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Enhancing investment decisions

JM Financial Ltd

Detailed Report

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process –

Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is

assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is

assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from

the CMP).

CRISIL

Fundamental Grade Assessment

CRISIL

Valuation Grade Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)

Research Analysts

Bhaskar Bukrediwala

[email protected]

Pratik Chheda

[email protected]

Arun Venkatesh

[email protected]

Client servicing desk

+91 22 3342 3561

[email protected]

mailto:[email protected]




JM Financial Ltd

Lending business continues to gain strength

Fundamental Grade: 4/5 (Superior fundamentals) Valuation Grade: 5/5 (CMP has strong upside)

Industry : Capital Markets Fair Value: ₹70 CMP: ₹51

June 27, 2016

For detailed initiating coverage report please visit: www.crisil.com

CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

JM Financial Ltd registered healthy growth across verticals in the past 12 months, led by its

lending business. Despite a challenging environment, the lending business’ assets increased

34% in FY16 and gross non-performing assets (GNPAs) slipped below 1%. In the investment

banking (IB) business, the company has strengthened its competitive position. It featured

among leading merger and acquisition (M&A) advisory firms in 2015, executing several

marquee deals. While regulatory revisions could moderate the internal rate of return (IRR) in

the asset reconstruction business, the company is well positioned, given a strong IB franchise.

After subdued performance over a sustained period, the asset management business’ asset

inflow recently surged, driving up profitability. Linkage to the inherently volatile capital markets,

regulatory risks, and competition from banks and NBFCs limit the fundamental grade to 4/5.

Lending business: Key growth engine

The lending business’ remains upbeat, as the assets under management (AUM) increased

34% y-o-y to ₹72 bn in FY16, driven by real estate and margin funding portfolios.

Notwithstanding the slowdown in the real estate sector, the company’s real estate lending

business - primarily managed by the new NBFC subsidiary - has doubled over the last one

year, albeit over a small base. Risk management has been robust. Given its strong risk

management focus, JM Financial is one of the few companies whose asset quality has not

been impacted even in the current stressed environment. GNPAs were stable at 0.3% in

H2FY16, after remaining steady at 0.8% in H1FY16. While the business is sufficiently

capitalised for growth in the medium term, with a capital adequacy ratio (CAR) of ~30% and

low leverage of 1.9x, GNPA level is a monitorable, amid subdued real estate demand and stiff

competition from NBFCs.

IB and brokerage: Sustained activity in capital markets should drive growth

Driven by strong traction in M&A activity, JM Financial featured amongst top players in league

tables in 2015. The company has been involved in a few large transactions. However, the IB

and securities business’ revenue declined 5% in FY16, as the broking revenue was subdued.

The company has indicated a robust pipeline of M&A advisory deals - seen as a key growth

driver, though it is likely to remain volatile as in the past.

Asset reconstruction business: Recovery to be key to future success

While the ARC industry growth has slowed down following tightening of regulations, JM Asset

Reconstruction Company (JMARC) continues to be competitively well positioned owing to the

support of a strong IB franchise. It has managed to recover some of the Hotel Leela assets

following the venture’s sale of its hotel in Goa for ₹7.25 bn. Continued success in recovery

efforts in the Leela assets is likely to fetch high returns, which will help the ARC business build

investor confidence and attract more funds to expand. Presence of Class A SRs and high

discount rates will be the key to success of future deals besides faster recovery cycles.

Fair value at ₹70 per share

We have used the sum-of-the-parts (SoTP) method to value JM Financial at ₹70 per share,

with the lending business contributing ~55% to the valuation. At the current market price of

₹51, the valuation grade is 5/5.

