Detailed Rationale

CRISIL has reaffirmed its rating on the short-term bank facilities of Geojit Financial Services Ltd (GFSL; formerly, Geojit BNP Paribas Financial Services Ltd)  part of the Geojit group at 'CRISIL A1'.

 

The rating continues to reflect the group's adequate capitalisation, sound risk management systems, experience of the promoters in the broking business, and established presence in retail broking. These rating strengths are partially offset by the inherent uncertainties in the core business of equity broking and exposure to risks relating to sustenance of the income profile across market cycles.

 

The group’s adjusted networth was Rs 543 crore as on September 30, 2020, improving from Rs  478 crore as on March 31, 2020. It has nil fund-based debt and the gearing is likely to remain below 0.5 time over the medium term.

 

Risk management systems are sound with strict margining and square-off policies for outstanding positions. The overall trade receivables stood at Rs 109 crore as on September 30, 2020, increasing from Rs 76 crore as on March 31, 2020. The overall bad debts have remained lower than 1% of the overall loans for the past several years

 

The promoters have an experience of more than three decades in the financial services industry, having witnessed various bull and bear cycles. Further, the group has developed good brand affinity in the south Indian states of Kerala and Tamil Nadu, where it is a market leader in the equity broking segment

 

The broking industry has undergone crucial changes related to margin collection and pledging practices effective September 1, 2020. The group has comfortably adapted to the new regulations without facing operational or business challenges.

 

The group businesses are confined within the capital market industry that has been highly competitive due to multiple players offering low- cost products to clients. The industry has seen significant transformation in the three fiscals through 2020 with tech-based discount brokers entering and creating their dominance in the market. The competitive intensity is expected to continue with more players proposing to enter in this space, which may further intensify the price war. The group's key broking business remains exposed to economic, political and social factors that drive investor sentiments. Given the volatile nature of the business, brokerage volumes and earnings are highly dependent on the level of trading activity in capital markets. Specifically since March 2020, the stock markets has seen high retail participation and daily trading volumes coinciding with the lockdown and people remaining at home. The sharp upward movement of the key benchmark indices during this period has led to broad-based gains across portfolios and contributed to the lure of stock market trading. More importantly, traditional debt savings avenues are also offering relatively low interest rates. While this has benefited the group as well as other broking players, the ability to scale-up might not continue over the medium term. Hence, sustainability of the market momentum will remain a key monitorable.

 

The group’s topline and bottom line are dependent on the overall volumes in the capital market. It has witnessed several cycles of increase and decline in the overall earnings based on market conditions. While the earnings have improved significantly during the first half of fiscal 2021 with total revenue increasing by 37% to Rs 199.6 crore and profit after tax(PAT) increasing by 270% to Rs 56.8 crore over the corresponding period of the previous fiscal, sustainability of this growth remains to be seen over the medium term.

 

The group was not impacted due to the COVID-19 lockdown as there was business continuity planning in place to continue working from remote locations.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of GFSL and its subsidiaries. That’s because all these entities, together referred to as the Geojit group, have integrated operations. GFSL, the flagship company of the group, undertakes retail broking and third-party product distribution. The other group companies are The group also comprises Geojit Credits Pvt Ltd, Geojit Techloan Pvt Ltd, Geojit Technologies Pvt Ltd, Qurum Business Group Geojit Securities LLC, Geojit Investment Services Limited, Barjeel Geojit Financial services LLC, BBK Geojit securities KSC .

 

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

Key Rating Drivers & Detailed Description

Strengths:

•                  Adequate capitalisation

The group is adequately capitalised for its current and planned scale of operations. The adjusted networth was Rs 543 crore (adjusted for fixed assets, intangible assets and investment in subsidiaries) with nil gearing as on September 30, 2020, an improvement from Rs 478 crore as on March 31, 2020. However, the group is likely to make healthy dividend payout of 70-80% which will lead to a steady-state absolute net worth of Rs 450-500 crore. Also, despite the cyclical nature of the business, the group has been making profits in the past five fiscals. The gearing has been low over this period, and is expected to remain negligible over the medium term, in the absence of any aggressive growth plans for the fund-based business. The group is thus likely to remain adequately capitalised over this period. The  strong networth should continue to lend stability to operations even during volatility in the capital market.

 

•                  Sound risk management systems and extensive experience of the promoters in the equity broking industry

The group uses client-grading methodology through which clients are graded on a three-point scale, based on parameters such as turnover details, brokerage earned and performance of the account. Margin funding or loans against shares are provided to clients on the basis of collateral security (cash or other shares in his depository participant account), after maintaining the minimum margin prescribed by the regulator. When the value of shares purchased goes below 50% (average percentage; depends on type of shares) in value of the collateral provided, a square off process is initiated, thus neutralising any adverse impact of risks associated with such products. The adequate risk mitigation measures implemented should minimise balance sheet risks. Mr C J George, the group managing director, has been engaged in equity broking since the early 1980s and established Geojit in 1987. His experience helps in providing guidance and direction to the group, which operates through many associates across India.

