IDirect BrokerageIndustry IC PDF

Indian
Indian Brokerage Industry
December 23, 2019
Broking twist: Advantage large brokers… Initiating on…

The fragmented Indian broking industry has witnessed an increase in market
Motilal Oswal – Buy – TP | 850
share of top brokers in volume terms with top 10 brokers now forming 37%
Initiating Coverage
(Diversified business model with
vs. 22% in 2014. In the past few years, Indian equity markets witnessed
presence across capital market
strong rise in average daily turnover (ADTO) at ~34.4% CAGR in FY13-19.
domain, expect to be beneficiary
Derivatives witnessed robust traction at 35.4% CAGR from | 155400 crore
of stricter SEBI norms and
in FY13 to | 959000 crore in FY19 while cash ADTO has increased at ~18.1%
consolidation in industry)
CAGR in FY13-19 to | 35200 crore. This has led to a reduction in the cash
segment, declining to only ~3% of total volumes impacting brokers. 5 Paisa – Hold – TP | 205
(Start-up discount broker with
The Indian broking industry has a large of number of players, many being
aggressive client acquisition,
proprietary in nature while large brokers still offer trading and investment
consistent revenue growth to drive
services to customers. In terms of market share, as per active clients, top 10
valuation)
brokers contribute ~63% in industry size. Among the same, top two brokers
constitute ~15% of market share in active clients, followed by ~46% market IIFL Sec – Buy – TP | 50
share contributed by the next eight players. Top two players constitute 15% (Pure broker with distribution
in ADTO of the market. Indian brokers have progressed from being pure strength, relatively cheap on
brokers (bank led brokers & non-bank led full service brokers) to distributors valuation)
of financial products and business diversification by forming AMC/PE funds,
Geojit Fin – Hold – TP | 29
lending through NBFC and setting up ARCs.
(Marginal player in aggressive
In the wake of changes experienced in the domestic stock market and competitive space, high
broking industry, evolution in terms of business model was imminent. In our proportion of cash ADTO remains
ICICI Securities – Retail Equity Research

view, the Indian broking industry is transitioning from a transaction based strength)
model to service or fee based model offering services like wealth
management and investment advisory. A shift towards a fee based model is Edelweiss Fin – Hold – TP | 125
already in the works with brokers focusing on building advisory model (Balance sheet restructuring
(wealth AUM). Apart from advisory services, focus on fund based activities, underway, minimal contribution of
including margin funding and loan against shares, is on the rise, enabling retail segment in capital market
brokers to build sustainable earnings. Cyclicality of income from volatile revenue)
markets/volumes is seen abating as pure brokerage income forms ~50-60%
of overall revenue for each player vs. 80-90% few years back. Again, with JM Fin – Hold – TP | 94
SEBI tightening norms on managing client funds as float or pledge on client (Strong performance in capital
shares, direct lending by brokers to clients in the form of allowing overdue market business, exposure to real
will disappear. Brokers need banks or NBFC tie-up, as they can only take estate remains an overhang)
pledge of client shares to fund the client. Bank led brokerages stand to gain
both as quick enablers of funding and trust on safety of demat holdings. Research Analyst
In a recent circular, SEBI announced new norms on bringing margin for cash Kajal Gandhi
kajal.gandhi@icicisecurities.com
buy/sell order addition. As we notice, online brokers had practiced the same
as clients need to keep margin money before buy order placement and sell Vishal Narnolia
is allowed only from delivery, leading to very negligible impact of new vishal.narnolia@icicisecurities.com
norms. All these SEBI norms and intense competition have impacted small
Harsh Shah
brokers while large brokers are expected to gain market share. shah.harsh@icicisecurities.com
Traditional brokers emerge strong on earnings

The Indian broking industry comprises participants with varied business
models from those primarily engaged in capital market activities and others
engaged in other financial activities including lending, AMC and ARC. Given
the dependence on capital market and inherent cyclicality, we assign PE
multiple in range of <15x for peers engaged in capital market. Accordingly,
we value pure brokers like IIFL Securities at 8x FY21E EPS and Geojit BNP
Paribas Financial Services at 12x FY21E standalone EPS. Players with
business models in other financial segments are valued on SoTP basis. We
value JM Financial at 1x FY21E BV (implying 11.5x FY21E EPS), Edelweiss
at 1.4x FY21E BV (implying 16.7x FY21E EPS) and Motilal Oswal at 23x
FY21E EPS. 5Paisa as a startup is valued at 4x FY21E revenue. We initiate
coverage with a BUY rating on IIFL Sec and Motilal Ostwal and HOLD rating
on 5 Paisa, Geojit Financial, Edelweiss Financial Services and JM Financial.
Initiating Coverage | Indian Broking Industry ICICI Direct Research
Exhibit 1: Valuation
| crore CMP TP Rating Mcap PAT (| crore) RoE (%) P/E (x) NW (| crore) P/BV (x)
| | | crore FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
Motil.Oswal.Fin. 730 850 Buy 10803 499 539 14 13 21.6 20.0 3809 4349 2.8 2.5
Edelweiss.Fin. 116 125 Hold 10827 343 656 5 8 31.6 16.5 7994 8656 1.4 1.3
JM Financial 91 94 Hold 7699 582 681 11 12 13.2 11.3 7620 7806 1.0 1.0
IIFL Securities 38 50 Buy 1214 164 205 20 21 7.4 5.9 895 1100 1.4 1.1
Geojit Fin. Ser. 28 29 Hold 655 14 20 9 11 46.9 33.5 515 572 1.3 1.1
5Paisa Capital 180 205 Hold 458 2.8 7.2 3 5 163.3 63.6 151 158 3.0 2.9
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 2

Industry Trend
Indian brokerage industry – perspective and structure
The Indian broking industry is very fragmented with large number of
participants (~3755/3099 registered with SEBI in cash/derivative market).
Many of these may be propriety desk, still a large number of brokers offer
trading services to customers. In the last six years, Indian markets have
witnessed a spurt in volumes at ~34.4% CAGR from FY13 to FY19.
Following global trend of higher tilt towards options, derivatives witnessed
robust traction at 35.4% CAGR from | 155400 crore in FY13 to | 959000
crore in FY19, while equity (Cash) ADTO grew only by ~18.1% CAGR in
FY13-19 to | 35200 crore.
The Indian stock market has undergone developments over several years in
terms of yields, products and customer services. In the initial phase, Indian
brokerages were to be divided in two categories – bank led brokers and non-
bank led brokers. Majority of these brokerages were full service brokers with
services spanning from providing platform for trading, settlement services,
investment advisory (research), investment banking and wealth
management.
In order to counter the volatility of markets and thereby business,
brokerages started on the path of diversification – the first step being
distribution of financial products – insurance and mutual funds. Later,
brokerages entered next level of diversification through entry into new line
of business spanning from asset management to credit disbursement
through NBFC.
The Indian brokerage industry has now witnessed entry of new category of
brokers – discount brokers that offer basic transactional service at low fixed
brokerage irrespective of the size of trade quantum. Apart from transactional
service, these brokers provide various product used for analysis and
research services at additional cost.
Exchange volumes skewed towards derivatives in last 5 years

Option segment witnessing higher share at 92%
The Indian stock market has been witnessing a continuous rise in volumes
16
traded in FY15-Q2FY20. However, there has been a growing divergence
ADTO in | lakh crore
14
between cash and derivatives product segment. While the proportion of 12
cash segment has remained steady at ~3% of total volumes, option as a 10
product has been gaining prominence with share in total volume rising from 8 13.4
6 11.4
8.7
79% in FY15 to 88% in FY19 and 92% in Q2FY20. 4 5.7
2 2.6 2.3 3.2
Exhibit 2: Market volume tilting towards options 0 0.5 0.5 0.6 0.8 0.9 0.8 0.9
ADTO in | crore FY17 FY18 FY19 Q1FY20 Q2FY20 Propn
Cash Intraday 16600 23300 26048 Cash Futures Options
Cash Delivery 8100 9600 9152 Source: NSE, ICICI Direct Research
Cash 24700 33000 35200 33629 34023 2.3%

Futures (NSE) 62361 82959 87564 79951 89734 6%
Stocks (NSE) 44877 63405 65109 55955 61020 4%
Index (NSE) 17484 19555 22455 23996 28714 2%
Options (NSE) 318164 587711 870503 1136812 1339202 92%
Stocks (NSE) 24627 39248 50735 45480 52299 4%
Index (NSE) 293537 548463 819768 1091332 1286903 88%
F&O total 382100 671000 959000 1216763 1428936 97.7%
Total ADTO 406800 704000 993000 1250392 1462959
Source: NSE, ICICI Direct Research

Exhibit 3: Options forming ~92% of market volume

16
14
ADTO in | lakh crore
12
10
8 13.4
11.4
6 8.7
4 5.7
2 2.6 3.2
2.3
0.5 0.5 0.6 0.8 0.9 0.8 0.9
0
FY 15 FY 16 FY 17 FY18 FY19 Q1FY20 Q2FY20
Cash Futures Options
Exhibit 4: Internet based trading on the rise in last five years

35
30
(% of total volume)
25
20
15
10
5
0
FY14 FY15 FY16 FY17 FY18
Cash F&O
Exhibit 5: Increase in market share of top five & 10 members

40
35
30
25
20
(%)
15
10
5
0
Mar-16 Mar-17 Mar-18 Mar-19 Nov-19 Top 10 brokers contribute ~63% of share
(Sep’19)
Top 5 Top 10
Source: NSE, ICICI Direct Research 13%
37%
Snapshot of brokerages in India
The Indian broking industry has a large number of players. However, in
terms of number of active clients top 10 brokers contribute to ~63% of the
industry size. Among peers, Zerodha has the highest number of active
clients with ~13% market share, followed by ~51% market share 50%
contributed by next nine players. In terms of active clients, Zerodha has
largest share of active clients, which were at 69%, compared to other players
Zerodha Next top 9 brokers Others
wherein active clients as a percentage of total was in the range of 24-32%.