KEY FORECAST

(₹ mn) FY13 FY14 FY15 FY16# FY17E

Operating income 10,416 10,020 13,984 16,847 20,425

EBITDA 6,426 6,050 9,554 12,252 14,712

Adj PAT 1,849 2,116 3,312 4,005 4,740

Adj EPS-₹ 2.5 2.8 4.2 5.1 6.0

Dividend yield 1.8 1.2 2.7 2.4 2.4

RoCE (%) 10.9 10.0 14.1 13.3 13.7

RoE (%) 9.1 9.9 13.9 14.7 15.5

PE (x) 20.9 18.4 12.1 10.0 8.5

P/BV (x) 1.7 1.6 1.2 1.1 1.0

# Abridged financials;

Source: Company, CRISIL Research estimates

CFV MATRIX

KEY STOCK STATISTICS

NIFTY/SENSEX 8095/26403

NSE/BSE ticker JMFINANCIL/

JMFINAN

Face value (₹ per share) 1

Shares outstanding (mn) 789.0

Market cap (₹ mn)/(US$ mn) 40,199/592

52-week range (₹)/(H/L) 58/33

Beta 1.3

Free float (%) 34.3%

Avg daily volumes (30-days) 1,065,257

Avg daily value (30-days) (₹ mn) 52.8

SHAREHOLDING PATTERN

PERFORMANCE VIS-À-VIS MARKET

Returns

1-m 3-m 6-m 12-m

JM Financial 11% 28% 30% 15%

Nifty 500 0% 6% 2% -2%

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fu

nd

am

en

tal G

rad

e

Poor

Fundamentals

Excellent

Fundamentals

Str

on

g

Do

wn

sid

e

Str

on

g

Up

sid

e

65.7% 65.7% 65.7% 65.7%

13.6% 13.8% 13.5% 13.8%

3.0% 3.0% 3.2% 3.2%

17.9% 17.6% 18.4% 17.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun-15 Sep-15 Dec-15 Mar-16

Promoter FII DII Others

http://www.crisil.com/

2

Table 1: JM Financial - Business environment

Parameters

Investment banking

and securities

business

Securities funding

and fund-based

activities

Asset

reconstruction

business Asset management Others

Segment offerings IB, brokerage and

wealth management

Margin funding, IPO

financing, promoter

funding, commercial

real estate lending,

loan against shares

Asset

reconstruction Asset management

Market position

JM Financial is a

leading domestic

investment banker. In

2015, it was among the

leading M&A advisors in

India

A relatively small player

in the equity brokerage

industry, India Infoline

Finance Ltd (IIFL) is

one of the leading

players with ~3% share

A fragmented industry

with diversified lending

exposure, but JM

Financial is relatively

more focused on

commercial real estate

and capital market

lending

JM Financial is

the third largest

player based

on AUM

JM Financial is a

small player with a

market share of ~1%

in terms of mutual

fund AUM of ₹158 bn,

as of H1FY16

Revenue

contribution*

FY15

FY17E

34%

29%

52%

59%

NM

(consolidated

as an

associate)

3%

4%

9%

7%

Revenue growth

(FY17E) 13% 25% NM 38% 0%

Key competitors

Global and domestic

investment banks such

as Citi, Macquarie, Axis

Capital and Edelweiss

Capital, among others

Equity brokerage firms

such as IIFL, Motilal

Oswal and Edelweiss

Capital; foreign

brokerage houses such

as CLSA and Credit

Suisse

HDFC, Indiabulls

Housing Finance,

Religare Enterprises,

Edelweiss Capital, IIFL,

Pirmal Fund

Management, etc.

ARCIL,

Edelweiss ARC JM Financial is a

relatively small player

compared with other

large AMCs, including

HDFC AMC, ICICI

Prudential AMC,

Reliance, Birla Sun

Life AMC, UTI AMC,

SBI MF, Franklin

Templeton AMC

* Total revenue, including inter-segment sales, is used to calculate revenue contribution of segments

Source: Company, CRISIL Research

3

Grading Rationale

Healthy performance across key segments with lending

business in the vanguard...

