| SMC Global Securities Limited | ||
| 'CRISIL A/Stable' assigned to Non Convertible Debentures | ||
| Rating Action | ||
| ||
| & Proposed public issue for quantum of Rs 150 crore | ||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||
| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL A/Stable’ rating to the non-convertible debentures (NCD) of SMC Global Securities Limited (SMC).
The rating factors in established presence and track record of the group in capital market businesses, healthy diversification in revenue across multiple segments, adequate capital position and the extensive experience of the promoters in the business.
These strengths are partially offset by a moderate albeit improving earnings profile and susceptibility to risks associated with capital market-related businesses.
The group has been in the broking business since 1994 with presence in both cash equity and derivatives market segments, including the currency and commodity derivatives division. The group’s other key offerings include lending through a non-banking financial company (NBFC), insurance broking, wealth management and real estate advisory services. The group also distributes third-party products such as mutual funds, corporate fixed deposits (FDs), bonds and initial public offerings. The broking business had a large retail client base of over 10.0 lakh customers as on September 30, 2023 (grew at 19.4% on-year in fiscal 2023). Active clients for the broking business stood at 1.86 lakh as on September 30, 2023.
SMC was co-founded by the promoters – Mr. Subhash Chand Aggarwal and Mr. Mahesh C Gupta, who are chartered accountants and have more than four decades of experience in the capital market industry. The promoters along with their family members, collectively own 67.4% of equity shares as on September 30, 2023.
The group has adequate capitalization, with reported networth of Rs 933 crore as on March 31, 2023 (Rs 991 crore as on Sep 2023), compared to Rs 926 crore as on March 31,2022. The networth remained nearly flat in fiscal 2023 on account of Rs 92 crore (including tax and other expenses) share buyback made by the company and 120% dividend paid per share. In terms of earning profile, profit after tax (PAT) stood at Rs 120 crore on total income of Rs 1,221 crore in fiscal 2023 (against Rs 175 crore and Rs 1,121 crore, respectively, for the previous fiscal). Profitability moderated in fiscal 2023 owing to increase in operating expenses to strengthen the information technology (IT) infrastructure and due to absence of one-time income earned on the investment book of Rs ~30 crore in fiscal 2022. For the half year ended September 30, 2023, the company reported PAT of Rs 70 core on total income of Rs 704 crore. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of SMC Global Securities Limited and its subsidiaries. That is because the entities, collectively referred to as the SMC group, have integrated operations and operate under a common brand name.
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:
The group has been in the broking business since 1994 and has an established operational track record. The group’s senior management team comprises the promoters -- Mr. Subhash Chand Aggarwal and Mr. Mahesh C Gupta, who have more than four decades of experience in the capital market industry. Further, the group has hired professionals having significant relevant expertise. The CEO and head of the broking division, Mr Ajay Garg, has more than 25 years of experience in the capital market industry. The promoter and top management have witnessed several cycles in the capital markets business. This has led to building sound risk management systems that partially offset risks arising from uncertainties inherent in the trading and broking business.
All the Securities and Exchange Board of India (SEBI) and exchange-prescribed regulations have been adhered to by instilling requisite systems and processes. The group sets client trading limits upfront and monitors client exposure on a real-time basis. It also sets scrip-wise exposure limit to keep a check on illiquid scrips or scrips under any kind of surveillance. Upfront margin along with peak margin is collected necessarily and clients are required to maintain adequate margin as prescribed by exchanges. In case of adverse/volatile price movements real-time risk-based square off could be initiated at any time during the day.
On the trading side the group engages largely in arbitrage strategies, which limits likelihood of losses. A dedicated surveillance team monitors trader limits, outstanding exposures, and mark to market on real-time basis. The sound risk management system has resulted in nil quarterly losses since inception. The group also set up an in-house technology team in fiscal 2023 to strengthen their IT infrastructure.