Exhibit 6: Financials of brokers (FY19)

| crore Kotak Sec HDFC Sec Axis Sec Moti JM Geojit Angel Zerodha
Revenue from operation 1708 782 190 1120 343 288 731 880
Broking Income 868 526 160 668 121 223 501 490
Revenue ex interest income 1236 702 172 1045 298 288 542 712
Revenue ex interest inc/ Total Rev 72% 90% 91% 86% 87% 100% 74% 81%
Total expense 1093 287 142 750 315 230 640 320
PAT 403 330 73 173 23 35 79 400
Total opex/total revenue 64% 37% 75% 70% 92% 80% 88% 36%
Source: Company, Media articles, annual report, DRHP, ICICI Direct Research
Exhibit 7: Proportion of clients remain broadly in a range across brokers

Q2FY20 HDFC Sec Sharekhan Kotak Sec Motilal IIFL Sec Angel* JM Geogit Edelweiss 5 Paisa Zerodha
Total clients ( in Lakh) 21.0 19.0 13.6 12.6 8.3 11.0 NA 10.1 11.0 4.2 15.0
Active clients ( in Lakh) 6.4 4.8 4.6 3.3 2.0 4.3 2.0 1.6 1.2 3.0 10.4
Active % of total clients 31% 27% 32% 32% 24% 39% NA 16% 11% 70% 69%
Source: Company, NSE, media articles & websites, annual report, DRHP, ICICI Direct Research
Exhibit 8: ADTO and yield of traditional and discount brokers

Kotak Sec Motilal Sec IIFL Sec Angel Broking JM 5 paisa Zerodha
Q1FY20 Q2FY20 Q1FY20 Q2FY20 Q1FY20 Q2FY20 FY18Q1FY19* Q1FY20 Q2FY20 Q1FY20Q2FY20* Q1FY20*
Total ADTO (| crore) 21207 23800 18900 20600 16934 19161 10890 13169 8205 10748 16805 18992 126900
Derivative (| crore) 17507 20536 17200 19000 15856 18021 9211 11318 7264 9861 16050 17923 123220
Cash (| crore) 3700 3264 1700 1600 1078 1140 1679 1851 941 887 755 1070 3680
Market share total 1.7% 1.6% 1.5% 1.4% 1.3% 1.3% 1.5% 1.3% 0.6% 0.7% 1.9% 2.0% 10.0%
Market share deriv 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.4% 1.5% 0.6% 0.7% 1.3% 1.3% 0.0%
Market share cash 10.0% 9.0% 4.6% 4.4% 2.9% 3.1% 8.8% 10.3% 2.6% 2.4% 2.1% 3.0% 10.0%
* Angel DRHP, annual reports
Source: Company, NSE, media articles, ICICI Direct Research
Sub-brokers have been integral part of traditional broker

In terms of business model, traditional broker had sub-broker as integral part
of distribution franchise. Motilal Ostwal and Angel have been strong players
in the industry with a large sub-broker franchise. This leads to fillip to
brokerage revenue enabling it as good business model for large traditional
brokers. Going ahead, we expect smaller brokers to become sub-broker of
larger franchise leading to consolidation in industry led by increased
competitive intensity.
Exhibit 9: Broker-wise share of franchise
FY19 Kotak Sec Sharekhan MOSL Angel# IIFL Sec
No of franchise <1100 2600 2500 <11000 500*
Volume share of franchise (ADTO in %) ~10-15 30 70 50 ~20-25
*Operational franchise, # Angel numbers are as per prospectus
Source: Company, media articles, ICICI Direct Research
Scaling of margin funding book to contribute to revenue

Margin funding i.e. providing funding in lieu of securities held by client in his
account is one of the avenues to generate interest based income for Indian
brokers. Traditionally brokers have been providing this facility to their clients
and generating interest income. Brokers provide margin funding on a rolling
basis for different tenures. Therefore, actual interest generating margin
funding book is seen at 1.5-2x of the closing balance as depicted in the

Exhibit below. This avenue remains attractive as yields generated from
margin funding book ranges between 12% and 18% on a rolling basis.
Exhibit 10: Margin funding book broker-wise as reported in balance sheet (FY19)
800 686
660
700
581
600 Funding book is in the range of 1.5-2x of what is
500 450 reported as closing balance
400
300 227
200 103 As of September 2019, majority of players have
52 78
100 24 witnessed decline in margin funding book due to lack
0 of funding options (e.g.: commercial papers)
Kotak Sec HDFC Sec Sharekhan Axis Sec Moti Angel 5Paisa Geojit IIFL
Securities
Source: Company, annual report, DRHP ICICI Direct Research
Exhibit 11: Interest as percentage of total income rising…. Exhibit 12: Share of broking income moderating
100 86 100 84
77 80 80 76
80 74 80 69
65 67
54 51 56 51 55 56
60 44 60 44
40 28 30 27 40 28 26
16 20 19
20 9 14 12 20 10 14
8 3 3 6
0
0 0
Brokergae Income/ Total Income Interest Income/ Total Income Brokergae Income/ Total Income Interest Income/ Total Income
Source: Company, Annual reports, DRHP, ICICI Direct Research Source: Company Annual reports, DRHP,, ICICI Direct Research
Business model to shift to advisory to sustain revenues

In the western stock market, entry of discount brokers have led to traditional
brokers mould their business model towards fee based income. Recently,
brokers including Charles Schwab, TD Ameritrade, E-Trade have dropped
trading fees and are offering nearly zero commission to clients. Accordingly,
the aim is to generate revenue from service offering including ETF and
advisory services rather than earlier regime of transaction based
commission.
In the wake of changes undertaken in domestic stock market and broking
industry, evolution in terms of business model is imminent. In our view, the
Indian broking industry is set to witness a gradual shift from transaction
based model to service or fee based model offering services like wealth
management and investment advisory. A shift towards fee based model is
already in foray with brokers focussing on building non transaction - wealth
AUM (refer Exhibit below). Apart from advisory services, focus on fund
based activities including margin funding and loan against shares, which the
brokers are currently engaged, is seen further increasing, enabling brokers
as sustainable avenue of contribution to earnings.

Exhibit 13: Business model to focus on generation of AUM

AUM (| crore) Motilal Edelweiss IIFL Wealth JM
AMC 38,500 35,900 23,420
Wealth 18,100 26,950 48,041
DP/Custodian assets 60,100 21500# 28,907
Distribution 9,900 80850* 72,730
Total 126,600 165,200 173,098 14,037
*Includes retail demat AUM, # comprises fully of custodian & clearing assets
Bank led brokerages maintain top slot amid competition

Emergence of discount brokers offering low brokerage on per order basis
has led to a shift in market share in terms of active clientele. Market share of
top 10 brokers in terms of number of clients moderated to ~63% in
September 2019 vs. ~65% in July 2019. Gaining market share, RKSV and
5Paisa are new additions in top 12 list of brokers in terms of clientele. Both
have climbed three places in ranking to nine and 11, respectively.
Exhibit 14: Active clients of top brokers
Active Clients (in '000) FY14 FY15 FY16 FY17 FY18 FY19 Jul-19 Sep-19 Nov-19 Mkt share
Zerodha 18 30 62 166 541 981 1008 1045 1113 12.3%
ICICI Securities 501 595 560 618 798 881 895 906 935 10.3%
HDFC Securities 279 348 408 483 602 651 647 635 648 7.1%
Sharekhan 275 343 336 366 535 505 501 481 486 5.4%
Kotak Securities 223 268 247 274 369 447 456 463 485 5.3%
Axis Securities 77 120 184 259 405 390 377 338 311 3.4%
Angel Broking 140 160 171 230 364 427 432 432 455 5.0%
Motilal Oswal 123 153 166 207 308 326 330 326 333 3.7%
RKSV Securities 188 277 376 4.1%
Karvy 126 172 167 181 245 267 268 265 283 3.1%
5 Paisa Capital Ltd 158 234 295 3.3%
SBI CAP Securities 68 114 126 169 214 212 213 213 220 2.4%
IIFL Securities 201 199 2.2%
Geojit Financial Services 157 157 1.7%
Edelweiss Broking 115 117 1.3%
Among discount players, Zerodha has been one of the prominent player
witnessing continuous increase in market share to ~12.3% in November
2019. Apart from Zerodha, RKSV and 5Paisa are next upcoming discount
brokers gaining market share. In addition, new players like Bajaj Financial
Securities (Bajaj Financial Services has launched subscription based
brokerage plans) and Paytm are also in row to formally launch fixed
brokerage plans. One of the peculiarity witnessed in terms of clientele is that
discount brokers have a large proportion to the extent of 60-70% of first time
investors in the age bracket of 25-40 years.
With focus on engaging with incremental or new investors entering stock
markets, traditional brokers have started to offer fixed brokerage products
mainly in the derivative segment. As depicted in the Exhibit below,
traditional brokers including Angel Broking, Edelweiss and Axis Securities
has launched fixed brokerage plans.

Revenue model of discount brokers is based on fixed brokerage per order

rather than percentage of trade value. Players like Zerodha cater to ~20-40
lakh order/trade per day, though ~50% of orders generate revenue (Zerodha
charges nil brokerage on cash delivery trades). Similarly 5Paisa caters to ~2-
3 lakh order per day and charges flat brokerage on per order basis. Increase
in clientele and orders provides with the top-line in terms of brokerage fees,
however, sustainability of this growth is yet to be seen. While low cost
enables discount brokers to maintain business parity, sustainable rise in
volumes remains most key driver for discount brokers to make meaningful
profitability.
Exhibit 15: Broking plans - traditional players moving to fixed plans
Brokers Angel Edelweiss Axis Sec Zerodha Upstox 5 Paisa
Discount plans I Trade Prime Edelweiss Lite Trade @ 20*
Brokerage
Equity Delivery Nil ₹10 or 0.01% whichever lower |. 20 Nil Nil |. 10
Equity Intraday |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 20 |. 10
Equity Futures |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 20 |. 10
Equity Options |. 20 |. 10 |. 20 |. 20 |. 20 |. 10
Currency Futures |. 20 ₹10 or 0.01% whichever lower |. 20 |. 20 |. 10
Currency Options |. 20 |. 10 |. 20 |. 20 |. 10
Source: NSE, company websites, media articles, ICICI Direct Research
Traditional brokers had started with the business model encompassing

online & offline model. Hence, requirement of headcounts have been higher
compared to discount brokers. Therefore, as seen in the exhibit below,
number of employees for traditional brokers stands higher on relative basis.
Exhibit 16: Broker-wise headcounts
6000
5000
4000
3000
2000
1000
0
Sharekhan Kotak Sec Motilal* HDFC Sec Angel Zerodha 5 Paisa * Geojit
No of employees
Source: Company, annual report, media articles, ICICI Direct Research
SEBI tightens rules on clients funds; large brokers could gain

In June 2019, SEBI released a circular tightening rules for usage of client’s
funds by brokers. As per the new rules, brokers need to transfer securities
to their client accounts within one day of receiving payment and not put to
any other use. In case, where the client defaults on payment, brokers have
been asked to hold the securities up to five days post which the broker can
liquidate securities in the market and recover their dues.
Further, SEBI has mandated that securities with brokers for non-receipt of
payment from clients is not be used as collateral for any of proprietary trades
or can be pledged with financial institutions. Post this circular, brokers will
not be able to use client stock as collateral thereby impacting revenue
stream of few brokers.

