AMBIT INSIGHTS

Geojit Financial Services NOT RATED

An attractive ‘SIP’ on rising equity inflows
Quick Insight
Geojit, amongst the top 7 non-bank retail stock brokers, is scaling up its
distribution revenues by focusing on SIPs; monthly SIP inflows are up 4.6x
Analysis
YoY. Guidance of distribution fees at 50% of FY21E revenues vs 8% currently
seems possible given focus in B-15 locations through branches rather than Meeting Note 
franchises and right employee incentives. This will structurally improve: (i) News Impact
revenue growth prospects; distribution fees are ~30bps of rapidly growing
industry AUM; (ii) RoE, given higher yields in distribution; and (iii) earnings
sustainability, due to trail-based commission income. Revenue guidance Stock Information
suggests 37% EPS CAGR over FY17-21, implying an inexpensive 13x FY20 EPS. Bloomberg Code: GEOFSL IN
Valuations are attractive due to superior earnings growth and cash
CMP (Rs): 78
generation (negligible lending book, dividend payout of 65%) despite a
marginal 6% premium to peers on FY19 P/E. Declining SIPs in equity markets TP (Rs): NR
is a key risk. Mcap (Rs bn/US$ bn): 18/0.3

Strongest retail broker down South: Incepted in 1988, Geojit Financial Services is 3M ADV (Rs mn/US$ mn): 56.4/0.8
one of the top 7 non-bank retail stock brokers in India with a client market share of
~3%. The company has 511 branches and a client base of 850,000 customers, with a
strong presence in Kerala and Tamil Nadu. The volatile nature of the retail broking Stock Performance (%)
business and an opex-heavy branch-driven model have led to highly unpredictable 1M 3M 12M YTD
earnings trajectory (EPS growth ranging (-)190 to (+)321% over FY11-17). Absolute 89 20 106 100
Scaling up distribution business; early trends encouraging: Management is now Rel. to Sensex 75 17 90 85
focusing on scaling-up distribution in small-ticket equity SIPs in smaller towns, Source: Bloomberg, Ambit Capital research
wherein commissions are higher (200-230bps versus ~100bps in top-15 cities).
Growth will be driven by cross-selling (penetration is just 15%) and tie-ups with 6
banks that would give access to 10,000 branches. Early trends are encouraging:
Monthly SIP inflows have grown 4.6x YoY, led by market share gains (1.9% from 0.8%
in FY16). Management confidently guides SIP AUM of Rs200bn by FY21 as the
monthly SIP inflows grow to Rs6bn from Rs0.9bn in 4QFY17.
Branch/employee architecture well aligned: Management’s confidence arises
from: i) branch-driven architecture rather than franchises wherein scaling up
distribution is challenging given conflict of interests; ii) strong focus in B-15 locations
(~65% of branches, ~75% of distribution revenues); and iii) alignment of employee
incentives with client interests; employee incentives are correlated to trail-based
variable incentives to ensure lower employee/investor attrition and portfolio churn.
This is in contrast to competitors that incentivize staff on up-fronted commissions.
Our view – Scaling up distribution can be a game changer: Mutual funds are the
biggest beneficiaries of financialisation of savings owing to under-penetration (4% of
population vs 20-30% for deposits/insurance) and lower intermediation costs
(maximum 2.25% for MFs versus maximum 4% for ULIPs). With distribution fee pool
strongly correlated with AUM (distribution costs are ~30bps of industry AUM), scaling
up distribution business will structurally improve Geojit’s earnings growth prospects.
Margins will also improve (200bps yields on SIP AUM vs 5.5bps on brokerage
volumes) and cash flows will be more sustained/predictable (trail-based income) vs
that of highly competitive and volatile broking business.
Valuations attractive given structural growth potential: Geojit is a pure play on
rising equity savings in India given the higher share of broking and distribution Research Analysts
business in its profitability as it hasn’t diversified into any lending activity (which
account for 60-80% of peers’ profits). Management meeting guidance suggests 37% Aadesh Mehta, CFA
EPS CAGR over FY17-21, inferring an inexpensive 13x FY20 EPS. Valuations are Tel: +91 22 3043 3239
aadesh.mehta@ambit.co
attractive due to superior earnings growth and cash generation (negligible lending
book, dividend payout of 65%) despite marginal premium to peers (6% higher on Pankaj Agarwal, CFA
FY19 P/E). Sustained equity inflows through SIP could be a key catalyst for the Tel: +91 22 3043 3206
company to meet its guidance and the re-rating of the stock. However, declining pankaj.agarwal@ambit.co
momentum of SIP investments into equity markets would be the key risk.

