring 28%.
…though inherent volatility in business to persist
Despite increasing traction in the lending business, which is not linked to the capital markets,
the company’s overall business prospects are still correlated with broader movements in
capital markets. The equity market is inherently volatile, driven by global and domestic
factors – both economic and political - as well as public sentiment. In the past, even though
the company was a strong player, sluggish market activity dampened growth. For instance,
revenue slipped ~4% in FY14. As of Q4FY16, the investment banking, asset management
and non-real estate lending businesses - comprising over 55% of total revenue - were
directly linked to the capital markets.
Figure 1: Lending business drives revenue*… Figure 2:…and profit*
*Revenue includes inter-segmental revenue
Source: Company, CRISIL Research
*Profit before tax
Source: Company, CRISIL Research
42% 39% 37% 34%27%
43% 50%48% 52%
58%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY12 FY13 FY14 FY15 FY16
IB, Brokerage and Wealth Mgmt Funding businessAsset management Alternative asset managementUnallocated
19% 19% 16%24%
11%
73% 72%71%
67%79%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY12 FY13 FY14 FY15 FY16
IB, Brokerage and Wealth Mgmt Funding businessAsset management Alternative asset managementUnallocated
Fig. 1: Fund-based activity segment
enjoys stable and robust RoCE
-5%
0%
5%
10%
15%
20%
25%
FY12 FY13 FY14 FY15
Fund Based Activity- IB and Securities Business
Alternative Asset Mgmt Asset Management
4
Lending business = turning into stable growth engine
The lending business has become the key revenue and profit driver for JM Financial. Despite
volatility in the capital markets lending business, the company’s loan book more than
doubled to ~ ₹72 bn in FY16 from ₹30 bn in FY14, buoyed by traction in real estate lending.
The real estate lending book is valued at ~₹56 bn.
Performance across parameters has been stable, which is a positive. However, given the
strong growth witnessed, asset quality remains a key monitorable.
● Asset quality healthy owing to strong focus on risk management, though stressed real
estate sector begets caution:
● Asset quality has been healthy over the past four quarters, with GNPAs at sub-1%
levels, driven mainly by the company’s policy of lending to builders with a track record
of over a decade. The company primarily lends to borrowers with an experience of over
25 years.
● However, asset quality remains a monitorable, considering continued stress in the real
estate sector and the recent strong growth in the loan book.
Figure 3: Real estate drives growth in lending business… Figure 4: …aiding steady growth in revenue
Source: Company, CRISIL Research Source: Company, CRISIL Research
14
28
56
16
25
16
-
10
20
30
40
50
60
FY14 FY15 FY16
(₹ bn)
Real estate lending Capital market lending
1,425
2,036 2,147 2,454 2,413 2,524
2,880 2,973
-
500
1,000
1,500
2,000
2,500
3,000
3,500
Q1
FY
15
Q2
FY
15
Q3
FY
15
Q4
FY
15
Q1
FY
16
Q2
FY
16
Q3
FY
16
Q4
FY
16
(₹ mn)
Lending business revenues
5
Figure 5: Asset quality has been stable in recent times… Figure 6: …but slowdown in real estate begets caution
Source: RBI, CRISIL Research Source: Company, CRISIL Research
● Shifting loan book mix aiding NIM expansion: While it has been volatile sequentially,
the company’s NIM expanded to 7.7% in Q4FY16 from 5.3% in Q1FY15, driven by
increasing share of high-yielding loans.
● Healthy capitalisation to support growth plans: The NBFC’s capitalisation remains
robust, with CAR of 28.8% as on Q4FY16. With a healthy gross leverage of 1.9x in
FY15, the business appears sufficiently capitalised to support growth in the medium
term.
Figure 7: Expansion in NIM… Figure 8: … leads boosts profitability
Source: RBI, CRISIL Research Source: Company, CRISIL Research
Strong show in investment banking in 2015
Relatively weak year for the M&A advisory business…
The deal value in M&A activities declined 40% from $33 bn in 2014 to $20 bn in 2015 despite
an increase in number of transactions (938 deals vis-à-vis 892 in 2014). While value of
inbound deals grew (on a weaker rupee), gross domestic deal value fell sharply from $19 bn
to $7.3 bn over the same period.