In a recent announcement, NSE has suspended Karvy Stock broking license

due to non-compliance of regulatory provisions of the exchange. As per
media sources, market regulator estimates that the broker has misused
client securities worth ~| 2800 crore, pledging the securities with financial
institutions. Currently, NSE has appointed EY India Ltd to conduct a forensic
audit and findings of the same is awaited. However, such events act as trust
deficit and can lead to large brokers gaining market share.
In a recent circular, SEBI announced new norms on bringing margin for cash
buy/sell order addition. As we notice, online brokers had practiced the same
as clients need to keep margin money before buy order placement and sell
is allowed only from delivery, leading to very negligible impact of new
norms. All these SEBI norms and intense competition have impacted small
brokers while large brokers are expected to gain market share.
Emergence as top discount broker - Zerodha

Zerodha has introduced disruptive pricing model offering low flat brokerage
to clients. Currently, Zerodha is serving to ~17 lakh customers (of which
close to 12 lakhs are active clients) with order/trades per day at 20-40 lakhs
as per the management. Accordingly, Zerodha has clocked revenue of ~|
800-900 crore in FY19. Nearly 2.5-3 lakh traders trade on their terminal on a
daily basis.
Management ascribes transparency and nimbleness as their core strengths
apart from low pricing.
Announcement of zero brokerage on delivery based cash transaction in
December 2015 and adoption of e-KYC post demonetisation were game
changing moves for the company which led to significant addition in
customer base. Launch of newer products has enabled garnering
incremental revenue
Valuation
Traditional brokers emerge strong on earnings
The Indian broking industry comprises participants with varied business
models from those primarily engaged in capital market activities and others
engaged in other financial activities including lending, AMC and ARC. Given
the dependence on capital market and inherent cyclicality, we assign PE
multiple in range of <15x for peers engaged in capital market. Accordingly,
we value pure brokers like IIFL Securities at 8x FY21E EPS and Geojit BNP
Paribas Financial Services at 12x FY21E standalone EPS. Players with
business models in other financial segments are valued on SoTP basis. We
value JM Financial at 1x FY21E BV (implying 11.5x FY21E EPS), Edelweiss
at 1.4x FY21E BV (implying 16.7x FY21E EPS) and Motilal Oswal at 23x
FY21E EPS. 5Paisa as a startup is valued at 4x FY21E revenue. We initiate
coverage with a BUY rating on IIFL Sec and Motilal Ostwal and HOLD rating
on 5 paisa, Geojit Financial, Edelweiss Financial Services and JM Financial.
Exhibit 17: Valuation

| crore CMP TP Rating Mcap PAT (| crore) RoE (%) P/E (x) NW (| crore) P/BV (x)
| | | core FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
Motil.Oswal.Fin. 730 850 Buy 10803 499 539 14 13 21.6 20.0 3809 4349 2.8 2.5
Edelweiss.Fin. 116 125 Hold 10827 343 656 5 8 31.6 16.5 7994 8656 1.4 1.3
JM Financial 91 94 Hold 7699 582 681 11 12 13.2 11.3 7620 7806 1.0 1.0
IIFL Securities 38 50 Buy 1214 164 205 20 21 7.4 5.9 895 1100 1.4 1.1
Geojit Fin. Ser. 28 29 Hold 655 14 20 9 11 46.9 33.5 515 572 1.3 1.1
5Paisa Capital 180 205 Hold 458 2.8 7.2 3 5 163.3 63.6 151 158 3.0 2.9

Motilal Oswal Financial (MOTOSW)
CMP: | 729 Target: | 850 (16.5%) Target Period: 12 months BUY
months December 23, 2019
Cyclicality of business to moderate…

MOSL is the eighth largest retail broker in India based on active client base
Initiating Coverage
of 3.3 lakh with a total client base of 12.6 lakh. With an average daily turnover
(ADTO) of | 20600 crore, it enjoys 1.4% market share as on September 2019.
Particulars
The consolidated entity includes asset management (MF), distribution,
wealth management apart from broking & investment banking in its overall Amount
business arena. It maintains its own treasury worth | 2650 crore. Market Capitalisation | 10804 crore
Overall revenue has grown at 14%, 23% CAGR in the last 10 years, five Networth (Q2FY20) | 3310 crore
years, respectively, depicting MOSL’s consistency in diversifying & building 52 week H/L 855/480
revenue streams. EBIDTA, PAT have grown at 14%, 6% and 61%, 48% Face Value |1
CAGR in nine, five years, respectively. Losses in home finance & fund based Promoter (%) 69.9
segments in the last year have impacted earnings. We expect revenues to
DII Holding (%) 1.7
grow at 4% CAGR boosted by growth in fund based revenues & PAT growth
at 26% CAGR in FY19-22E led by lower provisions & tax reduction. FII Holding (%) 13.2
Others (%) 15.1
Leading traditional broker, presence in retail, institutional, IB Key Highlights
Motilal Securities has been a strong player in the capital markets with a  Rich experience in capital market &
presence across business segments. It has seen a declining trend in ADTO inclination to scale up wealth &
home finance business bodes well
market share to 1.4%, down from highs of over 4% in FY09. However, it has for the company’s long term vision
tried to maintain share in the high yielding cash segment in last few years.


At current valuation, stock is fairly
Latest profits remained healthy growing 14% YoY, 58% QoQ in Q2FY20 post valued. Accordingly, we initiate
FY19 reported PAT growing 18% YoY to | 173 crore. It runs a lending book coverage with BUY rating and target
of ~| 1274 crore currently with pure margin funding at around | 348 crore. price of | 850
Strong presence in broking, enables it to spread wings Price movement

14,000 1,800
Over the years, MOSL has successfully built a pan-India distribution 12,000 1,600
1,400
network. It has over 211 branches and 2400 franchises. The company enjoys 10,000 1,200
advantage of access to the rich experience and network of promoters and 8,000 1,000
6,000 800
broking client relationships to expand even in other business segments. 4,000
600
400
AMC, wealth management, P/E and home finance are its key segments. 2,000 200
0 0
Vast experience – new business lines augur well, initiate with BUY
Oct-16
Feb-17
Jun-17
Nov-17
Mar-18
Jul-18
Nov-18
Mar-19
Jul-19
Nov-19
The experience of promoters and management remains rich in the capital MOFSL (R.H.S) Nifty (L.H.S)
market segment. We believe the wealth management and AMC businesses Source: ICICI Direct Research, Reuters
would reduce the impact of cyclicality of capital markets in earnings. We Research Analyst
expect revenues, PAT to grow at 4%, 26% CAGR, respectively, in FY19-22E.
Kajal Gandhi
Housing losses are turning around with other businesses picking up. We kajal.gandhi@icicisecurities.com
expect RoE to gradually improve from 9% in FY19 to 13-14% by FY20-21E.
Factoring in AMC business commands higher multiple, we value MOSL Vishal Narnolia
slightly higher than pure brokers. We value company on SOTP basis vishal.narnolia@icicisecurities.com
implying multiple of 23x FY21E PAT, providing a target price of | 850. We Harsh Shah
initiate coverage with BUY rating on the stock. shah.harsh@icicisecurities.com
Key Financial Summary

FY18 FY19 FY20E FY21E FY22E
ADTO (| crore) 13,700 17,400 19,314 20,859 22,528
Market Share (%) 2.0 1.8 1.6 1.4 1.3
Total Revenue (| crore) 2,935 2,677 2,624 2,783 2,993
Net Profit (| crore) 622 294 499 539 594
EPS (|) 43 20 34 37 41
P/E (x) 17 36 21 20 18
P/BV (x) 3.6 3.4 2.8 2.4 2.2
RoE (%) 9.6 14.0 13.2 12.8
s
Initiating Coverage | Motilal Oswal Financial ICICI Direct Research
Story in charts & rationale

Exhibit 18: Diversified revenue mix
100% 6 2 5 4 3 3
14 10 9
3 24 22 23 23 23
80% 20 30 23
20
60% 24 30 29 30 32 32
27
26
40%
62
20% 45 38 42 44 44 43 42 41
0%
FY15 FY16 FY17 FY18 FY19 H1FY20 FY20E FY21E FY22E
Capital Market Asset & wealth Management Housing finance Fund Based
Exhibit 19: Segment wise return on equity

FY18 FY19 H1FY20
RoE (%) % of NW RoE (%) % of NW RoE (%) % of NW
Capital Market 96 9 89 10 66 9
Asset & wealth Management 141 5 127 3 108 5
Housing finance -13 23 -17 27 1 25
Fund Based -5 63 3 60 11 60
Consolidated RoE (%) 6 10 18
Broking
Motilal Securities has been a strong player in the capital markets with a
presence across business segments. It has seen a declining trend in ADTO
market share to 1.4%, down from highs of over 4% in FY09. However, it has
tried to maintain share in the high yielding cash segment over the years.
Latest profits remained healthy growing 14% YoY, 58% QoQ in Q2FY20 post
FY19 with reported PAT growing 18% YoY to | 173 crore. It runs a lending
book of ~| 1274 crore currently with pure margin funding ~| 348 crore as
on Sept 2019. We expect broking segment earnings to grow marginally
higher from here led by lower volume growth and contained costs, along
with lower taxes at 25%.
Exhibit 20: Broking P&L
| Crore FY18 FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 FY20E FY21E FY22E
Total Revenues 1,121 1,133 294 270 281 278 302 1,102 1,147 1,221
Operating Cost 762 750 188 188 193 181 195 710 739 786
PAT 147 173 51 34 36 40 56 187 195 220
AMC
As of September 2019, AMC AUM was at | 38500 crore (up 6% YoY), with
MF AUM at | 19900 crore (up 5% YoY), PMS AUM at | 15800 crore (up 7%
YoY) and alternative investment fund (AIF) AUM at | 2600 crore. The group
has built a strong recurring revenue item from scratch. The growth
continues to remain healthy except last year. MF equity market share is
1.9%. It reported revenue & PAT of | 579 crore & | 150 crore, respectively,
in FY19 and grew 22% YoY in Q2FY20 benefiting from lower taxes.

Exhibit 21: AUM & income statement

AUM 35,600 38,900 36,402 37,400 38,900 38,809 38,501 41,623 45,785 50,364
Total Revenues 520 579 154 137 140 144 136 595 659 725
Operating Cost 349 348 93 83 86 88 85 379 418 460
PBT 170 231 61 54 53 56 50 223 245 274
PAT 110 150 39 34 36 36 48 167 184 206
IB and wealth management

Wealth management is the recent addition to the kitty with AUM of | 18100
crore and quarterly revenue of | 28 crore. However, the potential to expand
the business and build recurring revenues remains high. The IB business
remains lumpy.
Exhibit 22: Wealth management income statement
AUM 14,700 17,500 15,485 16,400 17,500 18,008 18,141 18,375 20,213 22,234
Total Revenues 98 109 32 25 26 22 28 103 113 125
Operating Cost 66 88 24 21 21 21 26 93 100 103
PBT 31 20 8 4 4 1 1 7 11 14
PAT 21 14 6 3 3 1 1 5 9 11
Aspire Housing Finance renamed Motilal Oswal Housing Finance

Aspire was the housing finance arm of MOFSL. The entity had faced losses
in the last two years due to asset quality issues. The management has done
write-offs in Q2FY20 and significantly reduced the GNPA and NNPA ratios
to 2.39% and 1.82% from a high of 10.4% and 7.8%, respectively. PCR is at
62%. These lower NPLs will help them to further boost lender’s confidence
and bring down incremental cost of funds. We expect housing loan growth
to pick up moderately to | 4280 crore in FY21E with asset quality concerns
subsiding.
Exhibit 23: Housing finance income statement
NII 238 231 70 52 51 58 54 225 235 257
Other Income 22 13 3 3 4 2 2 10 11 11
Total Revenues 261 244 73 56 55 60 57 235 246 268
Operating cost 99 104 26 27 24 24 25 108 113 123
PPoP 162 141 47 28 32 36 32 127 133 145
Provisions 137 352 101 178 22 11 49 70 70 70
PBT 25 -212 -54 -150 9 25 -18 57 63 75
PAT 19 -137 -36 -97 8 17 -12 40 44 52
Exhibit 24: Housing finance key data