JM Financial’s key businesses reported strong growth in the past one year, driving revenue

up 20%. The lending business performed well across key parameters of asset growth, net

interest margin (NIM) and asset quality. The company is well positioned in the IB business,

where it leverages its long industry presence and relationships with Indian companies. The

company was involved in key fund-raising transactions in 2015, including the recent ₹50 bn

HDFC QIP and the Adani Group restructuring. Asset management revenue has doubled,

benefitting from a strong inflow in equity schemes. Overall profitability has been robust too,

with TTM profit soaring 28%.

…though inherent volatility in business to persist

Despite increasing traction in the lending business, which is not linked to the capital markets,

the company’s overall business prospects are still correlated with broader movements in

capital markets. The equity market is inherently volatile, driven by global and domestic

factors – both economic and political - as well as public sentiment. In the past, even though

the company was a strong player, sluggish market activity dampened growth. For instance,

revenue slipped ~4% in FY14. As of Q4FY16, the investment banking, asset management

and non-real estate lending businesses - comprising over 55% of total revenue - were

directly linked to the capital markets.

Figure 1: Lending business drives revenue*… Figure 2:…and profit*

*Revenue includes inter-segmental revenue


*Profit before tax


42% 39% 37% 34%27%

43% 50%48% 52%

58%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY12 FY13 FY14 FY15 FY16

IB, Brokerage and Wealth Mgmt Funding businessAsset management Alternative asset managementUnallocated

19% 19% 16%24%

11%

73% 72%71%

67%79%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


IB, Brokerage and Wealth Mgmt Funding businessAsset management Alternative asset managementUnallocated

Fig. 1: Fund-based activity segment

enjoys stable and robust RoCE

-5%

0%

5%

10%

15%

20%

25%

FY12 FY13 FY14 FY15

Fund Based Activity- IB and Securities Business

Alternative Asset Mgmt Asset Management

4

Lending business = turning into stable growth engine

The lending business has become the key revenue and profit driver for JM Financial. Despite

volatility in the capital markets lending business, the company’s loan book more than

doubled to ~ ₹72 bn in FY16 from ₹30 bn in FY14, buoyed by traction in real estate lending.

The real estate lending book is valued at ~₹56 bn.

Performance across parameters has been stable, which is a positive. However, given the

strong growth witnessed, asset quality remains a key monitorable.

● Asset quality healthy owing to strong focus on risk management, though stressed real

estate sector begets caution:

● Asset quality has been healthy over the past four quarters, with GNPAs at sub-1%

levels, driven mainly by the company’s policy of lending to builders with a track record

of over a decade. The company primarily lends to borrowers with an experience of over

25 years.

● However, asset quality remains a monitorable, considering continued stress in the real

estate sector and the recent strong growth in the loan book.

Figure 3: Real estate drives growth in lending business… Figure 4: …aiding steady growth in revenue

Source: Company, CRISIL Research Source: Company, CRISIL Research

14

28

56

16

25

16

-

10

20

30

40

50

60

FY14 FY15 FY16

(₹ bn)

Real estate lending Capital market lending

1,425

2,036 2,147 2,454 2,413 2,524

2,880 2,973

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

(₹ mn)

Lending business revenues

5

Figure 5: Asset quality has been stable in recent times… Figure 6: …but slowdown in real estate begets caution

Source: RBI, CRISIL Research Source: Company, CRISIL Research

● Shifting loan book mix aiding NIM expansion: While it has been volatile sequentially,

the company’s NIM expanded to 7.7% in Q4FY16 from 5.3% in Q1FY15, driven by

increasing share of high-yielding loans.

● Healthy capitalisation to support growth plans: The NBFC’s capitalisation remains

robust, with CAR of 28.8% as on Q4FY16. With a healthy gross leverage of 1.9x in

FY15, the business appears sufficiently capitalised to support growth in the medium

term.

