Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to the Rs 125 crore commercial paper programme and Rs 125 crore short term non-convertible debentures of 5paisa Capital Ltd (5paisa).

 

The rating on 5paisa reflects the expectation of strong support from the promoter and promoter owned entities, healthy capitalisation and improving market position of 5paisa in the equity broking segment. These strengths are constrained by the intense competition and inherent uncertainties in the capital markets business, and the moderate, albeit improving earnings profile of the company.

 

5paisa started operations as a discount brokerage platform in 2016, and was a wholly-owned subsidiary of IIFL Holdings Ltd (IIFL Holdings; erstwhile listed holding company of IIFL group entities) until 2016. Post the demerger of 5paisa from IIFL Holdings in fiscal 2017, and the subsequent listing of the company, the shareholding pattern mirrored that of IIFL Holdings. As of June 30, 2021, the promoter and promoter group held 29.97% stake and the Fairfax group owned 44.72%. The promoters have consistently participated in the capital raise done by 5paisa, including the recent preferential issue of Rs 250 crore in May 2021.

 

Given the cyclical nature of the broking business, volume and earnings are highly dependent on the level of trading activity in the capital markets. Since March 2020, the stock markets have seen high retail participation and daily trading volume, coinciding with the lockdown to contain the Covid-19 pandemic and people confined within their homes. During this period, the industry has seen significant proportion of clients added in the age bracket of 25-30 years, with many being first-time investors. This trend has benefitted all broking players, including 5paisa. The company has around 56% of customers below 30 years of age, with 84% as first-time investors as of March 2021.

 

The company was able to onboard more than 8 lakh customers in fiscal 2021, with the total client base expanding to 16.5 lakh customers as of June 2021, from 61,000 customers as of March 2018. Consequently, the company was able to increase its market share, especially in the cash segment.

 

Supported by a healthy broking income, the company managed to break-even in fiscal 2021, and reported a profit after tax of Rs 14.69 crore on a total income of Rs 194.58 crore, as against a loss of Rs 7.89 crore on a total income of Rs 108.27 crore in the previous fiscal. Profits for the quarter ended June 30, 2021 stood at Rs 7.20 crore. Profitability should improve as the cost of acquisition normalises and operating leverage begins to flow in from sizeable recent investments in ramping up the technology infrastructure.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has consolidated the business and financial risk profiles of 5paisa and its subsidiaries. The rating also factors in the expectation of strong support from the promoter and promoter owned entities, primarily IIFL Finance Ltd (IIFL Finance; rated ‘CRISIL AA/CRISIL PP-MLD AAr/Stable/CRISIL A1+’).

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

* Expectation of strong support from promoters and promoter group companies

The promoters, Mr Nirmal Jain and Mr R Venkataraman are first-generation entrepreneurs and veterans in the capital market business. Their experience has helped the IIFL group diversify its operations across lending, securities and wealth management. The promoters and promoters group held 29.97% stake in 5paisa as on June 30, 2021 and remain committed to future growth. They have participated in the capital raising activities of the company, including the recent fund raise of Rs 250 crore announced in April 2021. The promoters continue to provide strategic oversight on an ongoing basis. Further, 5paisa benefits from the linkages with other promoter-owned entities – IIFL Finance, IIFL Securities Ltd (IIFL Securities; rated CRISIL A1+) and IIFL Wealth Management Ltd (CRISIL PP-MLD AAAr/Stable/CRISIL A1+), which have provided funding support mainly via inter-corporate deposits (ICD). As of June 2021, the company has a board approved ICD line of Rs 600 crore together from IIFL Group Companies.

 

* Improving market share in the equity broking segment

5paisa has emerged has one of the top 10 brokers in India, though it started operations only in fiscal 2017. The company mainly offers products and services through an online platform and mobile application. Backed by its low-cost pricing strategy, the company could onboard more than 8 lakh customers in fiscal 2021, out of the total client base of 13.46 lakh. 5paisa has become the sixth largest broker in terms of active clients. As of June 2021, the company had 10.02 lakh active customers on the National Stock Exchange (NSE), a sharp jump from 4.34 lakh active customers in March 2020 and 1.06 lakh in March 2019. Active market client share rose to 4.47% as of June 2021 from 4.02% in March 2020 and 1.21% in March 2019. In terms of overall turnover, the market share (as per CRISIL’s calculation[[1]]) in the cash segment stands at ~2.7% in fiscal 2021, and market share in F&O segment stands at ~1.4% in fiscal 2021.

 

* Healthy capitalisation

Regular fund infusions have helped capitalisation improve significantly over the past few years. The company raised more than Rs 100 crore in fiscal 2020, and announced a further raise of Rs 250 crore via preferential issue in April 2021, of which Rs 205 crore has already been infused and the balance is expected to be infused in current fiscal. Reported networth and gearing stood at Rs 156.08 crore and 1.5 times, respectively, as on March 31, 2021 (Rs 138.24 crore and 1.6 times, respectively, as on March 31, 2020). Post the recent capital infusion, networth and gearing has improved and stood at Rs 365.7 crore and 0.74 time, respectively, as on June 30, 2021. The company plans to utilise the funds raised to grow its margin trading facility (MTF) book, invest in technology and acquisition of customers over the medium term. While borrowings will also increase with growth in portfolio, overall gearing should be moderate at 1-1.5 times on a steady-state basis.