FY18 FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 FY20E FY21E FY22E
AUM 4860 4360 4600 4400 4360 4300 3850 3927 4280 4666
NIM (%) 4.1 4.8 4.6 4.85 4.8 5.2 5.1 5.7 5.5 5.5
GNPA (%) 4.5 9.3 7 8.68 9.3 10.4 2.4
NNPA (%) 3.3 7.2 5.6 6.97 7.2 7.8 1.8
MOFSL has an equity treasury book of ~| 1,100 crore with MTM valuations
of | 1550 crore as on September 2019. Apart from these, there are
liquid/debt funds of | 300 crore and sponsor investments in Private Equity
and Real Estate funds to the tune of ~| 450 crore.
Valuation
The experience of promoters and management remain rich in the capital
market segment. We believe the wealth management and AMC businesses
would reduce the impact of cyclicality of capital markets in earnings. We
expect revenues, PAT to grow at 4%, 26% CAGR, respectively, in FY19-22E.
Housing losses are turning around with other businesses picking up. We
expect RoE to gradually improve from 9% in FY19 to 13-14% by FY20-21E.
Factoring in AMC business commands higher multiple, we value MOSL
slightly higher than pure brokers. We assign 23x FY21E PAT, providing a
target price of | 850. We initiate coverage with a BUY rating on the stock.
Exhibit 25: SOTP valuation

Business Segment Value (| crore) |/share
AMC 6,704 460
Broking & IB 3,562 245
PE & other business 2,416 166
Home Finance 1,895 130
Holding company discount 15% 15%

Value per share 12,391.2 850
Exhibit 26: One year forward PE

1600
1400
1200
1000
| crore
800
600
400
200
0
Jan-14
Oct-14
Jan-15
Oct-15
Jan-16
Oct-16
Jan-17
Oct-17
Jan-18
Oct-18
Jan-19
Oct-19
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-14
CMP 15.0 X 20.0 X 25.0 X 30.0 X
Source: Capital line , ICICI Direct Research

Financial Summary
Exhibit 27: Income Statement (| crore)

Exhibit 28: Balance Sheet (| crore)
FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E
Total Revenue 2,677 2,624 2,783 2,993 Sources of Funds
Operating Cost 1,543 1,400 1,383 1,471 Equity
EBITDA 937 1,014 1,178 1,253 Net-worth 3050 3809 4349 4943
Interest Expense 517 470 446 433 Borrowings 5160 4472 4420 4332
PBT 396 666 719 792 Minority Interest 40 30 30 30
Tax 10 17 18 20 Total Liabilities 8250 8281 8769 9275
PAT 294 499 539 594
Source: Company, ICICI Direct Research Application of Funds
Fixed assets 300 330 330 330
Investment 2690 2700 2720 2720
Loans and Advances 4880 4677 5098 5554
Working Capital (net) 360 514 561 611
Deferred tax assets (net) 20 60 60 60
Total Assets 8250 8281 8769 9275
Exhibit 29: Key Ratios Exhibit 30: Growth (%)

FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E
No of Eq Shares (Crore) 14.57 14.57 14.57 14.57 Total Asset 0.4 5.9 5.8
EPS (|) 20.2 34.3 37.0 40.8 Total Income -2.0 6.1 7.5
Book Value(|) 212 261 298 339 ADTO 11.0 8.0 8.0
BVPS (|) 209 261 298 339 Expences -9.3 -1.2 6.4
P/E (x) 36.1 21.3 19.7 17.9 Net Profit 69.7 8.0 10.2
P/B (x) 3.5 2.8 2.4 2.2 Book Value 24.9 14.2 13.7
RoE (%) 9.6 14.0 13.2 12.8 EPS 69.7 8.0 10.2
ADTO (| crore) 17400 19314 20859 22528 Source: Company, ICICI Direct Research
Market Share (%) 1.8 1.6 1.4 1.3

Yield (%) 0.015 0.014 0.013 0.013

5paisa Capital (5PACAP)
CMP: | 180 Target: | 205 (14%) Target Period: 12 months HOLD
Sustainable revenue growth; pivotal for PAT visibility…

5paisa Capital is a leading discount stock broker backed by Nirmal Jain led
IIFL group. It started operations in March 2016 with 3652 active clients as of
Initiating Coverage
FY17. Over the years, aggressive customer acquisition and competitive Particulars
pricing have aided in superior active client growth to 2.64 lakh as on October Amount
2019. The company has become the third largest discount broker. However, Market Capilatisation | 459 crore
the company plans to make itself a financial platform and differentiator with
Networth | 141 crore
offerings like P2P lending platform apart from discount broking with a
product suite (free plan/ |249 plan & |499 plan) to select from. 52 week H/L 271/111
Face Value | 10
Increasing active clients; market share set to rise DII Holding (%) 0
On the back of its lower fixed brokerage and user friendly mobile apps & FII Holding (%) 18.2
systems, the company has been constantly acquiring active clients. This led Promoter Holding (%) 34.6
to market share gains to 1.4% in Q2FY20. As of October 2019, number of Others (%) 47.2
active clients was at 264712 vs. 3652 in March 2017 implying growth at 455%
Key Highlights
CAGR for the period. Led by lower brokerage, active client to total client is
expected to be better than traditional brokers. Further, average daily  Third largest discount broker with
active clients base of 2.64 lakh as of
turnover (ADTO) witnessed 200% growth to | 8658 crore in FY19 vs. | 2860
October 2019
crore in FY18. Going ahead, increasing pace of customer acquisition &
improving market share is seen improving ADTO growth to 59% CAGR to  With the stock fairly valued, we
initiate coverage on the stock with a
| 34500 crore by FY22E. Market share is seen improving to 2% by FY22E. HOLD rating and a target price of |

205/share
Superior revenue growth to aid improvement in CI ratio
Price movement
The company witnessed strong revenue growth of 189% CAGR to | 62.6
crore in FY19 (| 7.5 crore in FY17), largely led by improving ADTO & 14,000 350
12,000 300
increasing client base. We expect revenues growth at 36% CAGR in FY19-
10,000 250
22E, led by operating leverage which is seen driving CI ratio lower to 89%
8,000 200
in FY22E. 70-75% of opex is acquisition cost. Accordingly, it is poised to 6,000 150
post FY22E PAT of ~| 12.8 crore vs. loss of ~| 17 crore in FY19. 4,000 100
2,000 50
Return ratios to improve, fairly valued 0 0
Jan-18
Mar-18
May-18
Jul-18
Oct-18
Dec-18
Feb-19
Apr-19
Jun-19
Sep-19
Nov-19
Post years of losses, the company is expected to post a profit from FY20E
on the back of operating leverage. Accordingly, return ratios are expected
5 Paisa (R.H.S) Nifty (L.H.S)
to turn from negative to positive, reporting RoE of ~8% in FY22E. The
company focuses on increasing business growth led by aggressive pricing Source: Reuters, ICICI Direct Research
and strong client acquisition compared to peers. Accordingly, an increase in Research Analyst
operating leverage is anticipated. Revenue growth holds key. With expected
PAT of ~| 12.8 crore by FY22E, we believe the stock to be looked at as a Kajal Gandhi
start-up story. As a large number of clients are new to stock markets without
long experience, burnout ratio or leakage is to be watched. The stock is Vishal Narnolia
currently trading at 66x FY21E PAT and 3.6x revenues. With the stock fairly vishal.narnolia@icicisecurities.com
valued, we initiate coverage on the stock with a HOLD rating and a target
Harsh Shah
price of | 205/share, implying 4x revenues and 73x FY21E. shah.harsh@icicisecurities.com

ADTO (| crore) 2860 8658 22500 28500 34500
Market Share (%) 0.4 0.9 1.8 1.9 2.0
Revenue from operation (| crore) 19.7 62.6 103.9 129.8 158.1
Net Profit (| crore) -25.3 -16.6 2.8 7.2 12.8
EPS (|) -19.9 -13.0 1.1 2.8 5.0
P/E (x) -9.1 -13.8 163.5 63.7 35.8
RoE (%) -33.5 -30.3 2.8 4.7 7.8
s
Source: ICICI Direct Research, Company

Initiating Coverage | 5paisa Capital ICICI Direct Research
Story in Charts
Exhibit 31: Superior revenue growth Exhibit 32: Improving CI ratio seen ahead
180 158 250 350 319
160 219 300 269
140 130 200
250
120 163 104
150 200
100
| crore
(%) (%) 136

80 63 150
100 96
60 93 89
66 100
40 20 50
7 25 50
20 22
0 0 0
FY17 FY18 FY19 FY20E FY21E FY22E FY17 FY18 FY19 FY20E FY21E FY22E
Revenue Revenue Growth Cost To Income Ratio
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research
Exhibit 33: Aggressive client acquisition aiding strong ADTO growth

40000
34500
35000
28500
30000
25000 22500
| crore
20000
15000
8658
10000
5000 2860
0
ADTO
Valuation
Post years of losses, the company is expected to post profit from FY20E on
the back of operating leverage. Accordingly, return ratios are expected to
turn from negative to positive, reporting RoE of ~8% in FY22E.
The company focuses on increasing business growth led by aggressive
pricing and strong client acquisition compared to peers. Accordingly, an
increase in operating leverage is expected. Revenue growth holds key. Also,
with expected PAT of ~| 12.8 crore by FY22E, we believe the stock should
be looked at as a start-up story. The stock is currently trading at 66x FY21E
PAT and 3.6x revenues. With the stock fairly valued, we initiate coverage on
it with a HOLD rating and a target price of | 205/share, implying 4x revenues
and 73x FY21E.

Initiating Coverage | 5paisa Capital ICICI Direct Research
Financial Summary
Exhibit 34: Profit & Loss Ratios (| crore)Exhibit 35: Balance Sheet Ratios (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E Particulars FY18 FY19 FY20E FY21E FY22E
Revenue from operation 19.7 62.6 103.9 129.8 158.1 Source of Funds
Other Income - - - - - Equity Capital 12.7 12.7 25.5 25.5 25.5
Total Income 19.7 62.6 103.9 129.8 158.1 Reserve& Surplus 50.2 33.6 125.6 132.8 145.6
Employee expense 19.3 25.8 31.0 37.2 40.9 Networth 62.9 46.4 151.1 158.3 171.1
Finance cost 0.8 6.8 6.8 7.6 9.1 Borrowings 16.1 92.0 96.6 101.4 106.5
Depreciation 0.7 1.4 2.2 3.0 4.2 Other Liability 52.2 143.2 128.8 141.7 155.9
Other expenses 32.1 51.0 60.2 72.2 86.7 Total 131.3 281.5 376.5 401.5 433.5
Total Expense 52.9 85.1 100.1 120.1 140.9
Profit Before Tax -33.2 -22.5 3.8 9.7 17.2 Application of Funds
Tax -7.9 -5.9 1.0 2.5 4.4 Fixed Asset 2.1 2.3 2.3 2.4 2.5
Profit After Tax -25.3 -16.6 2.8 7.2 12.8 Investment 2.1 2.1 5.3 5.8 6.4
EPS (-19.9) (-13.0) 1.10 2.83 5.03 Advances 36.4 36.8 40.5 47.8 52.6
Source: Company, ICICI Direct Research Cash 27.9 113.0 90.4 94.9 102.5
Other Asset 62.7 127.3 238.1 250.5 269.5
Total 131.3 281.5 376.5 401.5 433.5
Exhibit 36: Key Ratios (| crore) Exhibit 37: Key Ratios (%)
Particulars FY18 FY19 FY20E FY21E FY22E Growth (%) FY18 FY19 FY20E FY21E FY22E
ADTO (| crore) 2860 8658 22500 28500 34500 Total Asset 20 115 34 7 8
Market Share (%) 0.4 0.9 1.8 1.9 2.0 Advances 539 1 10 18 10
Yield (%) 0.002 0.003 0.002 0.002 0.002 Borrowing 0 470 5 5 5
ROE (%) -33.5 -30.3 2.8 4.7 7.8 Total Income 163 219 66 25 22
No of Shares (crore) 1.3 1.3 2.5 2.5 2.5 Operating expense 122 61 18 20 17
EPS (|) -19.9 -13.0 1.1 2.8 5.0 Net profit -116 35 117 -157 -78
PE (x) -9.1 -13.8 163.5 63.7 35.8 Book Value -29 -26 63 5 8
Book Value (|) 49.4 36.4 59.3 62.1 67.2 EPS -38 34 108 -157 -78
P/BV (x) 3.6 4.9 3.0 2.9 2.7 Source: Company, ICICI Direct Research
Pat margin (%) -128.7 -26.5 2.7 5.6 8.1