2.60%2.50%
2.10%
0.90% 0.90%0.80%
0.30% 0.30%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Q1
FY
15
Q2
FY
15
Q3
FY
15
Q4
FY
15
Q1
FY
16
Q2
FY
16
Q3
FY
16
Q4
FY
16
GNPA
975 1127 1261 1544 1680 1649
6%
16%
12%
22%
9%
0%
5%
10%
15%
20%
25%
0
200
400
600
800
1000
1200
1400
1600
1800
FY12 FY13 FY13 FY14 FY15 H1FY16
(%)(₹ bn)
Bank's outstanding credit to commercial real estate
y-o-y increase(%)
5.30% 5.50%
6.20%
9.10%
8.00%8.30% 8.10%
7.70%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
Q1
FY
15
Q2
FY
15
Q3
FY
15
Q4
FY
15
Q1
FY
16
Q2
FY
16
Q3
FY
16
Q4
FY
16
Net interest margin
517 764
883
1,310 1,162 1,266
1,468 1,590
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Q1
FY
15
Q2
FY
15
Q3
FY
15
Q4
FY
15
Q1
FY
16
Q2
FY
16
Q3
FY
16
Q4
FY
16
(₹ mn)
PBT
6
…however, JM Financial strengthens position
Leveraging on strong relationships with domestic corporates, the company was involved in
several deals in 2015 and featured among top bankers, in terms of number and value of
deals executed. JM was involved in certain key deals, associated with corporates such as
Leela, Adani, Reliance Infra, Aditya Birla and Cairn. It was also involved in various fund-
raising transactions for corporates, including HDFC, Indian Oil and IndusInd Bank.
Consequently, the TTM IB and brokerage revenue grew 15% y-o-y, despite moderation in
equity broking turnover. Even though JM Financial’s position has strengthened, competition
has intensified with several MNC banks aggressively targeting deals.
Global ambitions: Still in gestation period
JM Financial has tied up with Seabury Corporate Finance to provide investment banking
advisory services, anticipating that American promoters and private equity companies will
increasingly look to invest in Indian companies, especially in sectors such as defence and
aviation.
The company aims to deepen its global foothold after its first international deal (Foilage) in
2014.
Figure 9: Strong performance in M&A*… Figure 10: …has aided growth in revenue and profit
* Data for announced deals (any involvement) in 2015
Source: Industry, CRISIL Research Source: Company, CRISIL Research
1,552 1,336 1,249 757 494 384 383 383 326
20
1716
10
65 5 5 4
0
5
10
15
20
25
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
JM
Fin
an
cia
l Ltd
Axis
Ba
nk L
td
Macq
ua
rie
Citi
ICIC
I
Ban
k o
f A
merica
Merr
ill L
ynch
Go
ldm
an
Sachs
Eve
rco
re P
art
ne
rs I
nc
Ern
st &
Yo
un
g
(₹ bn)
Total Deal Value Market Share (%)
-200
0
200
400
600
800
1,000
1,200
1,400
1,600
Q3
FY
13
Q4
FY
13
Q1
FY
14
Q2
FY
14
Q3
FY
14
Q4
FY
14
Q1
FY
15
Q2
FY
15
Q3
FY
15
Q4
FY
15
Q1
FY
16
Q2
FY
16
Q3
FY
16
Q4
FY
16
(₹ mn)
IB and securities business revenues IB and securities business PBT
7
Figure 11: Growth in equity turnover moderated in recent quarters
Source: Industry, CRISIL Research
Business remains vulnerable to market volatility
As witnessed earlier, inherent volatility in the IB and securities broking businesses could
persist, as they are linked to the capital markets.
Figure 12: Amount raised through IPOs and QIPs have picked up, but have been volatile historically
Source: Industry, CRISIL Research Source: Industry, CRISIL Research
Regulations muted ARC industry growth…
After registering fourfold growth in FY14, the ARC industry’s AUM growth slowed down to
30% in FY15, impacted by the Reserve Bank of India’s (RBI’s) revised regulations which
require higher upfront cash investment of 15% by ARCs as against 5% earlier. This made it
incrementally tougher for ARCs to arrange funds to enter into big asset sale deals. However,
the period of muted growth is expected to end following the removal of sponsorship cap of
50% and increase in the FDI limit from 74% to 100% under the automatic route in the budget.
