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IDirect BrokerageIndustry IC PDF
IDirect BrokerageIndustry IC PDF
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
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
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
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.
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
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
25
20
15
10
5
0
FY14 FY15 FY16 FY17 FY18
Cash F&O
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
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%.
Source: NSE, ICICI Direct Research
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
Total opex/total revenue 64% 37% 75% 70% 92% 80% 88% 36%
Source: Company, Media articles, annual report, DRHP, ICICI Direct Research
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
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
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.
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
No of employees
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.
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.
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
0%
FY15 FY16 FY17 FY18 FY19 H1FY20 FY20E FY21E FY22E
Capital Market Asset & wealth Management Housing finance Fund Based
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
Source: Company, ICICI Direct Research
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.
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.
ICICI Securities | Retail Research 12
Initiating Coverage | Motilal Oswal Financial ICICI Direct Research
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.
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Financial Summary
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 |
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
kajal.gandhi@icicisecurities.com
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
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
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research
20000
15000
8658
10000
5000 2860
0
FY18 FY19 FY20E FY21E FY22E
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.
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
Source: Company, ICICI Direct Research
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
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
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
kajal.gandhi@icicisecurities.com
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
Key Financial Summary
sss
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 (%)
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research
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.
Financial Summary
Exhibit 43: Profit & Loss (| crore) Exhibit 44: Balance Sheet (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E Particulars FY18 FY19 FY20E FY21E FY22E
Revenue from operation 834.7 835.1 775.7 776.4 801.7 Source of Funds
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 Income 947.1 875.5 820.2 825.3 855.5 Reserve& Surplus 559.5 667.1 830.9 1035.7 1239.6
Employee expense 210.9 256.6 256.6 228.0 244.0 Networth 623.2 730.9 894.7 1099.5 1303.4
Finance cost 144.5 114.5 111.4 56.8 66.2 Borrowings 1012.8 660.5 60.5 378.5 473.2
Depreciation 36.5 41.9 46.1 50.7 55.8 Other Liability 1225.8 1658.5 1675.1 1691.8 1708.8
Other expenses 275.9 200.9 183.2 223.5 219.3 Total 2861.8 3049.9 2630.3 3169.9 3485.3
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
Source: Company, ICICI Direct Research
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
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
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)
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
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
Exhibit 51: Profit & Loss (| crore) Exhibit 52: Balance Sheet (| crore)
Particulars FY18 FY19 FY20E FY21E FY22E Particulars FY18 FY19 FY20E FY21E FY22E
Revenue from operation 304.1 264.9 285.4 331.2 383.9 Source of Funds
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 Income 334.2 285.1 295.5 341.3 394.0 Reserve& Surplus 411.8 385.0 490.9 547.9 615.0
Employee expense 93.1 101.3 106.4 117.0 134.6 Networth 435.6 408.9 514.7 571.8 638.8
Finance cost 0.4 0.7 0.8 0.8 1.0 Borrowings 4.6 2.4 3.7 5.1 6.7
Depreciation 12.4 13.7 15.1 16.6 18.6 Other Liability 227.6 292.2 306.9 322.2 338.3
Other expenses 126.9 113.9 118.4 130.3 149.8 Total 667.8 703.6 825.2 899.1 983.8
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
Source: Company, ICICI Direct Research
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
Harsh Shah
shah.harsh@icicisecurities.com
es
Key Financial Summary
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
Source: ICICI Direct Research, Company
Initiating Coverage | Edelweiss Financial ICICI Direct Research
Story in Charts
Exhibit 55: Expected business structure by FY22
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
Source: Company, ICICI Direct Research
GNPA NNPA
60%
40% 73 74 74
70 71
20%
0%
FY17 FY18 FY19 Q1FY20 Q2FY20
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
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
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
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research
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
sseses
Key Financial Summary
FY18 FY19 FY20E FY21E FY22E
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
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)
Investment Banking, Securities and Wealth Credit business Asset management Others
8000
6000 1175 986 13349
11608
9861 9673
4000
2000 4797 4834
0
FY18 FY19 H1FY20 FY20E FY21E FY22E
Derivative Cash
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
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research
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
Financial Summary
Exhibit 78: Profit & Loss (| crore) Exhibit 79: Balance Sheet (| crore)
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
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%
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:
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Sell: -10% or more;
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