CI Ratio (%) 269.0 135.9 96.4 92.5 89.1
Mcap/Sales (x) 23.4 7.3 4.4 3.5 2.9

IIFL Securities (IIFSEC)
CMP: | 38 Target: | 50 (32%) Target Period: 12 months BUY
Holding its ground…

Started in 1995 as capital markets player, IIFL has emerged as a financial
conglomerate engaged in various businesses from broking, wealth
Initiating Coverage
management to lending. In September 2019, the company got demerged Particulars
and IIFL Securities (IIFL Sec) got listed separately. It is engaged in retail and
Amount
institutional broking, distribution of financial products and investment
banking. Currently, the company caters to a retail client base of 8.25 lakh Market Capitalisation | 1215 crore
and more than 600 institutional clients. In terms of active client base, the Networth | 730 crore
company is at 11th rank while in terms of ADTO market share, IIFL Sec has 52 week H/L 47.7/19
1.3% share as on Q2FY20 (| 19191 crore).
Face Value |2
DII Holding (%) 1
Client acquisition, higher volume to increase ADTO
FII Holding (%) 23.5
IIFL Sec caters to various client segments across spectrum including affluent
Promoter Holding (%) 29.4
customers (~1.75 lakh), millennial (~4 lakh) and small retail customer (~2.5
lakh). In the recent past, IIFL Sec has witnessed a decline in ADTO market Others (%) 45.9
share from 2% in FY18 to 1.3% in Q2FY20, led by higher volatility in markets Key Highlights
and rising share of options. Share in the cash segment saw a decline from  Traditional broker with retail &
3.9% in FY18 to 3.4% in Q2FY20. Client base has seen an increase from 7.66 institutional business and
lakh in FY18 to 8.23 lakh in Q2FY20. With focus on client acquisition and distribution of financial products
increase in volume of activity, average daily turnover (ADTO) is expected to  Building AUM at | 26900 crore – to
increase at ~15% CAGR to | 21000 crore in FY19-22E. Hence, we expect enable gradual shift to fee based
model

brokerage revenues to increase at 10% CAGR to | 414 crore in FY22E.
 Initiate coverage with BUY rating
and target price of | 50
Building of AUM to enable shift toward fee based model
In initial phase, earning fee based income through selling financial products Price movement
(MF & insurance) remained the key focus. Likewise, AUM has increased at 15,000 300
27% CAGR in FY17-19 to | 26900 crore. Distribution AUM rose at ~103% 250
CAGR in FY17-19 to | 8300 crore. However, a gradual shift towards AUM 10,000 200
based business model and margin funding is anticipated catering to higher 150
fee based income. Led by fee-based income, we expect revenues/PAT to 5,000 100
grow at 12%/11 CAGR in FY20-22E to | 874 crore/188 crore. 50
0 0
Dec-16
Apr-17
Jul-17
Nov-17
Feb-18
Jun-18
Sep-18
Jan-19
Apr-19
Aug-19
Dec-19
Valuation discount to persist; current lower valuation offers upside
Focus on increasing business growth led by client acquisition and increasing IIFLSec (R.H.S) Nifty (L.H.S)
market activity remain key catalysts for the base business. Focus on building Source: Reuters, ICICI Direct Research
AUM bodes well for a gradual shift towards the fee-based business model. Research Analyst
We expect the topline to increase at 12% CAGR to | 855 crore in FY22E while
earnings are seen at | 198 crore, growing at 10% CAGR. We believe as the Kajal Gandhi
wealth management and discount broking are already separately listed in
group, hence the discount in valuation vs. peers may remain. However, the Vishal Narnolia
stock is currently trading cheap at 6.4x FY21E EPS, which is at a steep vishal.narnolia@icicisecurities.com
discount compared to peers. We initiate coverage on the stock with a BUY
Harsh Shah
rating and a target price of | 50/share, implying ~8x FY21E EPS. shah.harsh@icicisecurities.com
sss

ADTO (| crore) 8415 13988 17709 20000 24000
Market Share (%) 1.2 1.4 1.4 1.3 1.4
Revenue from operation (| crore) 834.7 835.1 775.7 820.4 828.1
Net Profit (| crore) 180.6 171.5 163.8 204.8 203.9
EPS (|) 5.7 5.4 5.1 6.4 6.4
P/E (x) 6.7 7.1 7.4 5.9 6.0
RoE (%) 29.0 25.3 20.2 20.5 17.0
s

Initiating Coverage | IIFL Securities ICICI Direct Research
Snapshot of company
Exhibit 38: Revenue streams Exhibit 39: Brokerage income (retail & institutional business)
Proportion 300 282.9
| crore FY17 FY18 FY19 1HFY20
(1HFY20) 236.3 240.3
250
Broking 200
Retail 236.3 282.9 240.3 105.3 28%
| crore
138.5 130.8
150 123.6
Institutional 123.6 138.5 130.8 68.1 18% 105.3
100 68.1
Distribution 102.7 154.4 180.4 68.8 19%
50
IB 36.1 82 33.4 10 3%
Others 289.3 290.6 117.7 32% 0
FY17 FY18 FY19 1HFY20
Total 947.1 875.5 369.9 100%
Source: Company, ICICI Direct Research Retail Institutional
Exhibit 40: ADTO & market share (cash segment) Exhibit 41: ADTO & market share (overall)
5 1180 2.5 25000
1154 1155
1140 1160 19161
4 2 17709 16934 20000
1140
1120 13988
3 1.5 15000
| crore
| crore
1100
(%)
(%)
1078
2 1080 1 10000
1060
1 0.5 5000
1040
0 1020 0 0
FY18 FY19 Q1FY20 Q2FY20 FY18 FY19 Q1FY20 Q2FY20
Cash ADTO Market Share (%) Total ADTO Market Share (%)
Exhibit 42: Break up of AUM

| crore FY17 FY18 FY19 1HFY20 CAGR (FY17-19)
DP 15900 20800 20800 18600 14%
Financial products 1900 5500 7800 8300 103%
Total AUM 17800 26300 28600 26900 27%
Valuation
Focus on increasing business growth led by client acquisition and increasing
market activity remain key catalysts for the base business. Focus on building
AUM bodes well for a gradual shift towards the fee-based business model.
We expect the topline to increase at 12% CAGR to | 855 crore in FY22E while
earnings are seen at | 198 crore; growing at 10% CAGR. We believe that as
the wealth management and discount broking are already separately listed
in group, hence the discount in valuation vs. peers may remain. However,
the stock is currently trading cheap at 6.4x FY21E EPS, which is at a steep
discount compared to peers. We initiate coverage on the stock with a BUY
rating and a target price of | 50/share, implying ~8x FY21E EPS.

Initiating Coverage | IIFL Securities ICICI Direct Research
Financial Summary
Exhibit 43: Profit & Loss (| crore) Exhibit 44: Balance Sheet (| crore)
Other Income 112.40 40.40 44.47 48.92 53.81 Equity Capital 63.7 63.8 63.8 63.8 63.8
Total Expense 667.8 613.9 597.3 559.0 585.3
Profit Before Tax 279.3 261.6 222.9 266.3 270.3 Application of Funds
Tax 92.9 86.6 59.1 70.6 71.6 Fixed Asset 583.9 469.8 493.3 468.6 421.8
Profit After Tax 180.6 171.5 163.8 195.7 198.7 Investment 159.5 139.6 153.6 168.9 185.8
Exceptional Item 0.0 0.0 87.2 0.0 0.0 Advances 81.6 433.2 519.8 623.8 779.8
PAT post excp item 180.6 171.5 251.0 195.7 198.7 Cash 855.3 1065.0 465.0 688.5 764.2
EPS 5.67 5.38 5.14 6.14 6.23 Other Asset 1181.6 942.3 998.6 1220.0 1333.8
Source: Company, ICICI Direct Research Total 2861.8 3049.9 2630.3 3169.9 3485.3
Exhibit 45: Key Ratios (| crore) Exhibit 46: Growth (%)

Particulars FY18 FY19 FY20E FY21E FY22E Growth (%) FY19 FY20E FY21E FY22E
ADTO (| crore) 8415 13988 17709 20000 24000 Total Asset 7 -1 5 10
Market Share (%) 1.2 1.4 1.4 1.3 1.4 Advances 431 20 20 25
Yield (%) 0.025 0.015 0.009 0.008 0.006 Borrowing -35 -45 5 25
ROE (%) 29.0 25.3 20.2 20.5 17.0 Total Income -8 -6 1 4
No of Shares (crore) 31.9 31.9 31.9 31.9 31.9 Operating expense -8 -3 -6 5
EPS (|) 5.7 5.4 5.1 6.4 6.4 Net profit -5 -4 19 1
PE (x) 6.7 7.1 7.4 5.9 6.0 Book Value 17 33 12 18
Book Value (|) 19.6 22.9 28.0 34.5 40.9 EPS -5 -4 19 1
P/BV (x) 1.9 1.7 1.4 1.1 0.9 Source: Company, ICICI Direct Research
Pat margin (%) 19.1 19.6 20.0 23.6 23.1

CI Ratio (%) 70.5 70.1 72.8 67.9 68.5
Mcap/Sales (x) 1.3 1.4 1.5 1.4 1.4

Geojit Financial Services (GEOBNP)
CMP: | 27.3 Target: | 29 (6%) Target Period: 12 months HOLD
Marginal player in competitive environment…

Geojit Financial services (GFS) is a leading retail financial services company
in India with a growing presence domestically and in the Middle East.
Initiating Coverage
Particulars
Established in 1987, the company offers a wide portfolio of savings and
investment solutions to over 10.2 lakh clients through a countrywide Amount
network of over 469 offices, phone services & dedicated customer care Market Capitalisation | 651 crore
centres. The company also has a strategic presence in Middle East region in Networth (FY19) | 409 crore
the form of joint ventures and partnerships.
52 week H/L 48/22
Face Value |1
Higher cash market share in tough environment
DII Holding (%) 1.2
Increased competitive intensity led by large brokers has weighed on the FII Holding (%) 2.6
company’s market share & positioning. GFS has lost 26200 active customers
Promoter Holding (%) 62.1
in the last 30 months, with corresponding market share dwindling from 0.5%
in FY15 to 0.21% in Q2FY20. ADTO over this time frame has grown to | 1936 Others (%) 34.1
crore at a subdued CAGR of 11%, vastly underperforming the industry’s Key Highlights
42% pace. Despite loss in active clients & slower ADTO growth, GFS has
 Increasing competition from large
been able to maintain share in cash segment (FY19- | 448 crore, 23% of brokers taking a toll on business
ADTO) in total ADTO compared to its peers (Avg~10% for peers). growth
 Initiate coverage with HOLD rating
Moderation in revenue, higher cost to weigh on earnings and target price of | 29
Revenues grew to | 265 crore in FY19, with growth in FY16-19 limited to 7%