Other growth enablers include allowing non-institutional investors to invest in security
40%
-4%
-12%-14%
15%
-15%
23%
-13%
14%
8%
-3%
3%
-10%
-15%
10%
19%
-19%
2%
-4% -4%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
0
5000
10000
15000
20000
25000
30000
Apr-
14
May-1
4
Ju
n-1
4
Ju
l-14
Aug
-14
Sep
-14
Oct-
14
No
v-1
4
De
c-1
4
Ja
n-1
5
Feb
-15
Mar-
15
Apr-
15
May-1
5
Ju
n-1
5
Ju
l-15
Aug
-15
Sep
-15
Oct-
15
No
v-1
5
De
c-1
5
(%)(₹ Crore)
BSE NSE y-o-y Growth (RHS)
104
36
21
64
37
25
3745
65
0
20
40
60
80
100
120
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
(₹ Crore)Amount raised through IPO
Amount Raised (In Rs Cr) No. of IPO (RHS)
25
38
2
67
47
11 14
6
44
19
0
10
20
30
40
50
60
70
80
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
20
12
-13
20
13
-14
20
14
-15
20
15
-16 (
up
to31
/12/1
5)
(₹ Crore) Amount raised through QIP
Amount Raised (In Rs Cr) No. of QIP (RHS)
8
receipts and the proposed amendment in Sarfaesi Act, 2002, which allows the sponsor to
hold 100% stake in defaulting company facilitating ARCs to effectively participate in the huge
NPA market in the country. This way, ARCs can tap significant growth opportunity from high
non-performing and restructured assets in the Indian banking system. Despite this, we don’t
expect a significant jump in growth, as low returns to ARCs in the 15-85 structure remain a
stumbling block in arranging capital and making big deals happen.
…yet enhanced competitive position of JMARC
Large ARCs, such as JM Financial, with strong financial muscle at the group level and
established IB presence are better positioned to raise capital required for upfront cash
investment and to achieve higher recovery rate from asset sales given a strong IB franchise.
JM-ARC is one of the two largest private players with a share of ~15% by AUM.
Figure 13: JMARC has been witnessing steady growth
Source: Company, CRISIL Research
AMC business shows significant improvement, but still a
relatively small player
JM Financial’s AMC AUM grew a healthy 32% in FY16. Further, share of the high-yielding
equity assets increased to 62% in Q4FY16 from 42% in Q4FY15. Despite growth in assets,
JM Financial still has a marginal presence in asset management (~1% market share) with
AUM of ₹~162 bn, as of FY16. However, expansion in scale has helped profitability improve
– PBT rose to ₹563 mn in FY16 from ₹178 mn in FY15 and ₹38 mn in FY14. Going forward,
we expect the business to reflect the broader movement in the capital markets.
400
890 1,200
2,140
3,190
220
610 750 600
1,580
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY12 FY13 FY14 FY15 FY16
(₹ mn)
Revenue PBT
9
Figure 14: Increasing AUM and share of equity AUM… Figure 15: … have translated into higher revenue
Source: Company, CRISIL Research Source: Company, CRISIL Research
Figure16: … and profitability Figure 17: Yet, JM remains a small player
Source: Company, CRISIL Research Source: Company, CRISIL Research
7260 70
120 142 122 117 159 159 162
6% 8% 9%
38%
50%
42%
55%
61%66%
62%
0%
10%
20%
30%
40%
50%
60%
70%
0
20
40
60
80
100
120
140
160
180
Q3
FY
14
Q4
FY
14
Q1
FY
15
Q2
FY
15
Q3
FY
15
Q4
FY
15
Q1
FY
16
Q2
FY
16
Q3
FY
16
Q4
FY
16
(%)(₹ bn)
Asset management AUM ( Rs. bn) Share of equity AUM
68 72 70107
158132 147
240 242 226
0
50
100
150
200
250
300
Q3
FY
14
Q4
FY
14
Q1
FY
15
Q2
FY
15
Q3
FY
15
Q4
FY
15
Q1
FY
16
Q2
FY
16
Q3
FY
16
Q4
FY
16
(₹ mn)
Asset management revenues ( Rs. mn)
919
1351
108
5
82
176184
122
0
20
40
60
80
100
120
140
160
180
200
Q3
FY
14
Q4
FY
14
Q1
FY
15
Q2
FY
15
Q3
FY
15
Q4
FY
15
Q1
FY
16
Q2
FY
16
Q3
FY
16
Q4
FY
16
(₹ mn)
Asset management PBT
- 200 400 600 800
1,000 1,200 1,400 1,600 1,800 2,000
HD
FC
MF
ICIC
I P
rud
en
tia
l M
F
Re
liance M
F
Birla
Sun
Life M
F
UT
I M
F
SB
I M
F
Fra
nklin
…
Kota
k M
ah
ind
ra M
F
IDF
C M
F
DS
P B
lackR
ock M
F
Re
ligare
MF
Tata
MF
L&
T M
F
De
uts
ch
e A
sse
t M
F
Sun
da
ram
MF
Re
ligare
MF
JM
Fin
an
cia
l M
F
(₹ bn)
AUM
10
Key Risks
Linkage with equity market = inherent volatility in business
JM Financial’s business prospects are correlated to the level of trading in the equity market.