Figure 7: Expansion in NIM… Figure 8: … leads boosts profitability

Source: RBI, CRISIL Research Source: Company, CRISIL Research

Strong show in investment banking in 2015

Relatively weak year for the M&A advisory business…

The deal value in M&A activities declined 40% from $33 bn in 2014 to $20 bn in 2015 despite

an increase in number of transactions (938 deals vis-à-vis 892 in 2014). While value of

inbound deals grew (on a weaker rupee), gross domestic deal value fell sharply from $19 bn

to $7.3 bn over the same period.

2.60%2.50%

2.10%

0.90% 0.90%0.80%

0.30% 0.30%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

GNPA

975 1127 1261 1544 1680 1649

6%

16%

12%

22%

9%

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1000

1200

1400

1600

1800

FY12 FY13 FY13 FY14 FY15 H1FY16

(%)(₹ bn)

Bank's outstanding credit to commercial real estate

y-o-y increase(%)

5.30% 5.50%

6.20%

9.10%

8.00%8.30% 8.10%

7.70%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

Net interest margin

517 764

883

1,310 1,162 1,266

1,468 1,590

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

(₹ mn)

PBT

6

…however, JM Financial strengthens position

Leveraging on strong relationships with domestic corporates, the company was involved in

several deals in 2015 and featured among top bankers, in terms of number and value of

deals executed. JM was involved in certain key deals, associated with corporates such as

Leela, Adani, Reliance Infra, Aditya Birla and Cairn. It was also involved in various fund-

raising transactions for corporates, including HDFC, Indian Oil and IndusInd Bank.

Consequently, the TTM IB and brokerage revenue grew 15% y-o-y, despite moderation in

equity broking turnover. Even though JM Financial’s position has strengthened, competition

has intensified with several MNC banks aggressively targeting deals.

Global ambitions: Still in gestation period

JM Financial has tied up with Seabury Corporate Finance to provide investment banking

advisory services, anticipating that American promoters and private equity companies will

increasingly look to invest in Indian companies, especially in sectors such as defence and

aviation.

The company aims to deepen its global foothold after its first international deal (Foilage) in

2014.

Figure 9: Strong performance in M&A*… Figure 10: …has aided growth in revenue and profit

* Data for announced deals (any involvement) in 2015

Source: Industry, CRISIL Research Source: Company, CRISIL Research

1,552 1,336 1,249 757 494 384 383 383 326

20

1716

10

65 5 5 4

0

5

10

15

20

25

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

JM

Fin

an

cia

l Ltd

Axis

Ba

nk L

td

Macq

ua

rie

Citi

ICIC

I

Ban

k o

f A

merica

Merr

ill L

ynch

Go

ldm

an

Sachs

Eve

rco

re P

art

ne

rs I

nc

Ern

st &

Yo

un

g

(₹ bn)

Total Deal Value Market Share (%)

-200

0

200

400

600

800

1,000

1,200

1,400

1,600

Q3

FY

13

Q4

FY

13

Q1

FY

14

Q2

FY

14

Q3

FY

14

Q4

FY

14

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

(₹ mn)

IB and securities business revenues IB and securities business PBT

7

Figure 11: Growth in equity turnover moderated in recent quarters

Source: Industry, CRISIL Research

Business remains vulnerable to market volatility

As witnessed earlier, inherent volatility in the IB and securities broking businesses could

persist, as they are linked to the capital markets.

Figure 12: Amount raised through IPOs and QIPs have picked up, but have been volatile historically

Source: Industry, CRISIL Research Source: Industry, CRISIL Research

Regulations muted ARC industry growth…

After registering fourfold growth in FY14, the ARC industry’s AUM growth slowed down to

30% in FY15, impacted by the Reserve Bank of India’s (RBI’s) revised regulations which

require higher upfront cash investment of 15% by ARCs as against 5% earlier. This made it

incrementally tougher for ARCs to arrange funds to enter into big asset sale deals. However,

the period of muted growth is expected to end following the removal of sponsorship cap of

50% and increase in the FDI limit from 74% to 100% under the automatic route in the budget.