Ambit Capital Pvt Ltd 29 May 2017

 AMBIT INSIGHTS

A rocky ride in retail broking business

Incepted in 1988, Geojit Financial Services Ltd (Geojit) is one of the top-7 non-bank
retail stock-brokers in India with a market share of ~3%. The company has 511
branches and a client base of 860,000. The company has a strong presence in
southern India with states of Kerala and Tamil Nadu contributing 50% of its revenues.
The company also has a strong presence in the middle-eastern Asian countries with
large Indian populations (JVs in 5 countries), which account for 20% of its clients.
Stock-broking accounts for majority of its revenues (80%), with ancillary businesses
(financial product distribution, PMS and technology solutions) accounting for the
remaining 20% of revenues.

Exhibit 1: Geojit – business-wise mix of revenues (FY17) Exhibit 2: Geojit – geographical mix of revenues (FY17)

Others, 4% Geojit - Revenue mix Geojit - Geographical mix

Software
Cons., 7%
Gulf, 12%

Distribution
, 8%
Other
states, 38%
Stock
Broking, Kerala &
80% TN, 50%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Promoter background: The promoters of the company are Mr. George and family,
BNP Paribas and Kerala State Industrial Development Corporation (KSIDC). The
company was founded in 1987 by current managing director Mr. Mr. CJ George and
Mr. Ranajit Kanjilal (who retired from the firm in 1993). Before founding Geojit, the
promoter Mr. George started his career as an analyst with B&K Securities after gaining
his Masters in Commerce.
In a series of capital infusions in 2007 and 2009, BNP Paribas cumulatively acquired
~33% stake in the company. However, BNP Paribas stepped down from the board
post its acquisition of another stockbroker, Sharekhan, in 2015 due to conflict of
interests. Whilst BNP Paribas continues to hold ~33% stake in Geojit, it is no longer
involved in the decision-making process in the company. Other major shareholders in
the company are prominent individual investor Mr. Rakesh Jhunjhunwala (9.6%) and
KSIDC (8.5%).
Exhibit 3: Shareholding pattern of Geojit

Shareholding pattern - Mar'17

Others, 27.7% CJ George

& Fly,
20.9%

KSIDC, 8.5%

Jhunjhunwala &
Fly, 9.6%

BNP Paribas,
33.4%

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd 29 May 2017

 AMBIT INSIGHTS

Rocky ride driven by volatile broking business and hi-opex model: Retail stock
broking contributes around ~78% of its consolidated revenues with the remaining
22% contributed by other businesses such as PMS, MF distribution and technology.
Volatile nature of the retail broking business coupled with high fixed cost model had
resulted in significant volatility in earnings.

Exhibit 4: Geojit’s earnings have been volatile… Exhibit 5: …leading to volatile RoE

EPS RoE (%)

4.0 3.6 3.4 20% 15% 15%
3.0 2.4 15%
10%
2.0 1.3 1.6 10% 7%
0.9 4%
1.0 5%
0%
- 0%
(1.0) FY11 FY12 FY13 FY14 FY15 FY16 FY17 -5% FY11 FY12 FY13 FY14 FY15 FY16 FY17
(2.0) -10%
(3.0) -15%
-14%
(4.0) (3.2) -20%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

In fact, the company reported loss in FY13 owing to Rs1.2bn of write-offs on loans to
investors in NSEL scam. Geojit’s strong focus on the retail broking business is
corroborated by many firsts to its name – it was the first broker to launch trading
through internet (CY2000), mobile phones (CY2010) and Facebook (CY2013). Given
its superior technology and focus on cash volumes, its yields are among the highest
among non-bank brokers (5.4bps for Geojit versus 2-3bps for peers) despite such a
hyper-competitive business.

Scaling up distribution business

Management is now focusing on scaling up its distribution business, specifically in
small ticket equity mutual fund SIPs (systematic investment plans). The company has
taken various initiatives: (i) employee incentives for F&O and trading have been
lowered below that of the delivery business; (ii) planning to increase sales headcount
by 20% in the next 12 months; (iii) increase cross-selling to existing customers as at
present only 15% of customer base is sold SIPs; (iv) tie-ups with 6 banks that should
give access to 10,000 bank branches; (v) increased focus beyond top-15 towns as
regulator allows higher commission for distributors for mutual funds sold in smaller
towns (200-230bps versus ~100bps in top 15 cities).
Targeting a Rs200bn equity SIP AUM by 2020
Whilst the realignment of incentives has led to ceding of market share in the broking
business, growth in distribution business has been encouraging. The company’s
monthly inflows through SIPs have grown by 4.6x to Rs874mn in FY17 (from Rs190mn
in FY16). As per CAMS database, Geojit’s market share in SIP inflows has increased to
1.9% in FY17 from 0.8% in FY16.

