Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established track record in capital market supported by strong risk management systems: The group has emerged as the leading company engaged in proprietary trading and broking activities in the stock market for more than four decades. Its in-house algorithm software developed by a team of experienced and professional software developers provides them an edge in terms of low system latency and minimal human intervention.

The promoters, Mr Pankaj Shah (Managing Director of DAL), Mr Shailesh Shah, Mr Harendra Shah and Mr Rajendra Shah have been associated with the capital market industry for more than three decades. They are now supported by the second generation, who have also built requisite understanding and knowledge of the industry.

The company has a strong risk management system and a risk-averse approach to trading, as there are no directional trades executed. The management is conservative in its approach and maintains sufficient liquidity required for placing margins. The trades are executed through automated algorithmic software which calculates the hedge ratio considering market volatility and volume; and the position is hedged automatically. Trades are executed as per the set parameters in the algorithmic software and the traders can trade only within these parameters. Also, the group has a real-time risk monitoring system which ensures there are no errors. Human intervention is mitigated as the final execution of trades is done after the risk management checks. The group has a dedicated risk management team of five individuals headed by the promoter, Mr Pankaj Shah.

Adequate capitalisation: Capitalisation is adequate for the current scale of operations, with consolidated networth of the group (net of inter-company investments) at Rs 2,728 crore as on September 30, 2024 (Rs 2,537 crore as on March 31, 2024). The group has been able to build up the networth (Rs 2,206 crore and Rs 1,968 crore as on March 31, 2023, and March 31, 2022, respectively) relying on internal accruals. The group predominantly utilises non-fund based limits in the form of bank guarantees and overdraft facilities for margin purposes. With majority of the borrowings being non-fund based, gearing remains low at 0.1 times as on March 31, 2024. Further, majority of the borrowings are inter-group borrowings. On a standalone basis, DAL had a networth of Rs 963 crore as on December 31, 2024.

Weaknesses:

High reliance on a single revenue stream: With proprietary trading being the mainstay of the group, it remains exposed to income volatility as any adverse change may materially impact the earnings profile. The earnings profile is also subject to regulatory changes as well as fluctuations in volumes and volatility. The group reported a profit after tax (PAT) and return on equity (RoE) of Rs 386 crore and 16.3%, respectively, for fiscal 2024, improved from Rs 281 crore and 13.5%, respectively, for fiscal 2023. For the six months ended September 30, 2024, the trend continued, with a PAT of Rs 241 crore and RoE of 18.3% (annualised) with DAL attributing to 57% of the group PAT. In the third quarter of fiscal 2025, the earnings of the group were impacted by decline in high frequency trading (HFT) due to the recent regulatory change of limiting the weekly index derivative products to only one benchmark index per exchange. As a result, an impact was visible on one of the group entities which primarily deployed this strategy. Going forward, DAL’s contribution to the group’s income is expected to increase given the resultant focus and growth in the delta neutral hedged strategies. In recent years, proprietary trading activities have seen significantly intense competition with sizeable investments in physical infrastructure and hardware. Therefore, the ability of the group to sustain its position, maintain best in class trading systems and capitalise on opportunities will remain a key monitorable.

Susceptibility to regulatory changes and volatility inherent in capital market businesses: 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 3-4 years. Some of these include upfront margin collection for intraday positions and limiting the use of power of attorney, with the most recent being a revised Equity Index Derivatives Framework that is expected to hit derivatives volumes, ultimately impacting the revenue and profitability of brokers. This development comes alongside a revision in the transaction charge structure introduced by market infrastructure institutions (MIIs) on September 27, 2024, which will directly impact profitability of brokers, especially for discount brokers. However, as Dolat group is not in the retail broking business, this regulation is also not expected to have an impact on the operations on an on-going basis. Furthermore, with an aim to increase investor protection and market stability, SEBI has also introduced measures to be implemented in a phased manner. These include upfront collection of margin premium, removal of cross margin benefit on offsetting positions, intraday monitoring of index derivatives position limits, increase in minimum contract size, increase in margin on short options contracts and, lastly, limiting weekly index derivative products to just one benchmark index per exchange. Additionally, on account of the announcement in the Union Budget 2024-2025, the extent of impact of the increased tax rates in long-term capital gains (LTCG), short-term capital gains (STCG) and securities transaction tax (STT) on the earnings profile of the broking companies is to be monitored.

As far as the Dolat group is concerned, the business is primarily confined to proprietary business and they don’t cater to the retail broking business. However, some of the recent regulations, particularly around higher STT charges, reduction in weekly index expiry derivative products, which affects the HFT business; and lastly any prolonged decline in derivative volumes would have a direct impact on their business. This is offset by the size and scale of the group and higher contribution from other strategies, particularly delta hedging from DAL’s desk. Crisil Ratings believes that these regulations are expected to benefit the industry with increased transparency and de-risk the broking and trading platform for retail customers. Going ahead, the company’s ability to adapt to the dynamic regulatory environment while continuing to grow their business will be monitored on an ongoing basis.