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 and healthy reputation in the Indian capital market, 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.

 

The promoters, Ms Deena Mehta and Mr Asit C Mehta are well-known and reputed within the financial services industry. They have healthy financial flexibility and support the entities under ownership.

 

For fiscal 2023, the company reported loss of Rs 2.7 crore on total income of Rs 32.1 crore, as against net profit of Rs 6.3 crore on total income of Rs 40.1 crore in fiscal 2022. The deterioration in the bottom line was led by increase in operational costs (employee and other costs). To diversify revenue profile, the company is planning to increase its focus into discount brokerage, margin trading facilities, algorithm trading and planning to provide end to end wealth management services to clients. Therefore, company has recruited experienced talent from industry, and has made substantial investments in technological upgradation. This led to increase in the cost-to-income ratio to 108% in fiscal 2023 from 84% in fiscal 2022. Apart from increase in operational costs, the top line broking revenues have also declined by 30% to Rs 18 crore during fiscal 2023 from Rs 25 crore during fiscal 2022. CRISIL Ratings, overall believes that the ability of the company to create sizeable space in the current extremely competitive retail broking space will be key monitorable. CRISIL Rating also believes that ability of the company to yield the benefits from the investments that it has made and return to profit-making mode in fiscal 2024 will be key rating sensitivity factor.

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 high financial flexibility to infuse capital for scalability and sustainability. During fiscal 2021, preference shares valued Rs 4 crore were redeemed fully and issued on rights basis at a premium of Rs 10 each adding up to Rs 8 crore, which has been infused back into the company.  Therefore, networth and gearing on a standalone basis stood at Rs 18 crore and 1.7 times as on March 31, 2023, from Rs 22 crore and 1.4 times as on March 31, 2022. Gearing is expected to remain below 2 times over the medium term.

 

The promoters have experience of over 30 years in the retail equity broking business. Mr 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. Mr Mehta’s experience helps in providing guidance and direction to ACMIIL, which operates through associates across India. Ms Mehta is a postgraduate in management studies (finance) and is an associate member of the Institute of Chartered Accountants of India. She is the managing director of ACMIIL and oversees daily affairs.

 

Adequate risk management systems and processes

The company continues to maintain adequate risk management systems and processes. 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.

 

Weakness:

Earning profile marked by higher operating expenses:

Overall earnings profile of the company has been constrained due to high operational costs. In fiscal 23, the company reported loss of Rs 2.7 crore on total income of Rs 32.1 crore, as against net profit of Rs 6.3 crore on total income of Rs 40.1 crore in fiscal 2022. During fiscal 2023, cost to income stood at 108%, due to higher opex expense cost to income ratio of the company has remained high over 95% historically. Therefore, considering the inherent cyclical nature of the capital markets, ability of the group to sustain its earnings profile and improve its cost-to-income ratio here on, will remain monitorables.

 

Modest market position

Market share in the retail equity broking business (measured in terms of turnover) remained modest, at 0.001% in fiscal 2023 declining from 0.24% in fiscal 2020. 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 might not be as competitive as discount brokers on account of low tariff. The customer base remains small at around 23,944 clients. The company avoids acquiring customers from competitors.

 

While there has been an improvement in the number of active clients, ACMIIL remains small within the overall industry. The market share in terms of active client proportion stood at 0.06% of the overall active clients at exchange level as of March 2023. ACMIIL continues to largely operate as a full-service broker and charges a commission from its 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 also launched its discount broking plan to attract more customers.

 

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

 

Susceptibility to uncertainties inherent in the capital markets business

Over the last couple of years, the broking industry has witnessed continuous regulatory revisions. With the objective of further enhancing the transparency levels and limiting the misuse of funds, the Securities and Exchange Board of India has introduced a few regulations in the last one year. These include upfront margin collection for intraday positions and limiting the usage of power of attorney. The industry is undergoing changes pertaining to margin collection and pledging practices effective 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 is likely to lead to decline in the overall competitiveness towards larger digital and bank-based brokers.

 

The regulations of upfront margin collections for intraday trading are expected to decrease the leverage levels in the industry to 4-5 times from the current 10-15 times. This reduction in leverage essentially means that the level of positions (in terms of volume) taken by retail investors will also get impacted. The likely impact of this change on the company’s performance on an ongoing basis will be monitorable. Furthermore, as per new regulations, the 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 ACMIIL) have already streamlined their systems in accordance with the revised regulations. However, this may impact small and mid-sized brokers given their not-so-advanced IT infrastructure and risk management systems. While these revised regulations may affect the performance in the near term, in the long run, the industry will benefit from increased transparency and the de-risk broking platform for retail customers.

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 March 31, 2023, the company had cash and bank balance of Rs 11 crores. 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 58% on average over the 12 months through March 2023, and 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 remains below 70% on a sustained basis
• Increase in market share in the client broking segment

 

Downward Factors

• Deterioration in earnings with cost-to-income ratio remaining above 100% for next 3-4 quarters
• Increase in gearing to above 5 times

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 initial public offering 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 company 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, 2023

Any other information: Not applicable