Rating Rationale

Strengths
* Adequate capitalisation
The Geojit group is adequately capitalised for its current and planned scale of operations. The group's reported net worth was Rs 519 crores (adjusted for minority interest, intangible assets and deferred tax asset) with nil gearing as on March 31, 2019. Although, the networth reduced from Rs 545 crore as on March 31, 2018, it was mainly on account of the large dividend payout based on the high profits of fiscal 2018 and relatively lower accruals in fiscal 2019. Also, even as the business is cyclical in nature, the company has been posting profits since the past five years. The gearing was nil due to no borrowings on the balance sheet as on 31 March, 2019. The gearing has been low over the five years through 2018-19, and is expected to remain negligible over the medium term, in the absence of aggressive growth plans for the fund-based business. CRISIL, therefore, believes that the Geojit group will remain adequately capitalised over the medium term; the group's net worth will continue lending stability to its operations even during volatility in the capital markets.

* Sound risk management systems and promoters rich experience in equity broking industry
The risk management systems and processes are adequate. The company uses client-grading methodology via which it grades clients on a three-point scale, based on parameters such as turnover details, brokerage earned, and performance of 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 margins prescribed by the regulator; and when the value of shares purchased goes below 50% (average percentage; depends on type of shares) in value of the collateral provided, square off process is initiated, thus neutralising any adverse impact of risks associated with such products. CRISIL believes adequate risk mitigation measures have been implemented to minimize balance sheet risks.

Mr C.J.George, Geojit group's Managing Director, has been engaged in equity broking since early 1980's and later incorporated Geojit in 1987. Mr George's experience helps in providing guidance and direction to the Geojit group, which operates through many associate locations across India.

* Strong and established market position in the retail equity broking segment
Geojit group has significant presence in retail equity broking segment, especially in the cash market segment as reflected in its market share of around 0.8% in cash segment in fiscal 2019 marginally increased from 0.7% in fiscal 2018. The group is largely present in the south Indian market where the retail clients largely engage in higher yielding delivery based trade as compared to intraday and short term trading. However, in fiscal 2019, the company witnessed a decline in yields due to a higher proportion of intraday trading and a general slowdown in retail participation.

Weakness
* Inherent uncertainties in group's core business of equity broking
CRISIL believes that Geojit group's businesses will remain susceptible to risks related to volatility in capital markets, as the group derives most of its revenue from capital market operations. The broking volumes are dependent on the level of trading activity in the equity markets. Equity markets are 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. CRISIL therefore, believes that Geojit group's core business will continue to be driven by the state of the equity markets, and remain volatile over the medium term. Over the past 5 years ending fiscal 2019, the growth in the overall market turnover (consisting of cash and futures and options) has fluctuated between having a negative growth rate to a growth rate as high as 60% indicating the volatility in the market.

* Ability to sustain diversified income profile across market cycles
In fiscal 2019, Geojit reported net profit of Rs 35 crore compared to Rs 73 crore in the previous fiscal. Broking income contributed ~60% of the total income in fiscal 2019. The main reasons for decline in brokerage were a general slowdown in retail participation and a reduced share of high yielding delivery based trade and higher share of low yielding intraday trading. Since brokerage incomes have been fluctuating for the past few years, Geojit group has made conscious efforts towards improving its distribution business since 2016. Consequently contribution from activities other than equity broking which stood at ~30% of total income is expected to further increase to ~40% over the medium term.

Over the past few years, Geojit has built systematic investment book (SIP) and had 1.94% market share in the mutual fund distribution segment as of June 30, 2019; SIP portfolio stood at Rs 159 crore as on June 30, 2019 compared to Rs 28 crore as on June 30, 2016. However, the revenue from this business has declined as the commission has halved from 1.6% to 0.8% due to change in commission norms by SEBI between October 2018 and April 2019. Besides, change in B15 (beyond 15) cities to B30 cities in September 2018 has led to no additional commissions from newly included 15 cities. Additionally, the commissions that were earlier earned upfront are now spread over the tenure of the mutual fund investment due to adoption of full trail commission model. As a result, net profit has got impacted over the last 9 months ended June 30, 2019. Further in the first quarter of fiscal 2020, even as the revenues picked up, the company provided for complete diminution in value of its joint venture in Saudi Arabia (Aloula Geojit Capital Company) which resulted in lowering the profit after tax.

As a means to diversify sources of revenue, the company has started financial advisory services for high networth individuals and is also in the process of obtaining a peer-to-peer (P2P) lending license. The company is also planning to use its non-banking financial company (NBFC) license in Geojit Credits Pvt Ltd to lend loans for personal use. While the company is focusing on diversifying its revenue stream, CRISIL believes this will take time to scale up and benefits will accrue only over medium term.