The capital markets are inherently volatile, driven by economic and political factors as well
as public sentiment. Any potential instability would have a significant impact on the
company’s earnings potential.
Uncertainty of regulatory intervention is a risk
As in the case of banks, the RBI’s regulations have deeply affected the business models of
NBFCs and ARCs. Any adverse regulation or tightening of norms would further impact
profitability and viability of the company’s NBFC and ARC businesses.
Continued slowdown in the real estate sector
The commercial real estate lending business constitutes ~65% of the company’s overall
lending portfolio. Real estate lending is primarily linked to the economic condition in tier-I
cities such as Mumbai, Bengaluru, Chennai and the National Capital Region. Continued
downturn in these cities could significantly impact growth and asset quality of the NBFC and
our estimates unfavourably.
11
Financial Outlook
Expect revenue growth momentum to sustain
We expect revenue to increase 21% in FY17, driven by the NBFC business, aided by healthy
capitalisation and capital market activity. We expect the IB and brokerage business to grow
15%, driven by JM’s strong competitive positioning. In FY15, the lending business’ revenue
rose 52% y-o-y, steered by healthy growth in real estate lending. The lending business
appears sufficiently capitalised to pursue incremental growth opportunities. We have built in
revenue growth estimate of over 25% y-o-y in FY17.
Figure 18: Revenue to record ~21% CAGR over FY16-17 Figure 19: Fund-based activities dominate revenue
Source: Company, CRISIL Research Source: Company, CRISIL Research
RoE to increase moderately
Though RoE is expected to improve from 12.6% in FY15 to 14.4% in FY17, we believe there
is room for further improvement, considering the relatively low leverage, and high cash and
cash equivalents. Compared with peers such as India Infoline and Edelweiss Financial, JM
Financial’s leverage is low at 1.9x, primarily due to low leverage in the lending business.
With potential increase in leverage and upside in earnings from the ARC business, we expect
RoE to improve further.
10,416 10,020 13,984 16,847 20,425
20.7%
-3.8%
39.6%
20.5% 21.2%
-20%
0%
20%
40%
60%
-
3,000
6,000
9,000
12,000
15,000
18,000
21,000
24,000
FY13 FY14 FY15 FY16# FY17E
(₹ mn)
Adjusted revenues y-o-y growth % (RHS)
39% 37% 34%27% 29%
50%48% 52%
58%59%
6%11% 9% 10% 7%
0%
20%
40%
60%
80%
100%
FY13 FY14 FY15 FY16 FY17E
IB, Brokerage and Wealth Mgmt Funding business
12
Figure 20: Profitability expected to remain steady Figure 21: RoE expected to remain stable in FY17
Source: Company, CRISIL Research Source: Company, CRISIL Research
Figure22: JM Financial’s leverage is significantly lower than peers
Source: Company, CRISIL Research
1,829 2,095 3,300 4,005 4,740
17.6%
20.9%
23.6% 23.8% 23.2%
0%
5%
10%
15%
20%
25%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY13 FY14 FY15 FY16# FY17E
(₹ mn)
PAT PAT margin (RHS)
9.1 9.9
13.9
14.7 15.5
10.9 10.0
14.1
13.3 13.7
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
FY13 FY14 FY15 FY16# FY17E
(%)
RoE (%) RoCE (%)
5.0x
4.2x 4.2x
1.9x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
India Infoline Edelweiss Financial Religare Enterprises JM Financial
Leverage (x)
13
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.
Highly qualified and experienced management team
Led by Nimesh Kampani, Group Chairman, JM Financial operates through subsidiaries, joint
ventures and associate companies. Mr Kampani has over four decades of experience in the
Indian capital markets and has played a pivotal role in not only making JM Financial an
integrated player, but also fostered development of the domestic financial markets. Each
business is headed by experienced professionals with in-depth understanding of financial
markets and their relevant business segments.
● Dipti Neelakantan is the Group Chief Operating Officer with about four decades of
experience in IB.
● The institutional business is headed by Mr Kampani’s son, Mr Vishal Kampani, who is
the Managing Director of JM Financial Products and head of the institutional securities
business.
● V P Shetty is the Executive Chairman of JM Financial Products (which houses the
securities lending business). He has almost four decades of experience in the banking
industry.