SMC is an established player in the retail equity broking segment. The market share of the combined volumes of the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in both the cash and derivatives segments stood at 0.49% for fiscal 2023, with higher market share in the retail cash segment at 0.83%. It has a modest presence in the commodity and currency segment and earns ~11% of its total broking income from these two segments. Furthermore, amidst high competition from discount brokers, the group started its own discount broking platform in 2019 under the brand name ‘Stoxkart’ where customers are charged only for profitable transactions. The platform has a client base of over 2.3 lakh customers as on September 30, 2023 (grew at 83.5% on-year in fiscal 2023). With gradual scale up of fund-based business (NBFC) and the presence of fee-based businesses, such as insurance broking, distribution (financial products), wealth management, advisory, revenue streams have become more diverse. Contribution from these businesses to overall revenue has increased in the last few fiscals. The group is focusing on scaling up its insurance broking and distribution businesses by strengthening the technology infrastructure.
The wealth management business had assets under management (AUM) worth Rs 797 crore as on September 30, 2023 (Rs 610 crore as on March 31, 2023). The AUM of mutual funds under the distribution business was over Rs 3,300 crore as on September 30, 2023. The company has been able to create a niche for itself in distributing FDs and had distributed FDs worth Rs 3,012 crore for the half year period ended September 30, 2023. For their insurance broking business, it has sold over 4.5 lakh policies worth Rs 1,257 crore of insurance premium for the half year period ended September 30, 2023.
The group provides lending through its wholly owned subsidiary, Moneywise Financial Services Private Limited (Moneywise). The lending business commenced operations in 2008 and offers a wide bouquet of small and medium-sized enterprises (SME)-focused loan products such as working capital term loans, loan against property, asset financing, loan to other NFBCs, capital market funding, consumer durable loans, supply chain financing and gold loan. AUM grew 30% (on-year) in fiscal 2023 and stood at Rs 900 crore as on March 31, 2023, against Rs 690 crore a year ago; AUM further increased to Rs 1,016 crore as on September 30, 2023. The asset quality of the book remains stable as gross non-performing assets stood at 2.3% as on September 30, 2023, against 2.3% as on March 31, 2023. The subsidiary reported PAT of Rs 36 crore and return on assets of 4.0% for fiscal 2023, compared to Rs 22 crore and 3.3%, respectively, in the previous year. The management plans to grow the loan book aggressively and targets an AUM of Rs 5,000 crore in the next five years.
The group is adequately capitalised for its current and planned scale of operations. The group reported networth of Rs 991 crore and gearing of 1.1 times as on September 30, 2023, as against Rs 933 crore and 1.0 times, respectively as on March 31, 2023 (Rs 926 crore and 0.5 times respectively as on March 31, 2022). Absolute networth includes investment of Rs 382 crore in subsidiaries (of which Rs 230 crore is deployed in Moneywise). Capital augmentation has largely been driven by internal cash accrual since SMC operates in capital light businesses where borrowing needs are largely to meet working capital requirement and for margin trade funding business. But with plans to scale up the non-capital market related NBFC business, gearing is expected to increase gradually over the near to medium term. However, with gearing of the NBFC business modest at 1.7 times as on September 30, 2023, the need for raising capital is not immediate in the near term. Hence, the capital position is expected to remain adequate over the medium term.
Weaknesses:
The earnings profile of the group is well diversified on a consolidated basis. The income from traditional broking (capital market) comprises ~22% of total income in fiscal 2023 while insurance broking contributes ~28%. The group earns 21% of its total income through interest income (float and delayed interest charges, interest income from margin trade funding and NBFC business). Income from proprietary trading contributes another 14% of total income. Contribution from other fee-based income streams, such as distribution of financial products, research, wealth management, portfolio management is around 13% while other miscellaneous income comprises the rest 2% of total income.
The group reported total income of Rs 1,221 crore in fiscal 2023, vis-à-vis Rs 1,121 crore in the previous fiscal. In terms of expenses, variable expenses constitute 52-53% of the total expenses due to sub-brokerage model of various businesses (traditional broking, insurance broking, distribution). The rest 47-48% cost is fixed, of which ~30% comprises employee and finance costs and the rest (~18%) cost includes other operational expenses. The cost to income (net of sub-brokerage expenses) ratio is elevated in comparison to similar or larger-size peers; the ratio increased to 73.4% in fiscal 2023 from 62.9% in fiscal 2022 owing to higher operating expenses incurred in fiscal 2023 to strengthen the IT infrastructure. The operating efficiency is likely to remain in similar range over the next few years as technology infrastructure expenses will continue to remain a drag on earnings. The group reported net profit of Rs 120 crore in fiscal 2023 vis-à-vis Rs 175 crore in the previous fiscal. Going forward, the ability of the group to improve its operating leverage, and in turn profitability, will remain a key monitorable.
