Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Adequate capitalisation with conservative gearing policy

Adjusted Networth increased to Rs 367 crore as on March 31, 2022 from Rs 231 crore a year earlier while gearing improved to 0.51 time from 0.62 time. As on September 30, 2022 the group’s adjusted networth stood at Rs 495 crore and gearing 0.44 times. The capital position of the group improved substantially during past two years 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 group has reported a profit after tax (PAT) of Rs 202 crore in fiscal 2022 improved from PAT of Rs 81 crore in fiscal 2021. Trend continued in fiscal 23, during the half year ended Sep 22 of fiscal 22 the group has reported PAT of Rs 131 crore. Improved market sentiments should further enhance the core trading income and broking income of the group in the near term. 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.

Overall financial performance in fiscal 2022 and first half of fiscal 23 was supported by higher traded turnover The group turnover increased by 60% y-o-y in fiscal 22 and 20% (on an annualized basis)increase was witnessed in the total turnover in the first half of fiscal 2022 .

Sound risk management practices

The group has implemented sound risk management systems largely offset risks arising from uncertainties inherent in the trading and broking business. The group sets client trading limits upfront and monitors client exposure on a real-time basis. The group generally limits trades to liquid scrips so that positions can be squared off quickly and hedges its arbitrage positions immediately. Trading strategies to be adopted by dealers are decided beforehand by the senior management, and limits for fund allocation are set for each dealer. The risk department monitors trades on a real-time basis, to ensure dealers adhere to strategies and fund limits. The company adopts only market neutral strategies and hedging levels are also 100%.Further, the company has policy of keeping zero position at the end of the day. All above risk measures supported financial performance of the company as a result the company has reported nil write offs and negligible debtors over 6 months in the past three years. Further, adequate risk management has helped in averting losses and evident in the reported consistent profits for past five years.

Extensive experience of the promoters

The promoters of the group, Mr Praveen Gupta, Mr Rajesh Gupta, Mr Sachin Gupta have experience of over 27 years 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 Mr Kamlesh Shah (Managing Director) has been in the industry for more than 25 years and associated group for over three years. 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.

Further, the management with their extensive experience in broking segment has been able to onboard few foreign portfolio investors. Additionally, the group has empaneled four institutions as a broker in the past two quarters of fiscal 2022. Furthermore, to foray into retail space, the group acquired UTrade Solution Pvt Ltd (UTrade) and Algowire Trading Technologies Pvt Ltd (Algowire) in November 2021. The group is, therefore, likely to launch interest-based trading platform for retail client acquisition by April 2022.

Competitive resource profile

Promoters have been active in capital market space for over 3 decades. This overall high experience and brand image has enabled the group to establish relationship with bankers and avail facilities are competitive rates. The group has been able to develop good relations with 4-5 lenders mainly large private banks for raising bank guarantee and overdraft facilities for placement as margins at different exchanges. The group has been able to raise funding lines at a very competitive rate. Cost of borrowings (fees paid for availing Bank Guarantee) remained in the range of 0.8-0.9%.

Weakness:

Average, albeit improving, earnings with high dependence on proprietary income

Share India group has historically remained highly active in proprietary trading activities. The high experience of the promoters and top management has enabled them to build proprietary trading desk. Therefore, the higher focus on proprietary trading has resulted in revenue profile getting skewed towards the same. The revenue generated from prop-desk activities stood in the range of 71-82% during (fiscal 2018 to fiscal 2021). Further, during the first six months of fiscal 2023, the revenue from trading business stood at 58% while remaining comprised of revenue from broking business 31%, interest income of 9% and other income of 2%.

Nevertheless, with the changing environment and high influx of retail investors during last 18 months, the group has also started expanding its focus towards retail broking business. In order to establish itself within retail broking business the group acquired 2 fin-tech companies which would be used to create technology platform to acquire retail customers. In November 2021, the group acquired UTrade Solution Pvt Ltd (UTrade) at overall cost of Rs 13.6 crore. Post completion of transaction Utrade has become subsidiary of Share India Securities Limited, with the shareholding holding 63.50%. UTrade Solutions has been one of the tech companies providing software and tech-based solutions to many broking entities. Apart from this the group acquired 51% stake in Algowire Trading Technologies Pvt Ltd (Algowire) at a total consideration of Rs. 2.1 crores. Algowire is involved in creating algo-based trading solutions to investors. The group proposes to use this company to provide algo-based solution to its investors both retail and institutional.