● Manish Sheth is the Group Chief Financial Officer, with over a decade of experience in
financial consultancy, management consultancy, taxation, accounting and company
laws.
Decision-making is decentralised
JM Financial has an experienced second line of management to support different
businesses. Several members of the senior management, who lead various business
segments and manage day-to-day operations, have been associated with the company for
almost a decade. Our previous interaction with business heads (of ARC and NBFC) indicates
that business units enjoy sufficient autonomy in decision making, which enhances
operational flexibility.
Shown the intent to grow the business
The top management’s intent for diversified growth is apparent from their aggressive pricing
strategy to close the Hotel Leela venture ARC deal and raising ₹5.4 bn in capital by forming
a joint venture with Vikram Pandit’s fund. Further, JM Financial has resources, backed by
strong client relationships. However, execution of the business and growth strategy are
monitorables.
14
Corporate Governance
CRISIL’s 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 Research 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 company’s corporate governance.
Corporate governance at JM Financial is good. It is supported by a strong board and efficient
board practices. It adheres to all regulatory requirements.
A well-structured board with diverse knowledge
JM Financial has a six-member board, five of whom are independent, which meets Clause
49 of SEBI’s listing guidelines. The board is chaired by Nimesh Kampani. The independent
directors are well qualified and bring significant diverse domain knowledge in consulting,
corporate restructuring, project finance and strategic advisory. EA Kshirsagar is the non-
executive independent director and chairman of the audit committee. He has three decades
of experience in consulting and also serves on the board of other public listed companies in
India. Based on our interaction, independent directors have good understanding of the
business. The company has all the necessary committees – audit, remuneration and investor
grievance – in place. Board meetings are held at regular intervals and agenda papers are
also circulated in advance. JM Financial’s board processes and systems seem satisfactory.
Consistent dividend payment policy but disclosure levels need
to be improved
● Consistent payment of dividends – Despite significant cyclicality in the business, the
company has consistently paid dividends ranging from 28% to 45% over FY10-15.
● Long tenure of auditors – M/s. Khimji Kunverji & Co. has been the auditor for over a
decade. We believe the company has to change its auditors to comply with the new
Company’s Act, 2013. Deloitte Haskins & Sells LLP is the auditor for operational
subsidiaries.
15
Valuation Grade: 5/5
We continue to value JM Financial by the SoTP fair value estimate works out to ₹70 per
share, which implies a P/E multiple of 12x FY17E earnings. At the current market price of
₹51, our valuation grade is 5/5.
We have valued the securities funding business at a P/BV of 1.5x. The multiple, which is at
a discount to the multiple at which housing finance companies trade (average > 2x) is
justified given the company’s strong risk management capabilities as reflected in low GNPA
levels, healthy capitalisation and asset growth.
We have used the P/E multiple method to collectively value JM Financial’s IB and broking
business. We have assigned the business segment a forward P/E multiple of 12x, based on
FY17E earnings. We have adjusted the consolidated cash and investments for the holding
company’s investment in other businesses and for cash and investments in the securities
lending business.
Table 2: Valuation methodology
Business Parameter Multiple
Valuation
(₹ mn)
Lending & fund-based activities Price/book value (P/BV) 1.5x ~30,254