Price movement
CAGR. Topline growth has remained a laggard despite robust 32% CAGR in
distribution income in the past 36 months (financialisation of savings effect) 14,000 160
12,000 140
as brokerage income (76% of revenues) grew meagrely by 4% in this period.
10,000 120
Combined with a quicker rise in costs, the ensuing cost to income ratio 100
surged ~1000 bps in FY19 to 80% (70% in FY18), thus dragging earnings. 8,000
80
PAT witnessed a 6% CAGR decline in FY16-19. Going ahead, earnings are 6,000
60
seen being supported by a shift to lower tax rates and modest improvement 4,000 40
in CI ratio against any meaningful uptick in brokerage revenues. 2,000 20
0 0
Awaiting growth triggers; initiate coverage with HOLD
Dec-16
Mar-17
Jul-17
Nov-17
Feb-18
Jun-18
Sep-18
Jan-19
Apr-19
Aug-19
Nov-19
GFS’ current business strategy appears to be hampered by a moderation in
yield and loss of active clients, with revenues and market share suffering as Geojit (R.H.S) Nifty (L.H.S)
a result. Simultaneously, cost overhangs also limit visibility on the Source: Reuters, ICICI Direct Research
profitability front. In our opinion, GFS is in dire need of re-strategizing to be
able to compete better with large brokers. We expect earnings to remain Research Analyst
muted with the benefit of lower tax rate aiding profitability, going ahead. Kajal Gandhi
With earnings strength a key point of concern, the company’s competitive kajal.gandhi@icicisecurities.com
position appears threatened. GFS is currently trading at at 11.5x FY21E
Vishal Narnolia
standalone EPS (9.5x FY21E on consolidated basis). In our view, limited
vishal.narnolia@icicisecurities.com
growth visibility caps upside, though higher share of cash segment stays its
forte. We initiate coverage with HOLD rating and a target price of | 29, Harsh Shah
valuing it at 12x FY21E standalone EPS (10x FY21E on consolidated basis). shah.harsh@icicisecurities.com

s

ADTO (| crore) 1994 1936 2250 2775 3450
Market Share (%) 0.28 0.19 0.18 0.19 0.20
Revenue from operation (| crore) 304 265 285 331 384
Net Profit (| crore) 67.5 29.2 40.8 57.0 67.1
EPS (|) 2.8 1.2 1.7 2.4 2.8
P/E (x) 9.6 22.3 15.9 11.4 9.7
RoE (%) 16.2 6.9 8.8 10.5 11.1
Initiating Coverage | Geojit Financial Services ICICI Direct Research
Story in charts
Exhibit 47: Average daily turnover (ADTO) growth over the years
4000
3500
3000
Cash ADTO grew at a meagre pace of 1% during
2500
(| crore)
FY15-19 while derivatives grew at 14% CAGR during

2000 2898
the same period
1500 2276
1498 1488 1800
1000 868 956
760
500
426 369 394 496 448 450 500 552
0
FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Cash Derivative
Exhibit 48: Active clients and lower turnover impacting market share
0.60 0.53
0.50
0.40 Continuous loss of active clients and lower turnover
0.40 0.33
0.28
are impacting market share, which has halved to
(%) 0.30 0.19% in FY19 vs. 0.53% in FY15
0.19 0.18 0.19 0.20
0.20
0.10
0.00
FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Market Share
Exhibit 49: Revenue break-up

| Crore FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Declining yield & market share led to muted growth
Brokerage Income 182 204 242 202 219 256 302 in brokerage income (4% CAGR) while increased
Distribution Income 18 24 45 43 47 51 57 financialisation aided distribution growth (32%
Others 36 38 47 41 31 35 37 CAGR)

Valuation
GFS’ current business strategy appears to be hampered by a moderation in
yield and loss of active clients, with revenues and market share suffering as
a result. Simultaneously, cost overhangs also limit visibility on the
profitability front. In our opinion, GFS is in dire need of re-strategizing to be
able to compete better with large brokers. We expect earnings to remain
muted with the benefit of lower tax rate aiding profitability, going ahead.
With earnings strength a key point of concern, the company’s competitive
position appears threatened. GFS is currently trading at at 11.5x FY21E
standalone EPS (9.5x FY21E on consolidated basis). In our view, limited
growth visibility caps upside, though higher share of cash segment stays its
forte. We initiate coverage with HOLD rating and a target price of | 29,
valuing it at 12x FY21E standalone EPS (10x FY21E on consolidated basis).
Exhibit 50: One year forward PE
140
120
100
80
|
60
40
20
0
Oct-14
Jan-15
Oct-15
Jan-16
Oct-16
Jan-18
Jan-17
Oct-17
Oct-18
Jan-19
Oct-19
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Apr-14
Apr-15
Apr-17
Apr-18
Apr-16
Apr-19
CMP 5.0 X 10.0 X 15.0 X 20.0 X 25.0 X
Source: Company, Capital line, ICICI Direct Research

Financial Summary (Standalone)
Other Income 30.1 20.2 10.1 10.1 10.1 Equity Capital 23.8 23.8 23.8 23.8 23.8
Total Expense 232.7 229.6 240.7 264.8 304.0
Profit Before Tax 101.4 55.5 54.8 76.6 90.0 Application of Funds
Tax 34.0 18.8 14.0 19.5 23.0 Fixed Asset 55.3 66.4 69.7 76.6 84.3
Profit After Tax 67.5 29.2 40.8 57.0 67.1 Investment 114.7 45.0 67.4 74.2 81.6
EPS 2.8 1.2 1.7 2.4 2.8 Advances 155.9 172.5 175.9 184.7 203.2
Source: Company, ICICI Direct Research Cash 188.0 204.9 348.4 383.2 421.5
Other Asset 153.8 214.8 163.8 180.3 193.1
Total 667.8 703.6 825.2 899.1 983.8

Particulars FY18 FY19 FY20E FY21E FY22E Growth (%) FY18 FY19 FY20E FY21E FY22E
ADTO (| crore) 1994 1936 2250 2775 3450 Total Asset 5 5 17 9 9
Derivative (| crore) 1498 1488 1800 2276 2898 Advances 37 11 2 5 10
Cash (| crore) 496 448 450 500 552 Borrowing 0 -47 50 40 30
Market Share (%) 0.3 0.2 0.2 0.2 0.2 Total Income 25 -15 4 16 15
Yield (%) 0.046 0.040 0.037 0.035 0.033 Operating expense 21 -1 5 10 15
ROE (%) 16.2 6.9 8.8 10.5 11.1 Net profit -76 57 40 40 18
No of Shares (crore) 23.8 23.8 23.8 23.8 23.8 Book Value 9 -6 26 11 12
EPS (|) 2.8 1.2 1.7 2.4 2.8 EPS 74 -57 40 40 18
PE (x) 9.6 22.3 15.9 11.4 9.7 Source: Company, ICICI Direct Research
Book Value (|) 18.3 17.2 21.6 24.0 26.8

P/BV (x) 1.5 1.6 1.3 1.1 1.0
Pat margin (%) 20.2 10.2 13.8 16.7 17.0
CI Ratio (%) 69.6 80.5 81.4 77.6 77.2
Mcap/Sales (x) 1.9 2.3 2.2 1.9 1.7

Edelweiss Financial (EDEFIN)
Growth pauses; balance sheet in restructuring mode

Edelweiss Financial Services (Edelweiss) has successfully transformed itself
Initiating Coverage
from a pure investment banking advisor (65% of PBT in FY10) to a financial
conglomerate with businesses spanning three scalable and profitable
business segments: 1) credit (retail & corporate) (| 31289 crore) & ARC
Particulars
(| 38200 crore), 2) advisory (wealth management -| 107800 crore, asset
management- | 34900 crore & capital markets custodian asset | 21500 crore Amount
and 3) life & general insurance (| 218 crore premium). Market Capitalisation | 10744 crore
The recent resolution of Essar Steel has benefitted Edelweiss ARC that had Networth | 8830 crore
the second largest exposure at ~| 8307 crore of which 85% has been 52 week H/L 210/67
recovered. Edelweiss Tokio Life Insurance continued to generate minor Face Value |1
losses of | 28 crore in Q2FY20 while premium growth was healthy at 21% DII Holding (%) 4.9
YoY to | 218 crore. Breakeven is expected by FY23E. Major concerns remain FII Holding (%) 30.0
its high exposure to real estate of | 11000 crore spread across 162 projects Promoter Holding (%) 32.9
while 30-35 of them are stressed with risk of higher provisions ahead. Others (%) 32.2
Key Highlights
Credit business contributes 73% of the consolidated PAT post minority
 Higher-than-expected recovery
interest (MI) in Q2FY20. Concentration within real estate/wholesale sector from Essar Steel and on boarding of
has impacted ratings, earnings scenario. Post the September 2018 liquidity new investors provides comforts.
crisis, Edelweiss has cautiously started unwinding wholesale book and  Factoring in muted FY20E and
focused on scaling up retail & advisory business. It is expected to continue. expected revival in earnings in
Notably, in Q2FY20, the company on-boarded two large investors in the FY21E, we initiate coverage with

HOLD rating & target price of | 125
advisory business, reflecting its ability to raise capital even in a challenging
period. However, we are three to four quarters away from witnessing an
Price movement
improvement. Post a muted FY20E, consolidated profits are expected to pick
up in FY21E to | 617 crore, though lower than | 1044 crore in FY19. 14,000 400
12,000 350
Advisory – wealth, ARC hold key, fairly valued 10,000 300

250
8,000
200
The company’s strong positioning in institutional, investment banking 6,000
150
4,000
continues while market share in pure retail broking business has gradually 100
2,000 50
reduced. Overall market share may have reduced from 6.5% (actual) in FY09 0 0
to under 2% now (estimates basis active clients). The advisory business
Dec-16
Apr-17
Jul-17
Nov-17
Feb-18
Jun-18
Sep-18
Jan-19
Apr-19
Aug-19
Dec-19
including wealth management is expected to maintain healthy traction.
Advisory AUM of | 107800 crore includes 26% advisory, 74% distribution, EDEL (R.H.S) Nifty (L.H.S)
including retail demat balances. The management raised funds in a
Source: ICICI Direct Research, Reuters
challenging period bringing new partners and has been increasing focus on
advisory and retail businesses. It is moving towards a capital light, fee based
Research Analyst
model. Real estate & wholesale books are expected to move to fund based
models while co-lending model has been worked out with five banks to keep Kajal Gandhi
the balance sheet light. Factoring in balance sheet restructuring would take kajal.gandhi@icicisecurities.com
at least a year, we initiate coverage on the stock with a HOLD rating. We Vishal Narnolia
assign SoTP based target price of | 125/share (implying 16.7x FY21E EPS). vishal.narnolia@icicisecurities.com
Harsh Shah
shah.harsh@icicisecurities.com
es
FY17 FY18 FY19 FY20E FY21E
Revenue from operation (| crore) 3383 4443 5275 4290 4780
Net Profit (| crore) 609 838 991 343 656
EPS (|) 7.3 10.1 11.4 3.9 7.5
P/E (x) 15.8 11.4 10.1 29.2 15.3
Book Value 51.5 72.9 83.8 85.3 92.4
P/B (x) 2.2 1.6 1.4 1.3 1.2
RoE (%) 15.2 15.0 14.3 4.7 8.5
RoA (%) 1.5 1.5 1.6 0.6 1.3
Initiating Coverage | Edelweiss Financial ICICI Direct Research
Story in Charts
Exhibit 55: Expected business structure by FY22
Exhibit 56: Expected business structure by FY20
Exhibit 57: Loan book break-up

| crore FY15 FY16 FY17 FY18 FY19 Q1FY20 Q2FY20
Credit Business 13810 18118 25837 40589 41120 37812 35110
Wholesale 9622 12097 13875 19525 18055 16987 16178
Structured Credit 5,991 6,750 6,763 9,352 6,456 5,566 5,144
Real Estate 3,631 5,347 7,112 10,173 11,599 11,421 11,034
Retail Loans 4,187 6,021 11,962 21,064 23,065 20,825 18,932
Retail Mortgages 2,081 2,641 3,614 6,672 8,996 8,726 8,075
LAS & Others 1,162 1,940 2,328 4,640 4,089 3,998 2,943
SME & Agri Financing 944 1,440 3,010 4,876 4,990 4,257 4,093
SME 0 0 2,138 3,677 4,591 3,844 3,821
Agri & Rural 0 0 872 1,199 399 413 272
ARC Asset 0 0 4,781 6,297 7,380 8,631 8,765
Total Loan Book 13810 18118 30618 46886 48500 46443 43875
Proportion (%)
Credit Business 100 100 84 87 85 81 80
Wholesale 70 67 45 42 37 37 37
Retail Loans 30 33 39 45 48 45 43
ARC Asset 0 0 16 13 15 19 20
Total Loan Book 100 100 100 100 100 100 100