Other growth enablers include allowing non-institutional investors to invest in security

40%

-4%

-12%-14%

15%

-15%

23%

-13%

14%

8%

-3%

3%

-10%

-15%

10%

19%

-19%

2%

-4% -4%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

5000

10000

15000

20000

25000

30000

Apr-

14

May-1

4

Ju

n-1

4

Ju

l-14

Aug

-14

Sep

-14

Oct-

14

No

v-1

4

De

c-1

4

Ja

n-1

5

Feb

-15

Mar-

15

Apr-

15

May-1

5

Ju

n-1

5

Ju

l-15

Aug

-15

Sep

-15

Oct-

15

No

v-1

5

De

c-1

5

(%)(₹ Crore)

BSE NSE y-o-y Growth (RHS)

104

36

21

64

37

25

3745

65

0

20

40

60

80

100

120

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

(₹ Crore)Amount raised through IPO

Amount Raised (In Rs Cr) No. of IPO (RHS)

25

38

2

67

47

11 14

6

44

19

0

10

20

30

40

50

60

70

80

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

20

15

-16 (

up

to31

/12/1

5)

(₹ Crore) Amount raised through QIP

Amount Raised (In Rs Cr) No. of QIP (RHS)

8

receipts and the proposed amendment in Sarfaesi Act, 2002, which allows the sponsor to

hold 100% stake in defaulting company facilitating ARCs to effectively participate in the huge

NPA market in the country. This way, ARCs can tap significant growth opportunity from high

non-performing and restructured assets in the Indian banking system. Despite this, we don’t

expect a significant jump in growth, as low returns to ARCs in the 15-85 structure remain a

stumbling block in arranging capital and making big deals happen.

…yet enhanced competitive position of JMARC

Large ARCs, such as JM Financial, with strong financial muscle at the group level and

established IB presence are better positioned to raise capital required for upfront cash

investment and to achieve higher recovery rate from asset sales given a strong IB franchise.

JM-ARC is one of the two largest private players with a share of ~15% by AUM.

Figure 13: JMARC has been witnessing steady growth


AMC business shows significant improvement, but still a

relatively small player

JM Financial’s AMC AUM grew a healthy 32% in FY16. Further, share of the high-yielding

equity assets increased to 62% in Q4FY16 from 42% in Q4FY15. Despite growth in assets,

JM Financial still has a marginal presence in asset management (~1% market share) with

AUM of ₹~162 bn, as of FY16. However, expansion in scale has helped profitability improve

– PBT rose to ₹563 mn in FY16 from ₹178 mn in FY15 and ₹38 mn in FY14. Going forward,

we expect the business to reflect the broader movement in the capital markets.

400

890 1,200

2,140

3,190

220

610 750 600

1,580

-

500

1,000

1,500

2,000

2,500

3,000

3,500


(₹ mn)

Revenue PBT

9

Figure 14: Increasing AUM and share of equity AUM… Figure 15: … have translated into higher revenue


Figure16: … and profitability Figure 17: Yet, JM remains a small player


7260 70

120 142 122 117 159 159 162

6% 8% 9%

38%

50%

42%

55%

61%66%

62%

0%

10%

20%

30%

40%

50%

60%

70%

0

20

40

60

80

100

120

140

160

180

Q3

FY

14

Q4

FY

14

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

(%)(₹ bn)

Asset management AUM ( Rs. bn) Share of equity AUM

68 72 70107

158132 147

240 242 226

0

50

100

150

200

250

300

Q3

FY

14

Q4

FY

14

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

(₹ mn)

Asset management revenues ( Rs. mn)

919

1351

108

5

82

176184

122

0

20

40

60

80

100

120

140

160

180

200

Q3

FY

14

Q4

FY

14

Q1

FY

15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

(₹ mn)

