Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A-/Stable’ rating to Rs.50 crore non-convertible debentures of Nirmal Bang Securities Private Limited (NBSL; part of Nirmal Bang Group). Also, CRISIL Ratings has reaffirmed its rating on the existing debt instruments and bank facilities of NBSL ‘CRISIL A-/CRISIL PPMLD A-/Stable/CRISIL A1’.

 

The ratings continue to reflect the Nirmal Bang group’s adequate capitalisation, sound risk management practices, and extensive experience of its promoters in the capital markets business. These strengths are partially offset by an average but improving earnings profile, highly competitive capital market industry and susceptibility to the risk of regulatory changes.

 

The group’s CRISIL-adjusted networth increased to Rs 761 crores as on March 31, 2023 (adjusted for inter-group investments, proprietary trading capital and equity investments) from Rs 485 crore a in fiscal 2021. This was on account of steady internal accruals buoyed by an increase in broking income and healthy income generated from investments in the past two years. It has low fund-based debt with gearing of 0.10 times as on Mar 31, 2023, as compared to 0.01 times as on March 31, 2022 and it is likely to remain below 0.5 time over the medium term.

 

Further, profitability of the group moderated in fiscal 23 as company has reported total income of Rs 341 crore in fiscal 23 as against Rs 479 crore in fiscal 22 Client participation remained subdued in fiscal 23 as compared with earlier two years. Further, there has been limited pro trading done by the company during the year. While on the cost front, the cost to income ratio of the company increased to 85.5% in fiscal 23 as compared with 77% in fiscal 22.  The group has reported a profit after tax (PAT) of Rs30 crore in fiscal 23 as compared with Rs 156 crore in fiscal 2022.The group also maintains higher focus on diversifying revenue stream by enhancing distribution activities of financial products such as mutual funds and insurance. However, share of other products remain small in total income. Going forward, increase in revenue diversity and improvement in earning profile will remain monitorable over the medium.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of NBSPL, Nirmal Bang Equities Pvt Ltd, Nirmal Bang Financial Services Pvt Ltd, Nirmal Bang Commodities Pvt Ltd, Bang Securities Pvt Ltd, Bang Equity Broking Pvt Ltd and Mindset Securities Pvt Ltd. This is because all these companies, collectively referred to as the Nirmal Bang group, have highly integrated operations, and common directors and senior management. Moreover, the management has articulated that if any company is in distress, the group companies will extend financial support, including transfer of funds, on a timely basis. CRISIL Ratings has adjusted the networth of the group by 30% of the value of inventory of shares and securities, 100% of the investments in land and property, and entire receivables more than six month

 

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 with conservative gearing policy

The group has reported networth of Rs 761 crore and gearing of 0.1 times as on March 31, 2023, as against networth of Rs 485 crore and gearing of 0.14 time as on March 31, 2021. The improvement in capital position of the group continued in fiscal 2022 on account of healthy internal accrual. Overall financial performance was supported by higher traded turnover and increase in active clients resulting in sizeable accretion to reserve. The profitability of the group was buoyed by an increase in broking income and healthy income generated from investments in the past two years. Gearing has remained low because debt has been availed largely to fund the margin trading facility of clients. Despite healthy business prospects, gearing is not expected to increase materially over the medium term.  

 

Sound risk management practices

The group has implemented sound risk management systems largely offset risks arising from uncertainties inherent in the broking business. The group sets client trading limits upfront and monitors client exposure on a real-time basis. It also sets maximum scrip order quantity limit and maximum single order value limit for each client in the cash and futures and options (F&O) segments. In the F&O segment, clients are required to maintain standardized portfolio analysis of risk margin. The brokerage includes exposure margin as specified by stock exchanges. The group keeps the sale proceeds of stocks and fresh purchase of stocks by clients in the margin account and pool accounts, respectively. This enhances the buffer to absorb losses because of sudden downturn in markets and helps keep bad debts under control. This is reflected in the negligible level of losses reported due to bad and doubtful debts. During the last 5 years, the group has reported a loss of Rs 5.1 crore (less than 1% of total income of fiscal 2021) on account of doubtful debts.

 

Extensive experience of the promoters

The promoters of the group, Mr Kishore Bang and Mr Dilip Bang, have experience of over three decades in the capital markets and have developed a strong business acumen. They are actively involved in strategic decision making and daily operations. Furthermore, senior management personnel have been associated with the group for over two decades. The promoters and top management have witnessed several cycles in the capital markets business. Their understanding of the market and ability to offer solutions while adapting to changes has helped the group retain clients and maintain scale of operations even during challenging market environment.

 

Weakness:

Moderate earnings profile, which remains vulnerable to uncertainties inherent in the capital markets business

The earnings profile of group remains vulnerable due to inherent uncertainties in capital market business. In terms of cost to income ratio, though has shown improvement in fiscal 2022, it remains high in comparison to similar or large size peers. The cost to income (excluding proprietary trading income) ratio reduced marginally to ~76.9% in fiscal 2022 from 82% for fiscal 2021 and 97.7% for fiscal 2020. Likewise, due to moderation in income profile of the group, its cost to income ratio again  increased to 86% in fiscal 23. Historically, the cost to income ratio has been high because of sizeable, fixed overheads and as the group shares a large portion of its commission income (50-70%) with its sub-broker network. The group is trying to reduce its operating costs through cost rationalisation practices and by enhancing its technology systems, which will reduce staff requirement over the medium term. Nevertheless, sustainability of the same, especially during down-turn scenario, remains a key monitorable.