Exhibit 58: Revenue break-up

FY16 FY17 FY18 FY19 Q1FY20 Q2FY20
Net Interest Income - Credit (adjusted
1,651 2,135 2,305 3,142 710 504
for BMU/Corporate)
Income from non-credit business 697 1,061 1,330 1,310 509 460
Capital Markets revenue 455 556 620 342
Management Fees from Mutual fund 0 52 130 243
Management Fees from Wealth 242 453 580 725
Net Revenue 2,348 3,196 3,635 4,452 1,219 965

Exhibit 59: Return ratios to improve going ahead

20.0 8.1 9
7.7
7.2 7.0 8
6.8 18.9 6.6
15.0 7
16.6
15.5 6
14.5
5
(%) 10.0 12.0 (%)
4
9.2 3
5.0 2.7 2
1.9 2.1 2.1 1.6 2.4
1
0.0 0
FY16 FY17 FY18 FY19 FY20E FY21E
RoA RoE (RHS) NIM
Exhibit 60: Pressure on asset quality to persist in near term

4.50
3.87
4.00
3.50 2.94
3.00
2.50
(%) 1.75 1.87
2.00 1.59
1.40 Near term challenges lie in managing liquidity and
1.50
0.70 0.83 asset quality, with a shift towards advisory & retail
1.00 0.47 0.60
0.19 0.24 seen improving the granularity of the portfolio.
0.50
0.00
FY16 FY17 FY18 FY19 FY20E FY21E
GNPA NNPA
Exhibit 61: Wealth Management snapshot

As on 30th Sept 2019 No of Clients AUA (| crore) Number of RM
Ultra HNI 2410 83500 161
Affluent Investor 525300 24300 781

Exhibit 62: Break up of Wealth AUM (| 107800 crore )

100%
27 26 30 29 26
80%
60%
40% 73 74 74
70 71
20%
0%
FY17 FY18 FY19 Q1FY20 Q2FY20
Distribution Asset Advisory Asset
Exhibit 63: Snapshot of ARC business

| crore Q1FY20 Q2FY20
AUM 47463 47029
EOP Capital employed 8631 8765
EOP Equity 2158 2236
Net Interest Income 204 179
Credit Cost 26 17
PAT 105 73
Net Interest Margin (%) 11.2 8.3
Cost To Income (%) 22 28
RoA (%) 5.8 3.4
RoE (%) 22.3 13.1

Valuation
The management raised funds in a challenging period bringing new partners
and has been increasing focus towards advisory and retail businesses, it is
moving towards capital light and fee based model. Real estate & wholesale
books are expected to move to fund based models and co-lending model is
worked out with 5 banks to keep balance sheet light. Factoring balance sheet
restructuring to take at least a year, we initiate coverage on the stock with a
HOLD rating. We assign SoTP - based target price of | 125 per share
(implying 15.3x FY21E EPS).
Exhibit 64: SoTP Valuation
Company Value (| crore) Value/share
Credit Business
Wholesale Credit 3,147 34
Retail Credit 3,343 36
Distressed Credit 1,537 16
Franchise Business
Wealth Management 1,724 18
Asset Management 1,433 15
Capital Markets 554 6
Total Value 11,738 125

CMP 10,744 115
Upside/Downside(%) 9
Exhibit 65: 1 Year Forward PE chart

400
300
| 200
100
0
Jan-14
Oct-14
Jan-15
Oct-15
Jan-16
Oct-16
Jan-17
Oct-17
Jan-18
Oct-18
Jan-19
Oct-19
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Apr-14
Apr-16
Apr-17
Apr-18
Apr-15
Apr-19
CMP 10.0 X 15.0 X 20.0 X 25.0 X 30.0 X
Source: ICICI Direct Research, Capital Line

Financial Summary
Exhibit 66: Income Statement (| crore) Exhibit 67: Balance Sheet (| crore)
FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E
Net Interest Income- Credit Business
2,305 3,142 3,212 3,551 Share capital 87 89 94 94
Income from non credit business 1,330 1,310 1,078 1,230 Reserves and surplus 6,796 7,588 7,901 8,563
Other operating Revenue 81 82 0 0 Shareholders' Equity 6,883 7,677 7,994 8,656
Net Revenues 4,443 5,275 4,290 4,780 ex-insurance 6,328 7,143 7,525 8,254
Operating Expences 2,530 3,144 2,972 3,375 Minority interest 2,719 3,298 27,191 27,191
Borrowings 48,031 45,217 38,949 35,486
Operating Profit 1,913 2,131 1,319 1,405 Other liabilities 7,630 10,612 76,299 76,299
Provisioning 616 512 838 512 Total liabilities 63,487 64,544 55,582 56,965
PBT (ex- insurance) 1,297 1,618 481 893
Gain/(loss) from insurance business 53 -157 -127 -132 Fixed assets 577 548 657 789
PBT 1,350 1,740 550 1,009 Cash and bank balances 4,562 6,455 4,467 3,690
Tax 512 699 182 303 Investments 7,887 8,799 7,490 6,551
Consol PAT (ex-minority int) 838 1,040 369 706 Loans 38,439 38,408 34,361 36,899
Minority Interest -27 49 26 50 Other assets 12,022 10,333 8,606 9,036
Consol PAT 838 991 343 656 Total assets 63,487 64,544 55,582 56,965
Exhibit 68: Key ratios Exhibit 69: Growth (%)

FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E
Valuation Total Asset 1.7 -13.9 2.5
No of equity Shares 92 92 94 94 Advances -0.1 -10.5 7.4
EPS (|) 10.1 11.4 3.9 7.5 Borrowing -5.9 -13.9 -8.9
BV (|) 72.9 83.8 85.3 92.4 Total Income 18.7 -18.7 11.4
P/E (x) 11.1 9.9 28.5 14.9 Total Expense 24.3 -5.5 13.6
P/BV (x) 1.5 1.3 1.3 1.2 Net Profit 18.2 -65.4 91.5
Margin EPS 12.4 -65.4 91.5
NIM (%) 7.7 8.1 6.6 7 Book Value 14.9 1.9 8.3
Quality & Efficiency Source: Company, ICICI Direct Research
GNPA (%) 1.7 1.9 2.9 3.9

NNPA (%) 0.7 0.8 0.2 0.2
ROA (%) 1.5 1.6 0.6 1.3
ROE (%) 15.0 14.3 4.7 8.5

JM Financial (JMFINA)
Capital market business positive; real estate caps upside

JM Financial is a diversified financial group engaged in various businesses
providing a host of services including mortgage lending (wholesale and
Initiating Coverage
retail), distress asset management (ARC), investment banking, wealth
management and securities (IWS) and AMC. As of September 2019, the Particulars
es
advances book was at | 13810 crore, comprising | 9167 crore and | 639 Amount
crore of wholesale & retail mortgage, respectively, | 1100 crore for capital Market Capitalisation | 7675 crore
markets and | 2904 crore in corporate/promoter funding. Apart from lending Networth | 5214 crore
ARC AUM was at | 14037 crore. In capital markets, JM Financial has a market 52 week H/L 110/73
share in overall ADTO at 0.74% with 2.42% share in cash ADTO. In terms of Face Value |1
active client base, the company has ~36661 customers as of Sep’19. DII Holding (%) 4
FII Holding (%) 20.3
Real estate woes keep lending on slower track Promoter Holding (%) 62.1
Others (%) 13.9
JM Financial is engaged in wholesale and retail mortgage lending as well as
lending to capital markets. Primary exposure in real estate is towards large Key Highlights
developers in metros. Given the slowdown in the real estate sector,  Focus on capital markets activities to
advances to the real estate sector witnessed de-growth in H1FY20 to | 9367 support performance ahead
crore. Moderate growth in real estate advances and maintaining higher  Slowdown in real estate sector to
liquidity would keep NIM, earnings under pressure. Several measures taken keep advance growth moderate in
near term
by government for real estate remain positive, asset quality risk still persist.
 Initiate coverage with HOLD rating
and price target of | 94
Capital market business to remain key driver

The capital market has been a major contributor in terms of topline as well Price movement
as bottomline at ~45%. Investment banking has remained a strong point for 14,000 200
the entity. Apart from investment banking, JM Financial has been focusing 12,000
on institutional as well as HNI customers with limited presence in the retail 10,000 150
domain. In terms of active clients, JM Financial has ~36661 customers as of 8,000
100
September 2019 and contributes ~0.74% market share in overall ADTO. 6,000
However, the company has ~2.42% market share in cash ADTO at | 887 4,000 50
2,000
crore in Q2FY20. Going ahead, we expect focus on capital market business
0 0
to continue and contribute a substantial proportion in future performance.
Dec-16
Apr-17
Jul-17
Nov-17
Feb-18
Jun-18
Sep-18
Jan-19
May-19
Aug-19
Dec-19
Strong promoter, management to sustain valuations
JM Fin (R.H.S) Nifty (L.H.S)
Given the current subdued environment in the real estate sector, the lending Source: ICICI Direct Research, Reuters
business is seen staying on the slower track. We expect advances growth to
Research Analyst
remain moderate at 6.7% CAGR in FY20-22E. Business growth is seen being
led by focus on capital market activities ahead. The recent reduction in tax Kajal Gandhi
rate would benefit earnings momentum ahead. Board approval for capital kajal.gandhi@icicisecurities.com
raising of ~| 850 crore boosts confidence. Earnings are expected to grow at Vishal Narnolia
~10% CAGR in FY20-22E to | 748 crore. The stock is currently trading at vishal.narnolia@icicisecurities.com
11.6x FY21E EPS and ~1 P/BV on FY21E. We initiate coverage on the stock
with a HOLD rating and a target price of | 94 (using SOTP valuation), Harsh Shah
shah.harsh@icicisecurities.com
implying a multiple of ~11.5x on FY21E EPS.
sseses
NII (| crore) 1957.0 2133.0 2055.3 2213.7 2309.3
Net Profit (| crore) (Ex MI) 600.0 573.0 582.1 681.2 747.6
EPS (|) 7.2 6.8 6.9 8.1 8.9
P/E (x) 12.7 13.3 13.1 11.2 10.2
P/BV (x) 1 1 1 1 1
P/ABV (x) 1.31 1.07 1.02 0.99 0.97
RoE (%) 17.3 15.6 11.5 12.3 12.9
RoA (%) 3.9 3.7 3.8 4.0 4.0
s