Asset management PBT

- 200 400 600 800

1,000 1,200 1,400 1,600 1,800 2,000

HD

FC

MF

ICIC

I P

rud

en

tia

l M

F

Re

liance M

F

Birla

Sun

Life M

F

UT

I M

F

SB

I M

F

Fra

nklin

…

Kota

k M

ah

ind

ra M

F

IDF

C M

F

DS

P B

lackR

ock M

F

Re

ligare

MF

Tata

MF

L&

T M

F

De

uts

ch

e A

sse

t M

F

Sun

da

ram

MF

Re

ligare

MF

JM

Fin

an

cia

l M

F

(₹ bn)

AUM

10

Key Risks

Linkage with equity market = inherent volatility in business

JM Financial’s business prospects are correlated to the level of trading in the equity market.

The capital markets are inherently volatile, driven by economic and political factors as well

as public sentiment. Any potential instability would have a significant impact on the

company’s earnings potential.

Uncertainty of regulatory intervention is a risk

As in the case of banks, the RBI’s regulations have deeply affected the business models of

NBFCs and ARCs. Any adverse regulation or tightening of norms would further impact

profitability and viability of the company’s NBFC and ARC businesses.

Continued slowdown in the real estate sector

The commercial real estate lending business constitutes ~65% of the company’s overall

lending portfolio. Real estate lending is primarily linked to the economic condition in tier-I

cities such as Mumbai, Bengaluru, Chennai and the National Capital Region. Continued

downturn in these cities could significantly impact growth and asset quality of the NBFC and

our estimates unfavourably.

11

Financial Outlook

Expect revenue growth momentum to sustain

We expect revenue to increase 21% in FY17, driven by the NBFC business, aided by healthy

capitalisation and capital market activity. We expect the IB and brokerage business to grow

15%, driven by JM’s strong competitive positioning. In FY15, the lending business’ revenue

rose 52% y-o-y, steered by healthy growth in real estate lending. The lending business

appears sufficiently capitalised to pursue incremental growth opportunities. We have built in

revenue growth estimate of over 25% y-o-y in FY17.

Figure 18: Revenue to record ~21% CAGR over FY16-17 Figure 19: Fund-based activities dominate revenue


RoE to increase moderately

Though RoE is expected to improve from 12.6% in FY15 to 14.4% in FY17, we believe there

is room for further improvement, considering the relatively low leverage, and high cash and

cash equivalents. Compared with peers such as India Infoline and Edelweiss Financial, JM

Financial’s leverage is low at 1.9x, primarily due to low leverage in the lending business.

With potential increase in leverage and upside in earnings from the ARC business, we expect

RoE to improve further.

10,416 10,020 13,984 16,847 20,425

20.7%

-3.8%

39.6%

20.5% 21.2%

-20%

0%

20%

40%

60%

-

3,000

6,000

9,000

12,000

15,000

18,000

21,000

24,000

FY13 FY14 FY15 FY16# FY17E

(₹ mn)

Adjusted revenues y-o-y growth % (RHS)

39% 37% 34%27% 29%

50%48% 52%

58%59%

6%11% 9% 10% 7%

0%

20%

40%

60%

80%

100%

FY13 FY14 FY15 FY16 FY17E

IB, Brokerage and Wealth Mgmt Funding business

12

Figure 20: Profitability expected to remain steady Figure 21: RoE expected to remain stable in FY17


Figure22: JM Financial’s leverage is significantly lower than peers


1,829 2,095 3,300 4,005 4,740

17.6%

20.9%

23.6% 23.8% 23.2%

0%

5%

10%

15%

20%

25%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000


(₹ mn)

PAT PAT margin (RHS)

9.1 9.9

13.9

14.7 15.5

10.9 10.0

14.1

13.3 13.7

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


(%)

RoE (%) RoCE (%)

5.0x

4.2x 4.2x

1.9x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

India Infoline Edelweiss Financial Religare Enterprises JM Financial

Leverage (x)

13

Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of management

quality, apart from other key factors such as industry and business prospects, and financial

performance.