IB and securities Price/earnings (P/E) 12x ~13,785
Asset management % of AUM 4% ~4,268
Asset reconstruction Price/book value 1.5x ~4,774
Alternative asset management Price/book value 1.3x ~927
Other investments and cash ~2,827
Overall equity valuation (₹ mn) Book value
Number of shares 789
Fair value estimate ₹70
Source: CRISIL Research
16
One-year forward P/E band One-year forward EV/EBITDA band
Source: NSE, CRISIL Research Source: NSE, CRISIL Research
P/E – premium / discount to CNX 500 P/E movement
Source: NSE, CRISIL Research Source: NSE, CRISIL Research
0
20
40
60
80
100
120
Oct-
09
Ja
n-1
0
Apr-
10
Ju
l-10
Oct-
10
Feb
-11
May-1
1
Aug
-11
No
v-1
1
Mar-
12
Ju
n-1
2
Sep
-12
De
c-1
2
Mar-
13
Ju
l-13
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-14
No
v-1
4
Feb
-15
May-1
5
Aug
-15
De
c-1
5
Mar-
16
Ju
n-1
6
(₹)
JM 4x 8x 12x 16x 20x
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Oct-
09
Ja
n-1
0
Apr-
10
Ju
l-10
Oct-
10
Feb
-11
May-1
1
Aug
-11
No
v-1
1
Mar-
12
Ju
n-1
2
Sep
-12
De
c-1
2
Mar-
13
Ju
l-13
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-14
No
v-1
4
Feb
-15
May-1
5
Aug
-15
De
c-1
5
Mar-
16
Ju
n-1
6
(₹ mn)
EV 4x 6x 8x 10x
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
Oct-
09
Ja
n-1
0
Apr-
10
Ju
l-10
Oct-
10
Feb
-11
May-1
1
Aug
-11
No
v-1
1
Mar-
12
Ju
n-1
2
Sep
-12
De
c-1
2
Mar-
13
Ju
l-13
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-14
No
v-1
4
Feb
-15
May-1
5
Aug
-15
De
c-1
5
Mar-
16
Ju
n-1
6
Premium/Discount to CNX 500Median premium/discount to CNX 500
0
5
10
15
20
25
30
35
Oct-
09
Ja
n-1
0
Apr-
10
Ju
l-10
Oct-
10
Feb
-11
May-1
1
Aug
-11
No
v-1
1
Mar-
12
Ju
n-1
2
Sep
-12
De
c-1
2
Mar-
13
Ju
l-13
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-14
No
v-1
4
Feb
-15
May-1
5
Aug
-15
De
c-1
5
Mar-
16
Ju
n-1
6
(Times)
1yr Fwd PE (x) Median PE
+1 std dev
-1 std dev
17
CRISIL IER reports released on JM Financial Ltd
Date Nature of report
Fundamental
grade Fair value
Valuation
grade
CMP
(on the date of report)
28-Dec-09 Initiating coverage 4/5 ₹57 5/5 ₹41
02-Feb-10 Q3FY10 result update 4/5 ₹57 5/5 ₹41
01-Jun-10 Q4FY10 result update 4/5 ₹50 5/5 ₹38
19-Aug-10 Q1FY11 result update 4/5 ₹45 5/5 ₹34
03-Nov-10 Q2FY11 result update 4/5 ₹45 4/5 ₹40
27-Jan-11 Detailed Report 4/5 ₹45 5/5 ₹22
21-Feb-11 Q3FY11 result update 4/5 ₹45 5/5 ₹25
14-Jun-11 Q4FY11 result update 4/5 ₹42 5/5 ₹24
04-Aug-11 Q1FY12 result update 4/5 ₹42 5/5 ₹22
08-Nov-11 Q2FY12 result update 4/5 ₹33 5/5 ₹19
24-Nov-11 Detailed Report 4/5 ₹36 5/5 ₹15
20-Feb-12 Q3FY12 result update 4/5 ₹36 5/5 ₹18
27-June-12 Q4FY12 result update 4/5 ₹36 5/5 ₹12
29-Aug-12 Q1FY13 result update 4/5 ₹36 5/5 ₹14
28-Nov-12 Q2FY13 result update 4/5 ₹36 5/5 ₹17
06-Dec-12 Detailed Report 4/5 ₹36 5/5 ₹18
05-Mar-13 Q3FY13 result update 4/5 ₹36 5/5 ₹16
07-June-13 Q4FY13 result update 4/5 ₹36 4/5 ₹29
10-Sep-13 Q1FY14 result update 4/5 ₹36 5/5 ₹24
08-Nov-13 Q2FY14 result update 4/5 ₹36 5/5 ₹28
21-Feb-14 Q3FY14 result update 4/5 ₹36 5/5 ₹26
23-May-14 Q4FY14 result update 4/5 ₹42 4/5 ₹37
12-Aug-14 Q1FY15 result update 4/5 ₹49 4/5 ₹40
11-Nov-14 Q2FY15 result update 4/5 ₹49 3/5 ₹47
23-Feb-15 Q3FY15 result update 4/5 ₹70 5/5 ₹53
23-Jun-15 Detailed report 4/5 ₹70 5/5 ₹46
18-Aug-15 Q1FY16 result update 4/5 ₹70 5/5 ₹53
08-Dec-15 Q2FY16 result update 4/5 ₹70 5/5 ₹37
27-June-16 Detailed report 4/5 ₹70 5/5 ₹51
18
Company Overview
Established in 1973, JM Financial is an integrated financial services player, offering a wide
range of capital market products and services to corporates, HNIs and retail investors
through its subsidiaries / joint ventures / associate companies.
Organisational structure
Source: Company, CRISIL Research
It has a diversified product portfolio, comprising IB, broking (institutional and retail),
commodity broking, portfolio management, asset management, NBFC, PE and ARC
businesses. These businesses are managed as strategic business units and organised as
separate companies headed by a team of professionals.