 

Networth remains comfortable for the current and proposed scale of operations and will continue to lend stability to operations, even amid volatile phases in the capital market.

 

Weaknesses

* Exposure to intense competition and uncertainties inherent in capital-market-related businesses, including regulatory changes

As businesses are restricted within the capital market, 5paisa faces intense competition from multiple players offering low-cost products. The industry has seen a huge transformation in the last three years, with the entry of technology-based discount brokers, who are dominating the market share. The proposed entry of players with deeper pockets may intensify pricing pressure across the industry.

 

The key broking business remains exposed to economic, political and social factors that drive investor sentiment. Given the cyclicality associated with the capital market, brokerage volume and earnings are highly dependent on the level of trading activity. Specifically since March 2020, the stock markets have seen high retail participation. Upward movement of the key benchmark indices during this period, has also contributed to the lure of stock market trading and potential gains. Nevertheless, sustainability of market momentum remains a key monitorable.

 

Further, over the last couple of years, the broking industry has witnessed continuous changes in regulations. In order to enhance transparency and curb misuse of funds, SEBI has introduced few regulations in the last one year. These include upfront margin collection for intraday positions and restricting use of the power of attorney. Changes pertaining to margin collection and pledging practices also became effective from September 1, 2020. The newer margin collection practices will change the vintage business model of various small to mid-sized broking companies that relied on relationships, by offering differential leverage and margin payment avenues to clients. This may also lead to a decline in overall competitiveness towards larger digital and bank-based brokers.

 

Regulations of upfront margin collections for intraday trading are likely to reduce leverage to 4-5 times from 10-15 times prevalent across the industry. This reduction in leverage will also affect the level of positions (in terms of volume) taken by retail investors. Impact of this change on performance of 5paisa will be a monitorable.

 

Furthermore, as per new regulations, shares owned by investors can be lien marked with the respective broker instead of having to follow the current practice of transferring it to the broker’s pool account. CRISIL Ratings understands that most top brokers (including 5paisa) have already streamlined their systems in accordance with the new norms. However, small and mid-sized brokers could be more impacted, as they do not have advanced IT infrastructure and risk management systems. Though such revised regulations may impact the performance in the near term, the industry will benefit from increased transparency and the de-risk broking platform for retail customers in the longer run.

 

* Moderate, albeit improving, earnings profile

5paisa reported a profit after tax (PAT) of Rs 14.69 crore on a total income of Rs 194.58 crore in fiscal 2021, after reporting losses in the previous years. Though operating expenses were higher in fiscal 2021, improvement in revenue led by overall market turnover, supported a 70% growth in broking & related income. The company reported profit of Rs 7.2 crore during the quarter ended June 30, 2021.

 

On the operating expenses front, as operations commenced in 2016, the company has made significant investments in technology infrastructure and relevant personnel hired across verticals. As it is still in the growth phase, operating expenses may remain high and stabilise gradually. Nevertheless, the scale up of operations should improve the operating leverage and overall profitability, and the cost-to-income ratio should reduce from ~90% levels currently.

 

While the company is diversifying across segments like P2P lending, cross sell etc., majority of these may take time to become significant contributors to profitability and broking revenue will be key to overall earnings.

 

Ability to manage cost and improve earnings profile across market cycles will be a key monitorable.

[[1]] CRISIL’s market share calculation is based on a two legged approach (both buy and sell aspects of the transaction)

Liquidity : Strong

Liquidity remains comfortable as a result of the agency nature of business and healthy unutilised bank overdraft (OD)/WCDL facilities of Rs 100 crore as on June 30, 2021. Furthermore, the company had unutilised OD against fixed deposits (FDs) of Rs 16.18 crore and liquid investments of Rs 7.99 crore as on the same date, that can be utilised as per the requirement. All the bank facilities are working capital limits, which are matched against the margin trading facility exposures extended to clients. As those short-term instruments range between 15 days and three months, the company deposits the amount received from these facilities once they are closed by the client.

Rating Sensitivity factors

Downward factors

* Any material change in the shareholding or support philosophy of the promoter or promoter group companies, impacting the quantum and timing of support

* Impact on the business risk profile, indicated by a sustained drop in market share

* Weakening of the earnings profile

About the Company

5paisa was originally incorporated as IIFL Capital Limited on July 10, 2007, and it commenced operations in 2016. The company offers financial products through its online technology platform and mobile application. It targets retail investors and high-volume traders who actively invest and trade in securities and seek DIY (do-it-yourself) services at a low cost.

 

As on June 30, 2021, the promoters and promoters group held a 29.97% stake, Fairfax group held 44.72%.

Key Financial Indicators

As on / for the year ended March 31		2021	2020
Total assets	Rs crore	866.9	623.5
Broking & Allied income	Rs crore	124.2	72.9
Total income	Rs crore	194.6	108.3
PAT	Rs crore	14.7	-7.9
Cost to total income	%	90	109
Return on networth	%	10.0	-8.6
Gearing	Times	1.5	1.6

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
5paisa P2P Limited	Full	Wholly Owned Subsidiary
5paisa Insurance Brokers Limited	Full	Wholly Owned Subsidiary
5paisa Trading Limited	Full	Wholly Owned Subsidiary