Highly qualified and experienced management team

Led by Nimesh Kampani, Group Chairman, JM Financial operates through subsidiaries, joint

ventures and associate companies. Mr Kampani has over four decades of experience in the

Indian capital markets and has played a pivotal role in not only making JM Financial an

integrated player, but also fostered development of the domestic financial markets. Each

business is headed by experienced professionals with in-depth understanding of financial

markets and their relevant business segments.

● Dipti Neelakantan is the Group Chief Operating Officer with about four decades of

experience in IB.

● The institutional business is headed by Mr Kampani’s son, Mr Vishal Kampani, who is

the Managing Director of JM Financial Products and head of the institutional securities

business.

● V P Shetty is the Executive Chairman of JM Financial Products (which houses the

securities lending business). He has almost four decades of experience in the banking

industry.

● Manish Sheth is the Group Chief Financial Officer, with over a decade of experience in

financial consultancy, management consultancy, taxation, accounting and company

laws.

Decision-making is decentralised

JM Financial has an experienced second line of management to support different

businesses. Several members of the senior management, who lead various business

segments and manage day-to-day operations, have been associated with the company for

almost a decade. Our previous interaction with business heads (of ARC and NBFC) indicates

that business units enjoy sufficient autonomy in decision making, which enhances

operational flexibility.

Shown the intent to grow the business

The top management’s intent for diversified growth is apparent from their aggressive pricing

strategy to close the Hotel Leela venture ARC deal and raising ₹5.4 bn in capital by forming

a joint venture with Vikram Pandit’s fund. Further, JM Financial has resources, backed by

strong client relationships. However, execution of the business and growth strategy are

monitorables.

14

Corporate Governance

CRISIL’s fundamental grading methodology includes a broad assessment of corporate

governance and management quality, apart from other key factors such as industry and

business prospects, and financial performance. In this context, CRISIL Research analyses

the shareholding structure, board composition, typical board processes, disclosure

standards and related-party transactions. Any qualifications by regulators or auditors also

serve as useful inputs while assessing a company’s corporate governance.

Corporate governance at JM Financial is good. It is supported by a strong board and efficient

board practices. It adheres to all regulatory requirements.

A well-structured board with diverse knowledge

JM Financial has a six-member board, five of whom are independent, which meets Clause

49 of SEBI’s listing guidelines. The board is chaired by Nimesh Kampani. The independent

directors are well qualified and bring significant diverse domain knowledge in consulting,

corporate restructuring, project finance and strategic advisory. EA Kshirsagar is the non-

executive independent director and chairman of the audit committee. He has three decades

of experience in consulting and also serves on the board of other public listed companies in

India. Based on our interaction, independent directors have good understanding of the

business. The company has all the necessary committees – audit, remuneration and investor

grievance – in place. Board meetings are held at regular intervals and agenda papers are

also circulated in advance. JM Financial’s board processes and systems seem satisfactory.

Consistent dividend payment policy but disclosure levels need

to be improved

● Consistent payment of dividends – Despite significant cyclicality in the business, the

company has consistently paid dividends ranging from 28% to 45% over FY10-15.

● Long tenure of auditors – M/s. Khimji Kunverji & Co. has been the auditor for over a

decade. We believe the company has to change its auditors to comply with the new

Company’s Act, 2013. Deloitte Haskins & Sells LLP is the auditor for operational

subsidiaries.

15

Valuation Grade: 5/5

We continue to value JM Financial by the SoTP fair value estimate works out to ₹70 per

share, which implies a P/E multiple of 12x FY17E earnings. At the current market price of

₹51, our valuation grade is 5/5.

We have valued the securities funding business at a P/BV of 1.5x. The multiple, which is at

a discount to the multiple at which housing finance companies trade (average > 2x) is

justified given the company’s strong risk management capabilities as reflected in low GNPA

levels, healthy capitalisation and asset growth.