Ambit Capital Pvt Ltd 29 May 2017

 AMBIT INSIGHTS

Exhibit 6: Geojit’s monthly SIP inflows have grown at a Exhibit 7: … led by market share gains
strong pace…

Monthly SIP inflows (Rs mn) Equity SIP market share 1.9%
1,000 2.0%
874
1.8%
800 357% YoY growth 1.6%
643 1.6%
600 1.4% 1.3%
463
1.2%
400
260 0.9%
190 191 1.0%
170 0.8%
200
0.8%
- 0.6%
2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 4Q16 1Q17 2Q17 3Q17 4Q17

Source: Company, Ambit Capital research Source: CAMS, Company, Ambit Capital research

As of Mar’17, Geojit had ~189,000 SIP accounts investing small saving of ~Rs4,600
monthly in equity mutual funds. Management believes that monthly SIP inflows would
increase to Rs6bn by FY21E (6x increase from 4QFY17), taking its outstanding SIP
portfolio to Rs200bn by FY21E (from Rs5bn at Mar’17). Consequently, management
expects the share of distribution business in its revenues to increase to 50% by FY21
from currently 8%.
Management’s confidence to meet the guidance arises from the fact that it has the
right branch architecture and employee incentives in place:
 Branch-driven architecture: Scaling up distribution is easier in the branch
model (due to direct client relationship and control over the quality of advice)
rather than franchises (owing to conflict of interests since they also run distribution
as their side business). Unlike other larger stock brokers, Geojit has higher
reliance on its own branches (64% of its locations, 75% of its broking revenues),
that should lead to fewer hurdles in scaling up this business.
 Strong positioning on B-15 locations: Geojit’s strong focus on B-15 locations
(beyond the top 15 locations that contribute to the industry AUM) is validated by
its high contribution in the revenue mix, at 75% of SIP distribution revenues.
Moreover, Geojit’s market leadership in Kerala also coincides with the state
having the highest per capita demat accounts in the country. This contrasts with
peers that have focused mostly on T-15 locations (top 15 locations that contribute
to the industry AUM) for larger ticket investments as small ticket SIPs in these
locations have prohibitive costs and would take at least 3-4 years to break even.
 Alignment of employee incentives with client interests: Geojit shares a part
of the trail commissions with employees, which ensures lower employee attrition,
as the employees accrue incentives (on trail income) without much incremental
effort. This also leads to lower investor attrition and portfolio churn as the sticky
employees are no longer incentivized to churn investor’s portfolio. Employees are
also eligible for ESOPs, which vest on meeting their sales targets, and improve
employee loyalty. This is in stark contrast to competitors whose incentives are
based on aggressive targets and distribution commissions are still up-fronted.

Our view: New foray is game-changing

Distributors: Proxy plays on surging equity inflows
Since FY13, savings have been gradually shifting from physical to financial assets. This
is being led by lacklustre returns in real estate (since FY15) and gold (since FY13),
buoyant stock markets and declining inflation. Share of financial assets has increased
in the savings pie from 31% of household savings in FY12 to 41% in FY16.

Ambit Capital Pvt Ltd 29 May 2017

 AMBIT INSIGHTS

Exhibit 8: Rising share of financial assets

Financial savings (% of household savings)

55% 52%
50%
48% 49% 48%
50% 47% 46%
45% 45%
43% 43% 43%
45% 41%
40% 36% 36%
35% 33%
31%
30%

25%
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16
Source: Ambit Capital research; Govt of India

However, the demonetisation has acted as a very powerful and rapid catalyst for this
trend. With the demonetisation of high-value currency notes (`500 and `1000) on 8
Nov 2016, savings surged across various financial products like deposits, insurance
and mutual funds as an estimated `8tn-9tn cash entered the financial system in a
short span of two months.
Exhibit 9: Demonetisation drove runaway growth across financial assets