Apart from focus on expanding towards broking business, the group also maintains higher focus on diversifying revenue stream by enhancing distribution activities of financial products such as mutual funds and insurance. The income from other distribution products is expected to gradually increase in the medium term. CRISIL Ratings, overall believes that, considering the highly price-sensitive and competitive retail broking space, the group’s ability to steadily enhance its revenue diversity and generate sufficient earnings from broking business over the medium term will be key monitorable.

In terms of cost to income ratio, it has remained high (historically) in the range of 80-84% between fiscal 2018 to fiscal 2020. Nevertheless, with substantial improvement in revenue profile, the cost to income ratio has also witnessed improvement during past two years. Cost to income ratio reduced to 69% in fiscal 2022 from 76% for fiscal 2021. Further, during half year ended Sep 2022, the group’s cost to income ratio stood at 64%. Although cost to income ratio have improved, it is relatively high as compared to industry benchmarks. Also, the group’s earning profile is heavily dependent on level of trading activity in capital markets, which in turn, are driven by economic, political, and social factors guiding investor sentiments. Global factors also influence fortunes of the domestic market. The overall earnings profile, therefore, remains susceptible to volatility in capital markets. However, due to prop trading and arbitrage nature of business the group is expected to be lesser impacted by downcycle in the capital market. Therefore, considering the inherent volatility nature of capital markets, ability of the group to sustain its earnings profile and improve its cost to income ratio from here on, will remain key monitorable.

High client concentration in broking business

On the client broking side, the group has mainly focused on serving institutional clients (both DII and FII). As a result, the group has been able to create base of institutional clients. The company’s customer concentration risk remains with majority of revenue derived from few customers in H1of fiscal 23, in line with past trends around 60-65% of the revenue comes from top 10 clients. The high dependence of revenue from few customers accentuates the risk of revenue volatility that may result from client attrition or any other disruption in client business. Further, broking industry faces intense competition, with multiple players offering low – cost products to clients. The industry has seen a huge transformation in the last three years, with technology- based discount brokers entering and dominating the market.

High dependence on few clients in intense competitive broking business will remain risk over the medium term .Further, considering Share India group would be expanding their presence in retail broking space, ability to build healthy model, thereby managing competition at the same time will remain key monitorable.

Exposure to uncertainties inherent in capital-market-related businesses, including regulatory changes

The company’s 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 to contain the Covid-19 pandemic and people remaining at home. A significant proportion of client additions at the industry level are in the age bracket 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 industry at large, sustainability of the market momentum will remain a key monitorable.

Further, over the last couple of years, the broking industry has witnessed continuous regulatory revisions. With the objective of further enhancing the transparency levels and limiting the misuse of funds, SEBI has introduced a few regulations in the last one year. Some of these regulations include upfront margin collection for intraday positions and limiting the usage of power of attorney. The industry is undergoing changes pertaining to margin collection and pledging practices effective September 1, 2020. The newer margin collection practices will change the vintage business model of various small to mid-sized broking companies that relied on relationships by offering differential leverage and margin payment avenues to clients. This is likely to lead to decline in the overall competitiveness towards larger digital and bank-based brokers.

The regulations of upfront margin collections for intraday trading are expected to decrease the leverage levels in the industry to 4-5 times from the current 10-15 times prevalent across the industry. This reduction in leverage essentially means that the level of positions (in terms of volume) taken by retail investors will also get impacted. The likely impact of this change on the Share India group's performance on an ongoing basis will be a monitorable. Furthermore, as per new regulations, the shares owned by investors can be lien marked with the respective broker instead of having to follow the current practice of transferring it to the broker's pool account. CRISIL Ratings understands that most top brokers (including the Share India group) have already streamlined their systems in accordance with the revised regulations. However, this may impact small and mid-sized brokers in particular given their not-so-advanced IT infrastructure and risk management systems. While these revised regulations may affect the performance in the near term, in the long run, the industry will benefit from increased transparency and the de-risk broking platform for retail customers.