JM Financial Asset
Management
Ltd.
(Mutual Fund
Management)
Infinite India Investment Mgmt Ltd.
(Real Estate Asset Mgmt)
JM FinancialInvestment
Managers Ltd
(Private Equity Asset Mgmt.)
JM Financial Asset
Reconstruction
Co. Pvt. Ltd.
(Asset
Reconstruction)
JM Financial Trustee Company Pvt.
Ltd(Trusteeship)
100% 53.5% 90% 100% 100%50.01%
9%
91%
JM Financial Overseas
Holdings Pvt. Ltd.
(MauritiusInvestment
Advisor)
100%
100%
JM Financial Limited
Core Investment Holding Co.
JM Financial Singapore Pte
Ltd
SingaporeCorporate
Finance Advisory & Financial Advisory)
Astute Investments
JM Financial Securities Inc.
(USA)
100%
JM Financial Properties and Holdings Ltd.
(Property Holding)
100%
25%
CR Retail Malls (India) Ltd.
(Rental of Property)
SEBI Regulated
Others
Holding Co
Companies outside India
RBI Regulated
JM Financial Credit
Solutions
Limited
(NBFC)
50%
JM Financial Products Ltd.
(NBFC)
100%
JM Financial Commtrade
Ltd
(Commodity Broking)
40%
100% 60%
JM Financial Insurance
Broking Pvt
Ltd
100%
Note Includes Equity + CCPS
JM Financial Institutional
Securities Ltd.
(Merchant Banking &
Institutional equity)
JM Financial Services Ltd.
(Stock Broking & Investment
Advisory)
4.2%
4.2%
JM Financial Capital Limited
100%
19
Milestones
1973 ● 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 IB and securities broking services
2006 ● Launch of PE fund, JM Financial India Fund, with US-based Old Lane 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
2008-12 ● Acquired the remaining 40% stake in ASK Securities and rechristened JM Financial Institutional Securities Pvt. Ltd
● Strategic co-operation with Rand Merchant Bank of South Africa to offer M&A advisory services to Indian and African
corporates
● Expanded to international markets
● Commenced asset reconstruction business
2012-till
date ● Announced partnership in real estate NBFC, with an investment made by Vikram Pandit
Source: Company
20
Annexure: Financials
# Abridged financials
Source: CRISIL Research
Income statement Balance Sheet
(₹ mn) FY13 FY14 FY15 FY16# FY17E (₹ mn) FY13 FY14 FY15 FY16# FY17E
Operating income 10,416 10,020 13,984 16,847 20,425 Liabilities
EBITDA 6,426 6,050 9,554 12,252 14,712 Equity share capital 752 755 784 789 789
EBITDA margin 61.7% 60.4% 68.3% 72.7% 72.0% Reserves 19,855 21,216 24,646 28,306 31,130
Depreciation 122 152 181 203 188 Minorities 1,403 1,650 6,546 6,685 7,056
EBIT 6,304 5,897 9,374 12,049 14,524 Share w arrants - - - - -
Interest 3,763 3,078 4,202 5,121 7,007 Net worth 22,010 23,621 31,976 35,780 38,975
Operating PBT 2,542 2,819 5,172 6,929 7,517 Convertible debt - - - - -
Other income (2) (13) (2) - - Other debt 42,691 29,927 47,239 66,707 71,239
Exceptional inc/(exp) (20) (20) (13) - - Total debt 42,691 29,927 47,239 66,707 71,239
PBT 2,519 2,785 5,157 6,929 7,517 Deferred tax liability (net) 954 906 873 853 863
Tax provision 729 784 1,557 2,224 2,405 Total liabilities 65,655 54,453 80,088 103,340 111,077
Assets
(39) (94) 301 699 371 Net f ixed assets 213 1,178 3,334 3,403 3,147
PAT (Reported) 1,829 2,095 3,300 4,005 4,740 Capital WIP 12 14 25 - -
Less: Exceptionals (20) (20) (13) - - Total fixed assets 225 1,193 3,359 3,403 3,147
Adjusted PAT 1,849 2,116 3,312 4,005 4,740 Investments 5,590 4,801 5,383 5,099 5,099