Initiating Coverage | JM Financial ICICI Direct Research
Snapshot of company
Exhibit 70: Credit business & capital market to remain key revenue contributor
4450 101
3950 87
94 76
3450 112
2950 2202
1851 2047
(| crore)
2450 1261 1916

1950 38
1450
924
950 1724 1635 1644 1711
1500
450 750
-50
FY18 FY19 H1FY20 FY20E FY21E FY22E
Investment Banking, Securities and Wealth Credit business Asset management Others
Exhibit 71: Market share in ADTO to witness gradual uptick

16000 1483
14000 1290
12000
887 1075
10000
(| crore)
8000
6000 1175 986 13349
11608
9861 9673
4000
2000 4797 4834
0
Derivative Cash
Exhibit 72: Loan book break-up

18,000 828
16,000 464 753
581 639 684
14,000 3,477
2,705 2,317 3,161
12,000 2,904 2,874 1,325
2,334 1,078 1,204 Loan book growth to remain slow amidst real estate
(| crore)
10,000 1,100 1,095

8,000 woes
6,000 10,928
9,268 10,131 9,167 9,031 9,934
4,000
2,000
0
Real Estate Capital market Structured Finance SME

Exhibit 73: Change in borrowing franchise from FY18 Exhibit 74: …to H1FY20
2% 2% 1% 2%
15%
30% 27%
27%
55%
39%
CP NCD Term Loans Short termloans from Banks Others CP NCD Term Loans Short termloans from Banks Others
Exhibit 75: Marginal stress witnessed in asset quality

4.0 3.6
3.5
3.0
2.4
2.5
2.0 1.6
(%)
1.4 1.3 1.3 1.1

1.5
0.9 0.8
1.0 0.6 0.5 0.7 0.5 0.4 0.7 0.6 0.7 0.6
0.5
0.0
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20
GNPA NNPA SMA 2

Valuation
Given the current subdued environment in the real estate sector, lending
business is seen staying on slower track. The board has approved capital
raising of ~| 850 crore, which will boost confidence. We expect advances
growth to remain moderate at 6.7% CAGR in FY20-22E. However, increasing
business growth led by focus on capital market activities would continue
ahead. The recent reduction in tax rate would benefit earnings momentum
ahead. Earnings is expected to grow at ~10% CAGR in FY20-22E to | 748
crore. The stock is currently trading at 10.6x EPS and ~1x P/BV on FY21E.
We initiate coverage on the stock with HOLD rating and a target price of
| 94 (using SOTP valuation), implying a multiple of ~10.5x on FY21E EPS.
Exhibit 76: P/E band
250
200
150
|
100
50
0
Oct-14
Jan-15
Oct-15
Jan-16
Oct-16
Oct-18
Jan-19
Jan-17
Oct-17
Jan-18
Oct-19
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Apr-14
Apr-16
Apr-17
Apr-19
Apr-15
Apr-18
CMP 5.0 X 10.0 X 15.0 X 20.0 X
Source: Capital Line, ICICI Direct Research
Exhibit 77: SoTP valuation

Business Segment JM's stake (%) |/share
JM Financial Credit Soln 50.0 14
JM Financial Products 99.3 18
JM Financial ARC 50.0 11
Wealth Management 100.0 47
AMC 59.5 4
AIF 100.0 1
Value per share of JM 94


Financial Summary
FY18 FY19 FY20E FY21E FY22E FY18 FY19 FY20E FY21E FY22E
Intrest Income 3,096 3,579 3,488 3,774 4,010 Shareholders' Equity 4,502 5,079 5,298 5,298 5,298
Interest Expense 1,139 1,446 1,432 1,561 1,700 Minority interest 1,395 2,150 2,322 2,508 2708
Net Interest Income 1,957 2,133 2,055 2,214 2,309 Total Equity 5,897 7,229 7,620 7,806 8,007
Operating Expences 759 815 766 792 801 Share of security receipt holder523 484 489 494 499
Employee Exp 391 422 414 420 416 Borrowings 14,988 13,991 13,563 14,919 16,411
Other Exp 368 393 353 372 384 Other liabilities 746 879 1,064 1,276 1531.57
Operating Profit 1,198 1,318 1,289 1,422 1,508
Provisioning 34 35 123 120 116 Total liabilities 22,154 22,583 22,736 24,496 26,448
PBT 1,164 1,283 1,166 1,302 1,393
Tax 382 446 315 351 376 Loan Book 14,768 13,999 13,684 15,052 16,557
PAT (ex-minority int) 782 837 851 950 1,017 Distressed Asset book 3,026 4,194 4,160 4,368 4,587
Minority Interest 182 264 269 269 269 Cash 1,469 1,737 2,084 2,064 2,043
Adjusted PAT 600 573 582 681 748 Other Investment 1,004 842 884 928 975
Source: Company, ICICI Direct Research Arbitrage & Trading 198 312 328 360 396
Fixed Asset 377 372 417 458 504
Other Asset 1,312 1,127 1,179 1,264 1,386
Total Asset 22,154 22,583 22,736 24,496 26,448


FY18 FY19 FY20E FY21E FY22E FY18 FY19 FY20E FY21E FY22E
Valuation Total Asset 2 1 8 8
No of equity Shares 83.79 83.99 84.11 84.11 84.11 Advances -5 -2 10 10
EPS (|) 7.2 6.8 6.9 8.1 8.9 Borrowing -7 -3 10 10
BV (|) 70.4 86.1 90.6 92.8 95.2 Total Income 16 -3 8 6
ABV (|) 69.4 85.2 89.6 91.7 93.9 Operating expense 7 -6 3 1
P/E (x) 12.7 13.3 13.1 11.2 10.2 Net Profit (ex-MI) 7 2 12 7
P/BV (x) 1.29 1.06 1.00 0.98 0.96 Book Value 22 5 2 3
P/ABV (x) 1.31 1.07 1.02 0.99 0.97 EPS -5 1 17 10
Margin Source: Company, ICICI Direct Research
Yield (%) 15.1 17.0 16.5 16.6 16.3

Cost of Fund (%) 7.6 10.3 10.6 10.5 10.4
Spread (%) 7.5 6.6 5.9 6.1 6.0
Quality & Efficiency
GNPA (%) 0.63 0.68 0.77 0.80 0.84
NNPA (%) 0.56 0.55 0.62 0.65 0.68
ROA (%) 3.9 3.7 3.8 4.0 4.0
ROE (%) 17.3 15.6 11.5 12.3 12.9

RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock
Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

RATING CERTIFICATION
ANALYST RATIONALE
We /I, Kajal Gandhi, CA, Vishal Narnolia, MBA and Harsh Shah, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the
stocks according to their notional target price vs. current market price and then categorises them as Strong Buy,
specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in
the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.
Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts'
Terms valuation
& conditions for other
and a stockdisclosures:
ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI
Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number – INH000000990. ICICI Securities Limited Sebi Registration is INZ000183631 for stock broker. ICICI
Buy: >10%/15% for large caps/midcaps, respectively;
Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance,
general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com
Hold: Up to +/-10%;
ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment
banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons
Sell: -10% or more;
reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.
The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly
confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or
reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no
obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate
that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where
ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.
This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness
guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe
for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat
recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy
is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own
investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign
exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily
a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ
materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.
ICICI Direct Research Desk,
ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other
assignment in the past twelve months. ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report
Road
for services in respect of managing or co-managing public offerings, Nofinance,
corporate 7, MIDC,investment banking or merchant banking, brokerage services or other advisory service in a merger or
specific transaction.
Andheri (East)
Mumbai
ICICI Securities or its associates might have received any compensation
mentioned in the report in the past twelve months.
– 400
for products 093other than investment banking or merchant banking or brokerage services from the companies
or services
research@icicidirect.com
ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did
not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI
Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report.
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.
ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day
of the month preceding the publication of the research report.
Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject
company/companies mentioned in this report.
ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.
Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.
We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such
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Indian Brokerage Industry

December 23, 2019

Broking twist: Advantage large brokers… Initiating on…

ICICI Securities – Retail Equity Research

Traditional brokers emerge strong on earnings

ICICI Securities | Retail Research 2

Exchange volumes skewed towards derivatives in last 5 years

Cash 24700 33000 35200 33629 34023 2.3%

ICICI Securities | Retail Research 3

Exhibit 3: Options forming ~92% of market volume

Source: NSE, ICICI Direct Research

Exhibit 4: Internet based trading on the rise in last five years

Source: NSE, ICICI Direct Research

Exhibit 5: Increase in market share of top five & 10 members

Source: NSE, ICICI Direct Research 13%

ICICI Securities | Retail Research 4

Exhibit 6: Financials of brokers (FY19)

PAT 403 330 73 173 23 35 79 400

Exhibit 7: Proportion of clients remain broadly in a range across brokers

Exhibit 8: ADTO and yield of traditional and discount brokers

Source: Company, NSE, media articles, ICICI Direct Research

Sub-brokers have been integral part of traditional broker

Source: Company, media articles, ICICI Direct Research

Scaling of margin funding book to contribute to revenue

funding book is seen at 1.5-2x of the closing balance as depicted in the

Source: Company, annual report, DRHP ICICI Direct Research

Business model to shift to advisory to sustain revenues

ICICI Securities | Retail Research 6

Exhibit 13: Business model to focus on generation of AUM

Source: Company, ICICI Direct Research

Bank led brokerages maintain top slot amid competition

ICICI Securities | Retail Research 7

Revenue model of discount brokers is based on fixed brokerage per order

Discount plans I Trade Prime Edelweiss Lite Trade @ 20*

Traditional brokers had started with the business model encompassing

Source: Company, annual report, media articles, ICICI Direct Research

SEBI tightens rules on clients funds; large brokers could gain

ICICI Securities | Retail Research 8

In a recent announcement, NSE has suspended Karvy Stock broking license

Emergence as top discount broker - Zerodha

Exhibit 17: Valuation

ICICI Securities | Retail Research 9

Cyclicality of business to moderate…

ICICI Securities – Retail Equity Research

Strong presence in broking, enables it to spread wings Price movement

Key Financial Summary

Story in charts & rationale

Source: Company, ICICI Direct Research

Exhibit 19: Segment wise return on equity

ICICI Securities | Retail Research 11

Exhibit 21: AUM & income statement

IB and wealth management

Aspire Housing Finance renamed Motilal Oswal Housing Finance

Exhibit 24: Housing finance key data

Exhibit 25: SOTP valuation

Holding company discount 15% 15%

Exhibit 26: One year forward PE

CMP 15.0 X 20.0 X 25.0 X 30.0 X

Source: Capital line , ICICI Direct Research

ICICI Securities | Retail Research 13

Exhibit 27: Income Statement (| crore)

Exhibit 29: Key Ratios Exhibit 30: Growth (%)