Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB-/Stable/CRISIL A3’ ratings on the bank facilities of Asit C. Mehta Investment Interrmediates Limited (ACMIIL).

 

The ratings continue to reflect the promoters’ financial flexibility, extensive experience and healthy reputation in the Indian capital markets and the company’s adequate risk management systems and processes. These strengths are partially offset by average earnings, modest market position and susceptibility to uncertainties inherent in the capital markets.

 

During fiscal 2024, Cliqtrade Stockbrokers Pvt Ltd, promoted by Mr Mahavir Lunawat and Ms Madhu Lunawat (founders of Pantomath Financial Services Group [Pantomath Group]), increased its stake in Asit C Mehta Financial Services Ltd (ACMFS) to 52.20% from 37.19%. Till then, the majority shareholding in ACMFS had been with the Mehta family. ACMFS is the parent company of ACMIIL and holds 94.58% stake in the latter, with the remaining stake held by Ms Deena Mehta. This change in the promoter is a part of the succession planning with the understanding that the Lunawat family will henceforth provide capital support to the company.

 

Pantomath Group is primarily into investment banking and initial public offering (IPO) solution services, and is expanding its product profile by venturing into different financial services such as mutual funds, alternative investment funds (AIFs), broking. ACMIIL brings in the broking platform and allied activities, along with a client base for cross selling, consequently supporting the product offerings of Pantomath Group. Likewise, ACMIIL will benefit from the larger client base and network of Pantomath Group, and will receive funding support. CRISIL Ratings believes the market position of ACMIIL will improve with the synergies coming in from Pantomath Group and support from the Lunawat family. However, the ability of ACMIIL to scale up operations across product segments profitably will remain monitorable.

 

ACMIIL has incurred losses in the past two years. For fiscal 2024, the company reported a loss of Rs 5.39 crore and total income of Rs 44.93 crore, compared with a loss of Rs 2.67 crore and total income of Rs 31.64 crore in the previous fiscal. The decline in the bottom line is largely attributed to increased operating costs, particularly employee and related costs. To diversify its revenue streams, the company is focusing on wealth management solution and distribution business. It has hired seasoned professionals and made significant investments in technology over the past couple of years. As a result, the cost-to-income ratio rose to 112% in fiscal 2024 from 95% on average between fiscals 2021 and 2023. The losses have eroded the company’s networth, weakening the gearing to 5.8 times as on March 31, 2024, from 1.7 times as on March 31, 2023. Improvement in earnings, and consequently in capital structure, over the next couple of quarters will remain monitorable

Analytical Approach

CRISIL Ratings has evaluated the standalone credit risk profile of ACMIIL and taken into consideration the strong financial flexibility of the promoters to support the company through equity infusions on an ongoing basis and in times of necessity.

Key Rating Drivers & Detailed Description

Strengths:

Promoters’ financial flexibility and healthy reputation in the financial services industry

The promoters have experience of over 30 years in the retail equity broking business. Mr Asit Mehta, ACMIIL’s chairman, is a qualified chartered accountant, securities law graduate, and a seasoned capital market professional. He has been engaged in equity broking since 1983 through a proprietorship firm, and incorporated ACMIIL in 1993. His experience helps in providing guidance and direction to ACMIIL, which operates through associates across India. Ms Deena Mehta, the managing director of ACMIIL, is a postgraduate in management studies (finance) and is an associate member of the Institute of Chartered Accountants of India. She oversees the company’s daily operations. Mr Mahavir Lunawat has been into financial services for over 20 years. He is the chairman of Association of Investment Bankers of India. Ms Madhu had stints with Infosys, ASREC (India) Ltd, and served as the chief financial officer of Edelweiss ARC before joining the board of Pantomath Group.

 

The promoters have high financial flexibility to infuse capital for scalability and sustainability. CRISIL Ratings believes the promoters will provide support on ongoing basis and in periods of distress.

 

Adequate risk management systems and processes

ACMIIL has adequate risk management systems and processes in place. It has limited receivables exposure and strict internal controls for managing risks. The company uses a customised version of the ‘Now’ software developed by the National Stock Exchange to monitor client accounts in real time. It also uses a client-grading methodology, which grades clients on a three-point scale, based on parameters such as turnover details, brokerage earned and performance of account. The company has ventured into arbitrage trading, wherein it focuses on delta hedging. However, adequate risk mitigation measures have been implemented to minimise balance sheet risks.

 

Weaknesses:

Average earning, marked by high operating expenses

The earnings profile of the company has been constrained by high operational costs. In fiscal 2024, the company reported a loss of Rs 5.39 crore and total income of Rs 44.93 crore, compared with a loss of Rs 2.67 crore and total income of Rs 31.64 crore in fiscal 2023. During fiscal 2024, cost to income stood at 112%, due to higher operating expense. Given the inherent volatility in capital markets, the company’s ability to turn its bottomline to positive territory and improve its earnings remains monitorable.