Current assets
Inventory (securities held as stock in trade) 5,978 5,342 3,510 2,569 2,238
Sundry debtors 2,253 2,292 2,627 3,548 3,837
Ratios Loans and advances 40,576 34,404 59,397 79,669 102,126
FY13 FY14 FY15 FY16# FY17E Cash & bank balance 3,840 4,139 2,031 15,268 848
Growth Marketable securities 10,443 5,750 7,311 - -
Operating income (%) 20.7 (3.8) 39.6 20.5 21.2 Total current assets 63,090 51,928 74,876 101,054 109,049
EBITDA (%) 33.8 (5.9) 57.9 28.2 20.1 Total current liabilities 4,051 4,568 4,650 7,269 7,271
Adj PAT (%) 52.5 14.4 56.5 20.9 18.4 Net current assets 59,039 47,360 70,226 93,785 101,778
Adj EPS (%) 52.1 13.9 50.3 20.6 18.4 Intangibles/Misc. expenditure 802 1,100 1,120 1,053 1,053
Total assets 65,655 54,453 80,088 103,340 111,077
Profitability
EBITDA margin (%) 61.7 60.4 68.3 72.7 72.0 Cash flow
Adj PAT Margin (%) 17.6 20.9 23.6 23.8 23.2 (₹ mn) FY13 FY14 FY15 FY16# FY17E
RoE (%) 9.1 9.9 13.9 14.7 15.5 Pre-tax profit 2,539 2,806 5,170 6,929 7,517
RoCE (%) 10.9 10.0 14.1 13.3 13.7 Total tax paid (747) (832) (1,590) (2,245) (2,395)
RoIC (%) 12.5 10.2 13.4 12.8 13.0 Depreciation 122 152 181 203 188
Working capital changes (11,235) 7,285 (23,413) (17,633) (22,413)
Valuations Net cash from operations (9,321) 9,412 (19,653) (12,747) (17,103)
Price-earnings (x) 20.9 18.4 12.1 10.0 8.5 Cash from investments
Price-book (x) 1.7 1.6 1.2 1.1 1.0 Capital expenditure (96) (1,419) (2,366) (181) 67
EV/EBITDA (x) 10.6 9.9 8.8 8.0 8.0 Investments and others (9,997) 5,482 (2,143) 7,595 -
EV/Sales (x) 7.2 6.5 6.5 5.8 5.8 Net cash from investments (10,093) 4,063 (4,509) 7,415 67
Dividend payout ratio (%) 36.7 21.3 32.1 23.7 20.0 Cash from financing
Dividend yield (%) 1.8 1.2 2.7 2.4 2.4 Equity raised/(repaid) 55 88 557 5 (0)
Debt raised/(repaid) 10,639 (12,765) 17,312 19,468 4,532
B/S ratios Dividend (incl. tax) (837) (586) (1,265) (1,131) (1,131)
Current ratio (x) 15.6 11.4 16.1 13.9 15.0 Others (incl extraordinaries) 15 67 5,437 225 (786)
Debt-equity (x) 1.9 1.3 1.5 1.9 1.8 Net cash from financing 9,871 (13,196) 22,042 18,568 2,615
Net debt/equity (x) 1.3 0.8 1.2 1.4 1.8 Change in cash position (9,522) 299 (2,108) 13,237 (14,420)
Interest coverage 1.7 1.9 2.2 2.4 2.1 Closing cash 3,840 4,139 2,031 15,268 848
Quarterly financials
(₹ mn) Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16
Total operating income 3,772 3,665 3,929 3,830 4,016
Change (q-o-q) 41.6% -2.8% 7.2% -2.5% 4.9%
EBITDA 2,521 2,574 2,753 2,706 2,913
Per share Change (q-o-q) 48.1% 2.1% 7.0% -1.7% 7.6%
FY13 FY14 FY15 FY16# FY17E EBITDA margin 66.8% 70.2% 70.1% 70.7% 72.5%
Adj EPS (₹) 2.5 2.8 4.2 5.1 6.0 Reported PAT 977 983 1,071 1,071 1,125
CEPS 2.6 3.0 4.4 5.3 6.2 Adj PAT 922 870 930 723 973
Book value 29.3 31.3 40.8 45.3 49.4 Change (q-o-q) 58.1% -5.6% 6.9% -22.3% 34.6%
Dividend (₹) 0.9 0.6 1.4 1.2 1.2 Adj PAT margin 24.4% 23.7% 23.7% 18.9% 24.2%
Actual o/s shares (mn) 752 755 784 789 789 Adj EPS 1.2 1.1 1.2 0.9 1.2
Minority interest/Share of
profit from associates
CRISIL Research Team
Senior Director
Nagarajan Narasimhan CRISIL Research +91 22 3342 3540 [email protected]
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Last updated: April 2016
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