YoY growth
April-Oct Nov-April
100%
182%
80%
60% 155%
40% 30%
24%
20%
19%
0%
-20%
-39%
-40%
1st yr insurance premiums MF Inflows MF Inflows - equity

Source: Ambit Capital research, AMFI, The RBI, IRDA

Asset managers have been the major beneficiaries of this trend as demonstrated by
rising penetration of mutual funds in B-15 cities and rising share of retail participation
through SIPs. Moreover, lower intermediation costs versus the insurance business
have also led to mutual funds being a more favoured investment vehicle than
insurance. This is now leading to AMCs reporting higher growth in AUM versus other
financial products such as life insurance and, thus, gaining market share. Given that
growth in the distribution revenue pool is strongly correlated with AUM growth of the
industry (distribution costs account for ~30bps of AUM), distributors are strong proxies
to AMCs in terms of their growth prospects. Moreover, we believe larger distributors
should do better as they consolidate the smaller players owing to their superior
networks, advisory capabilities and lower fees.

Ambit Capital Pvt Ltd 29 May 2017

 AMBIT INSIGHTS

Exhibit 10: MF is the most under-penetrated savings Exhibit 11: …but is gaining market share from other
instrument.. instruments

Penetration (% of population) 35% CAGR

35% 31%
30% 29%29%
29% 7yrs 5yrs
30% 24%
25% 3yrs 1yr 22%
25%
20% 20%
16%
15% 15% 13%12%13%12%
10% 10% 11%
10% 10%
4% 6%
5% 5%
0%
0%
Savings Life Term Mutual Fund
AMC AUM Insurance AUM Cash delivery
Deposits Insurance Deposits (retail)
ADTO
Policies

Source: The RBI, IRDA, AMFI, Ambit Capital research Source: The IRDA, AMFI, NSE, BSE, Ambit Capital research

Exhibit 12: Investors are now preferring to invest through Exhibit 13: Contribution from B-15 centers is also
SIPs increasing

SIPs (% of retail accounts) B-15 to overall AUM

27% 20%
26% 24%
18% 17%
16%
23% 22%
16% 15% 15%

20% 14% 13%

12%
16%
17% 12% 11%
15%

14% 10%
FY13 FY14 FY15 FY16 FY17 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: AMFI, Ambit Capital research Source: AMFI, Ambit Capital research

Exhibit 14: Distribution cost is ~30bps of overall industry Exhibit 15: Larger distributors are gaining market share
AUMs

Dist. Cost (% of industry AUM) Top 15 distributors (% of dist. rev. pool)

0.50% 61%
59%
0.44%
59%
57% 57%
0.40% 57%
55%
0.34% 54%
0.32% 55%
0.32%
0.30% 0.30%
0.30% 53%
51%
51%

0.20% 49%
FY11 FY12 FY13 FY14 FY15 FY16 FY11 FY12 FY13 FY14 FY15 FY16

Source: Company, AMFI, Ambit Capital research Source: AMFI, Ambit Capital research

Ambit Capital Pvt Ltd 29 May 2017

 AMBIT INSIGHTS

Distribution business enjoys superior economics:

We believe the distribution business enjoys superior earnings growth prospects due to:
 Better growth: Investors now prefer to invest through mutual funds (most
underpenetrated financial product in the country) rather than direct investments,
which implies higher growth for the AMC and distribution business versus pure
retail brokerage.
 Better margins: Gross fee on distribution is higher, at 1-2%, versus brokerage of
10-50bps on cash delivery transactions.
 More sustainable and predicable cash flows: Commission is earned on trail
basis on the assets advised/managed, which means they earn income on a
recurring basis till the investor remains invested in the asset. This is more
sustainable than brokerage revenues.
 Less cash-intensive: Brokers are required to keep margins at stock exchange
depending on their volumes, which blocks a significant amount of their working
capital. However, there is no such requirement for distributors.
Valuations are attractive given structural growth
Geojit offers a pure play on rising equity savings of the country given the higher share
of broking and distribution business in its profitability. This is because, unlike its peers,
it hasn’t diversified into any lending activity (which account for 60-80% of peers’
profits). The management meeting its guidance suggests 37% EPS CAGR over FY17-
21, inferring an inexpensive 13x FY20 PE. Valuations are attractive due to superior
earnings growth and cash generation (negligible lending book, dividend payout of
65%) despite marginal premium to peers (6% higher on FY19 PE). Sustained equity
inflows through SIP could be a key catalyst for the company to meet its guidance and
the re-rating of the stock. However, declining momentum of SIP investments into
equity markets would be the key risk.
Exhibit 16: Relative valuation snapshot
Mcap Reco. TP Up/ P/B P/E EPS CAGR ROA ROE
Broker US$bn Rs (Down) FY18E FY19E FY18E FY19E FY17-19E FY18E FY19E FY18E FY19E