Most businesses of the group are confined to the capital market industry, which faces intense competition from multiple players offering low-cost products. Additionally, competition from various proprietary trading businesses has increased considerably. Given that trading volumes are the highest for most arbitrage players, trader retention will remain a challenge with the entrance of various players in the futures and options trading business.
The broking industry has seen a huge transformation in the last three years, with technology-based discount brokers entering and dominating the market. The 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 Covid-19 pandemic-led lockdown and people remaining at home. A significant proportion of client additions in the industry are of the 25-30 year age demographic, 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 this market momentum will remain a key monitorable.
Over the past couple of years, the broking industry has witnessed a dynamic regulatory environment. With the objective of enhancing transparency, limiting misuse of funds and safeguarding investor interests, SEBI has introduced several changes. Some of these include margin pledge/re-pledge mechanism, daily client collateral reporting and disclosure, collateral allocation at clearing corporations by brokers, and upfront margin collection for intraday positions. More recently, SEBI has approved blocking of funds facility for trading in secondary markets, and non-usage of client deposits for availing bank guarantees (BG) by brokers, which aim to prevent misuse of client funds, broker defaults and consequent risk to investor capital. This is similar to the Application Supported by Blocked Amount (ASBA) facility already available for the primary market, which ensures movement of money only when an allotment happens.
With increasing compliance intensity, associated costs are expected to increase. CRISIL Ratings understands that most large brokers and some mid-sized companies including the SMC group have streamlined their systems in accordance with the revised regulations. However, this could impact small and mid-sized brokers with not-so-advanced IT infrastructure and risk management systems.
Fundamentally, while these revised regulations will benefit the broking industry in the long term by increasing transparency and lowering risks for customers, the changes do increase the compliance costs for brokers and require them to adapt their business models to keep pace. |
Liquidity; Adequate Liquidity of SMC is comfortable for the current scale of operations. The company had cash and cash equivalents of Rs 55 crore as on September 30, 2023. Additionally, the company has deposited margins with exchanges amounting to Rs ~607 crore as on same date. Against this, company has scheduled repayments of Rs 14 crore over the next six months.
Liquidity of Moneywise is also comfortable as the asset liability management profile had positive cumulative mismatches across all buckets as on September 30, 2023. Further, the company had cash and cash equivalents and liquid investments aggregated to Rs 64 crore as on September 30, 2023, sufficient to cover the principal debt obligation of Rs 48 crore for the three months ended December 31, 2023. |
Outlook: Stable CRISIL Ratings believes the SMC group will continue to maintain healthy capitalisation metrics while benefitting from the modest presence across the financial services businesses and its adequate risk management systems. The ability to improve its market position and profitability will have to be monitored. |
Rating Sensitivity factors Upward factors
Downward factors
|
About the Company SMC, the holding company of the SMC group, was incorporated in 1994. The group offers diversified financial services across different business segments such as brokerage, investment banking, wealth management, distribution of third-party financial products, research, financing, depository services, insurance broking, clearing services and real estate advisory services. The group had customer base of over 10 lakhs as on September 30, 2023. Apart from online presence, it has a well spread-out distribution network with 180 branches and 2,485 sub-brokers across 455 cities in India as on September 30, 2023.
For fiscal 2023, the group reported PAT of Rs 120 crore on total income of Rs 1,221 crore, against Rs 175 crore and Rs 1,121 crore, respectively, for the previous fiscal. For the half year ended September 30, 2023, it reported a PAT of Rs 70 crore on total income of Rs 704 crore.
On a standalone basis, SMC reported PAT of Rs 93 crore on total income of Rs 693 crore, against Rs 145 crore and Rs 684 crore, respectively, for the previous fiscal. For the half year ended September 30, 2023, it reported a PAT of Rs 67 crore on total income of Rs 411 crore. |
Key Financial Indicators : (consolidated)
^ On an annualised basis
Key Financial Indicators: (standalone)
^ On an annualised basis |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Yet to be issued (Quantum of Rs 150 crore to be issued by way of public issue) |
Annexure – List of entities consolidated
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
Criteria Details
|