 

Group’s revenue also remains skewed towards broking income (66% in fiscal 2023), and comprises interest income (21%), trading income (Nil in fiscal 23) and other income (11%). Moreover, the group has high dependence on income from proprietary trading activities. Therefore, any significant volatility in the market will directly impact the group’s overall income. For instance, the group suffered a loss of Rs 75.1 crore in fiscal 2020 because of the decline in the value of securities in March 2020 but recouped Rs 152 crore during fiscal 2021 as the equity markets bounced back. Similarly, in fiscal 23 the group has reported a PAT of Rs 30 crore due to moderation in broking income and limited opportunities in prop trading side.  The overall earnings profile, therefore, remains susceptible to volatility in capital markets. Hence, the ability of the group to diversify its revenue profile will remain key monitorable.

 

Highly competitive capital market industry

Nirmal Bang group's businesses are confined to the capital markets, which faces intense competition, with multiple players offering low-cost products. The industry has seen a huge transformation in the last three years, with technology-based discount brokers entering and dominating the market. The competition is expected to increase as more players with cash burn ability propose to enter this space, further intensifying the price war in the industry. The company's key broking business remains exposed to economic, political and social factors that drive investor sentiments. Given the volatility in the business, brokerage volume and earnings are highly dependent on the level of trading activity in capital markets. Specifically, since March 2020, the stock markets have seen high retail participation and daily trading volume coinciding with the lockdown imposed to contain Covid-19 and people remaining at home. A significant proportion of client additions in the industry are of 25-30 years, without significant savings surplus. The upward movement of the key benchmark indices during this period, too, has further contributed to the lure of stock market trading and potential gains. While this has benefited the group as well as other broking players, sustainability of the market momentum will remain a key monitorable.

 

Susceptibility to regulatory risks

The capital markets have seen several regulatory revisions in the past few years. To increase transparency and limit the misuse of funds, the Securities and Exchange Board of India introduced some regulations in the past year, including upfront margin collection for intraday positions and limits on the use of power of attorney. The margin collection and pledging practices effective September 1, 2020, will change the vintage business model of small and mid-sized broking companies, which hitherto relied on relationships by offering differential leverage and margin payment avenues to clients. This may reduce their competitiveness vis-à-vis large digital and bank-based brokers.

 

Upfront margin collection for intraday trading will likely reduce leverage levels in the industry to 4-5 times from the current 10-15 times and will affect positions (in terms of volume) taken by retail investors. The impact on the Nirmal Bang group's performance on an ongoing basis will be a monitorable. Further, the new regulations allow lien marking of shares owned by investors with the respective broker instead of the current practice of transferring shares to the broker's pool account. CRISIL Ratings understands that most top brokers (including the Nirmal Bang group) have already adjusted their systems in-line with the new regulations. However, small and mid-sized brokers may be hit given their not-so-advanced IT infrastructure and risk management systems. While the revised regulations may affect performance in the near term, the industry will benefit in the long run from increased transparency and the de-risking of the broking platform for retail customers.

Liquidity: Adequate

Liquidity is adequate for the current scale of operations, given the absence of any fund-based borrowing or debt obligation. The company’s is in capital markets business and thus the overall borrowing requirements for the company remains low. As on August 28, 2023, the group has around Rs 900 crore of liquid assets available in the form of cash &bank balance and investments in liquid mutual funds, encumbered FDs, which can be liquidated or extended as margins at the exchange level for meeting any urgent requirements.

Outlook: Stable

The Nirmal Bang group will continue to benefit from the extensive experience of its promoters and maintain its strong capital position

Rating Sensitivity Factors

Upward factors

• Cost-to-income ratio improving to below 70% (excluding trading gains) on a steady-state basis
• Improvement in income diversity and profitability on a sustained basis
• Sustenance of improvement in the market share leading to significant scale-up of operations

 

Downward factors

• Impact on business risk profile, indicated by drop in market share impacting revenue from core broking operations
• Weakening of the earnings profile with sustained increase in cost to income ratio of around 95%

About the Company

Established in 1994, the Nirmal Bang group offers a wide array of financial services such as equity and commodity broking, financing of initial public offerings, mutual funds distribution, research, margin funding, and loans against shares to retail and institutional clients. It is a registered member of the National Stock Exchange (both cash and F&O segments) and the Bombay Stock exchange, and depository participant of National Securities Depository Ltd and Central Depository Services (India) Ltd. The promoters, Mr Kishore Bang and Mr Dilip Bang, have experience of over two decades in the capital markets.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of allotment	Coupon rate	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned  with outlook
NA	Bank Guarantee	NA	NA	NA	680	NA	CRISIL A1
NA	Overdraft Facility	NA	NA	NA	265	NA	CRISIL A-/Stable
NA	Long Term Principal Protected Market Linked Debentures^	NA	NA	NA	40	Highly Complex	CRISIL PPMLD A-/Stable
INE681R08018	Long Term Principal Protected Market Linked Debentures	5-Sep-22	G Sec Link	5-Mar-24	25	Highly Complex	CRISIL PPMLD A-/Stable
INE681R08026	Long Term Principal Protected Market Linked Debentures	14-Jun-23	G Sec Link	14-Dec-24	35	Highly Complex	CRISIL PPMLD A-/Stable
INE681R08034	Non-Convertible Debentures	8-Aug-23	10.75%	8-Feb-25	35	Simple	CRISIL A-/Stable
NA	Non-Convertible Debentures^	NA	NA	NA	15	Simple	CRISIL A-/Stable
NA	Non-Convertible Debentures^	NA	NA	NA	50	Simple	CRISIL A-/Stable

^Yet to be issued