Motilal Oswal* 2.3 BUY 1,020 1% 7.0 5.6 28.4 20.7 40% 14.9% 20.4% 20.3% 20.8%
Edelweiss 2.5 NA NA NA 3.1 2.7 19.9 15.0 33% 1.6% 1.8% 15.7% 18.0%
India Infoline 2.2 NA NA NA 2.8 2.7 16.9 17.5 9% 3.2% 3.2% 20.3% 20.1%
JM Financial 2.6 NA NA NA 3.3 2.8 20.9 15.7 33% 1.6% 1.8% 15.7% 18.0%
Average 4.1 3.5 21.5 17.2 28% 6.6% 8.5% 18.8% 19.6%
Geojit Fin. 0.28 NA NA NA NA NA 27.4 18.0 NA NA NA NA NA
Source: Ambit Capital research, Bloomberg; Note:*For MOFS, RoA and RoE are ex-HFC;

Ambit Capital Pvt Ltd 29 May 2017

 AMBIT INSIGHTS

Income statement (` mn)

FY12 FY13 FY14 FY15 FY16 FY17
Total Income 2,571 3,050 2,325 3,264 2,720 3,058
- Stock Broking 1,706 1,653 1,395 2,156 1,683 2,197
- Financial Products Distribution 61 71 87 208 163 227
- Software Consultancy 89 133 155 200 187 196
- Others 715 1,192 688 699 686 437
Operating expenses 1,914 1,792 2,744 1,959 1,960 1,995
EBITDA 657 1,258 -418 1,304 760 1,063
Depreciation 142 128 110 98 129 142
EBIT 516 1,130 -528 1,207 630 921
Finance costs 40 33 25 11 8 6
Profit before tax 476 1,098 -553 1,196 622 915
Less:Tax 243 225 220 374 179 302
PAT 233 873 -773 821 442 613
Share of profit/Loss in an Associate 0 5 4 3 1 2
MI profit 39 49 -44 45 65 53
Consol PAT 194 818 -732 774 376 558
Source: Company, Ambit Capital research.

Balance sheet (` mn)

FY12 FY13 FY14 FY15 FY16 FY17
Networth 4,117 4,692 4,343 4,700 4,901 5,121
Minority Interest 392 448 367 404 480 532
Borrowings 408 765 150 45 0 55
Total Sources of funds 4,916 5,905 4,860 5,149 5,381 5,708
Cash 2,100 1,760 1,549 2,045 2,090 2,525
Investments 1,118 1,071 1,145 1,052 781 1,648
Fixed Assets 499 602 509 604 627 604
Loan book 227 83 123 155 133 200
Net working capital 973 2,389 1,534 1,293 1,750 732
Total Application of funds 4,916 5,905 4,860 5,149 5,381 5,708
Source: Company, Ambit Capital research; *Balance sheet is ex-Aspire

Key parameters
FY12 FY13 FY14 FY15 FY16 FY17
Operating margins (%) 25.6 41.3 -18.0 40.0 27.9 34.8
Operating Cost/Income 74.4 58.7 118.0 60.0 72.1 65.2
Debt to Equity (%) 0.1 0.1 0.1 0.1 0.1 0.1
Revenue Growth -8.6 18.6 -23.8 40.4 -16.7 12.4
PAT Growth -33.0 320.6 -189.5 -205.6 -51.4 48.4
Source: Company, Ambit Capital research

Key metrics
FY12 FY13 FY14 FY15 FY16 FY17
BVPS (Rs) 18.0 20.5 19.0 20.3 20.9 21.8
Dil. EPS (Rs) 0.9 3.6 -3.2 3.3 1.6 2.4
ROA (%) 4.0 15.1 -13.6 15.5 7.1 10.1
ROE (%) 4.7 18.6 -16.2 17.1 7.8 11.1
P/E 91.8 21.8 -24.3 23.4 48.8 32.8
P/BV 4.3 3.8 4.1 3.8 3.7 3.6
Dividend yield (%) 1.0 1.3 0.1 2.2 1.3 1.6
Source: Company, Ambit Capital research
Ambit Capital Pvt Ltd 29 May 2017