 

•                  Strong and established market position in the retail equity broking segment

The group has significant presence in the retail equity broking segment, especially in the cash market segment as reflected in its market share of around 1.0% in the retail cash segment during the six months through September 2020, declining from 1.1% during fiscal 2020. The group largely caters to clients that have delivery-based requirements in the equity segment. On account of high speculative volumes in the intraday segment during the l6 months through September 2020, the delivery volumes as a proportion of overall cash volumes declined slightly, impacting the overall market share of the group. However, the client base remains sticky and there were steady requirements over the past several years. This helps to maintain overall turnover during low volume periods in the market. The group is largely present in the south Indian market where the retail clients largely engage in higher yielding delivery-based trade as compared with intraday and short-term trading.

 

Weakness:

•                  Vulnerability to inherent uncertainties in the core business of equity broking

The group's businesses should remain susceptible to risks related to volatility in the capital market, from which most of the revenue is derived. The broking volumes are dependent on the level of trading activity in the equity market. This market is inherently volatile, driven by economic and political factors, and investor sentiments. Global events also influence the fortunes of the domestic market. Turnover and volumes in the broking business move sharply in tandem with market sentiments. Hence, the core business is likely to continue to be driven by the state of the equity market, and remain volatile over the medium term.

 

•                  Exposure to risks related to sustenance of income profile across market cycles

The group has benefited from the high volumes in equity markets during the first half of fiscal 2021. The market has witnessed healthy participation from retail clients since March 2020 on account of high volatility in the market and ease of transacting during the past six months. As a result, the group’s topline and bottom line have improved significantly during this period. Overall income has improved by 37% year on year to Rs 199.6 crore during this period from Rs 145 crore in the corresponding period in the previous fiscal.

 

The improvement in the overall topline has led to a better bottom line and operating efficiency, with net profit improving by 270% to Rs 56.8 crore for the six months ended September 30, 2020, from Rs 15.3 crore during the corresponding period of the previous fiscal. The cost-to-income ratio has improved to 61.2% during this period from an average of 74.1% in fiscals 2018-2020. However, income will be impacted if market volumes and retail participation decline. Any significant and sustained improvement in the topline will be a key rating sensitivity factor.

Liquidity: Adequate

The group largely utilises non-fund-based facilities. The fund-based facilities are used only for meeting short-term needs. It had no debt as on September 30, 2020. The unencumbered cash reserves and the cash and bank balance was adequate Rs 88.89 crore as on September 30, 2020. The group has current investments in liquid mutual funds that can be liquidated if needed.

Rating Sensitivity Factors

Upward factors

• Scaling-up operations, thus improving and sustaining the overall retail cash market share at over 3.0% in volumes
• A significant decline in the cost-to-income ratio

 

Downward factors

• The cost-to-income ratio remaining at above 80%
• Significant weakening in capitalisation
• A substantial decline in the number of active clients

About the Group

GFSL, the flagship company of the Geojit group, was founded in 1987. The group offers services such as retail broking, depository, equity research, portfolio management, third-party product distribution, and loan against shares. As on September 30, 2020, the Geojit group had 463 offices (includes branches and franchisees) across India, and over 10,70,000 clients. It also set up broking joint ventures in Dubai, Saudi Arabia, Kuwait, and Oman, to offer equity broking and related services, mainly to non-resident Indians in these countries.

Key Financial Indicators

Particulars	Unit	H1FY21	2020	2019
Total assets	Rs Crore	1038	909	907
Total income	Rs Crore	199.7	306.4	310
Profit after tax	Rs Crore	56.8	50.9	30
GNPA	%	NA	NA	NA
Gearing	Times	0.0	0.0	0.0
Return on networth (excluding minority interest)	%	19.1	8.8	5.0

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Complexity Levels	Issue Size (Rs.Cr)	Rating Outstanding with Outlook
N.A	Bank Guarantee	N.A	N.A	N.A	NA	167	CRISIL A1
N.A	Overdraft facility	N.A	N.A	N.A	NA	30	CRISIL A1
N.A	Proposed Short Term Bank Loan Facility	N.A	N.A	N.A	NA	45	CRISIL A1

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Geojit Credits Pvt Ltd	Full	Subsidiary
Geojit Techloan Pvt Ltd	Full	Subsidiary
Geojit Technologies Pvt Ltd	Full	Subsidiary
Qurum Business Group Geojit Securities LLC	Full	Subsidiary
Geojit Investment Services Limited	Full	Subsidiary
Barjeel Geojit Financial Services LLC	Proportionate	Jointly controlled entity
Aloula Geojit Capital Company	Proportionate	Jointly controlled entity
BBK Geojit Securities KSC	Proportionate	Associate