 

Modest market position

ACMIIL’s market share in the retail equity broking business (measured in terms of turnover) remained modest, at 0.001% in fiscal 2024. Being a full-service broker, the company is likely to focus on high-networth individuals (HNIs), where yield on overall turnover is higher. However, in terms of customer growth, the company may not be as competitive as discount brokers on account of low tariff. The customer base remains small at 23,000-24,000 clients. The company avoids acquiring customers from competitors.

 

While there has been an increase in the number of active clients, ACMIIL remains a small company, with a share of 0.06% of the overall active clients at the exchange level as of March 2024. ACMIIL continues to operate largely as a full-service broker and charges a commission from clients based on overall turnover. Full-service brokers have remained less competitive than discount brokers in terms of acquiring new clients over the last 8-12 quarters. Nevertheless, in line with the industry, the company has launched its discount broking plan to attract more customers.

 

Despite benefits from presence in smaller cities through business and marketing associates, ACMIIL’s market position will remain modest over the medium term.

 

Susceptibility to uncertainties inherent in the capital markets business

The broking industry has seen constant regulatory revisions in the past couple of years. With the objective of enhancing transparency and limiting the misuse of funds, the Securities and Exchange Board of India (SEBI) introduced a few regulations in the past year. Some of these include upfront margin collection for intraday positions and limiting the use of power of attorney. The industry has been undergoing changes pertaining to margin collection and pledging practices effective September 1, 2020. The new margin collection practices will change the vintage business model of small and mid-sized broking companies, which rely on relationships by offering differential leverage and margin payment avenues to clients. This could reduce their competitiveness in favour of larger digital and bank-based brokers. The regulations for upfront margin collection for intraday trading are expected to decrease leverage in the industry to 4-5 times from the current 10-15 times. This essentially means the level of positions (in terms of volume) taken by retail investors will be impacted.

 

SEBI recently observed that some market infrastructure institutions (MIIs) were following a volume-based, slab-wise charge structure. These charges are levied in lieu of various services offered by MIIs and are recovered from the end clients by members (stockbrokers, depository participants, clearing members). SEBI also observed that members generally recover such charges from the end clients on a daily basis whereas MIIs receive aggregate charges from the members on a monthly basis. As a result, aggregated charges collected by the members from the end clients are higher than the end of month charges paid to the MII (due to the slab benefit). The difference is equivalent to a discount or rebate received by the members. Moreover, this may result in an incorrect or misleading disclosure to the end client about the charges levied by MIIs. With respect to broking companies, CRISIL Ratings notes that the discount/rebate benefit has supported the profitability of brokers. The extent, however, varies depending on factors such as volume and the rebate received. Hence, assuming the current charge structure on an as-is basis, the removal of the discount/rebate will have an immediate impact on the earnings. However, the actual extent of impact will depend on two factors: (1) the charges under the new redesigned structure to be finalised by the MIIs, and (2) the ability of brokers to reassess their revenue and cost structures.

 

Given that this circular will be effective from October 1, 2024, CRISIL Ratings believes that broking companies have adequate time to reassess their revenue and cost models to offset the impact on earnings. The final impact will be known over the next 3-4 months as all stakeholders in the market attune to the new charge structure and revised business models.

 

Additionally, as announced in the Union Budget for fiscal 2025, the tax rates on long-term capital gains (LTCG), short-term capital gains ( STCG) and securities transaction tax (STT) have been increased, and the impact on the earnings of broking companies needs to be seen.

 

CRISIL Ratings will continue to monitor regulations and the impact on the Asit C Mehta group’s performance on an ongoing basis.

Liquidity: Adequate

Liquidity is adequate for the current scale of operations. ACMIIL is a broking company and maintains cash of Rs 1.0-1.5 crore on a steady state basis. As on June 30, 2024, the company had cash and bank balance of Rs 3 crore. The company covers its interest and commission obligation through interest income and accrual from the broking business. The overdraft facility and short-term loan were utilised 90-95% over the 12 months through March 2024 and the utilisation is expected to remain at a similar level.

Outlook: Stable

CRISIL Ratings believes ACMIIL will continue to benefit from the extensive experience of its promoters and maintain adequate risk management systems.

Rating Sensitivity Factors

Upward Factors

• Cost-to-income ratio remaining below 70% on a sustained basis
• Increase in market share in the client broking segment

 

Downward Factors

• Decline in earnings with cost-to-income ratio remaining above 100% for the next two quarters
• Increase in gearing to above 5 times on a steady state basis

About the Company

ACMIIL is the flagship company of the Asit C Mehta group. The company undertakes equity and derivatives trading, advisory, mutual fund and IPO distribution and depository services. ACMIIL was founded by Mr Asit C Mehta in 1986 as a proprietary business engaged in equity broking. By fiscal 1993, the firm had entered the debt, money, capital and currency markets as broker/advisor. In December 1993, the firm was reconstituted as a company. In the retail broking business, ACMIIL has presence across India through three branches and 149 business associates as on March 30, 2024

Any other information: Not Applicable