We have used the P/E multiple method to collectively value JM Financial’s IB and broking

business. We have assigned the business segment a forward P/E multiple of 12x, based on

FY17E earnings. We have adjusted the consolidated cash and investments for the holding

company’s investment in other businesses and for cash and investments in the securities

lending business.

Table 2: Valuation methodology

Business Parameter Multiple

Valuation

(₹ mn)

Lending & fund-based activities Price/book value (P/BV) 1.5x ~30,254

IB and securities Price/earnings (P/E) 12x ~13,785

Asset management % of AUM 4% ~4,268

Asset reconstruction Price/book value 1.5x ~4,774

Alternative asset management Price/book value 1.3x ~927

Other investments and cash ~2,827

Overall equity valuation (₹ mn) Book value

Number of shares 789

Fair value estimate ₹70

Source: CRISIL Research

16

One-year forward P/E band One-year forward EV/EBITDA band

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

P/E – premium / discount to CNX 500 P/E movement

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

0

20

40

60

80

100

120

Oct-

09

Ja

n-1

0

Apr-

10

Ju

l-10

Oct-

10

Feb

-11

May-1

1

Aug

-11

No

v-1

1

Mar-

12

Ju

n-1

2

Sep

-12

De

c-1

2

Mar-

13

Ju

l-13

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-14

No

v-1

4

Feb

-15

May-1

5

Aug

-15

De

c-1

5

Mar-

16

Ju

n-1

6

(₹)

JM 4x 8x 12x 16x 20x

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Oct-

09

Ja

n-1

0

Apr-

10

Ju

l-10

Oct-

10

Feb

-11

May-1

1

Aug

-11

No

v-1

1

Mar-

12

Ju

n-1

2

Sep

-12

De

c-1

2

Mar-

13

Ju

l-13

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-14

No

v-1

4

Feb

-15

May-1

5

Aug

-15

De

c-1

5

Mar-

16

Ju

n-1

6

(₹ mn)

EV 4x 6x 8x 10x

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Oct-

09

Ja

n-1

0

Apr-

10

Ju

l-10

Oct-

10

Feb

-11

May-1

1

Aug

-11

No

v-1

1

Mar-

12

Ju

n-1

2

Sep

-12

De

c-1

2

Mar-

13

Ju

l-13

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-14

No

v-1

4

Feb

-15

May-1

5

Aug

-15

De

c-1

5

Mar-

16

Ju

n-1

6

Premium/Discount to CNX 500Median premium/discount to CNX 500

0

5

10

15

20

25

30

35

Oct-

09

Ja

n-1

0

Apr-

10

Ju

l-10

Oct-

10

Feb

-11

May-1

1

Aug

-11

No

v-1

1

Mar-

12

Ju

n-1

2

Sep

-12

De

c-1

2

Mar-

13

Ju

l-13

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-14

No

v-1

4

Feb

-15

May-1

5

Aug

-15

De

c-1

5

Mar-

16

Ju

n-1

6

(Times)

1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev

17

CRISIL IER reports released on JM Financial Ltd

Date Nature of report

Fundamental

grade Fair value

Valuation

grade

CMP

(on the date of report)

28-Dec-09 Initiating coverage 4/5 ₹57 5/5 ₹41

02-Feb-10 Q3FY10 result update 4/5 ₹57 5/5 ₹41

01-Jun-10 Q4FY10 result update 4/5 ₹50 5/5 ₹38

19-Aug-10 Q1FY11 result update 4/5 ₹45 5/5 ₹34

03-Nov-10 Q2FY11 result update 4/5 ₹45 4/5 ₹40

27-Jan-11 Detailed Report 4/5 ₹45 5/5 ₹22


14-Jun-11 Q4FY11 result update 4/5 ₹42 5/5 ₹24



24-Nov-11 Detailed Report 4/5 ₹36 5/5 ₹15


27-June-12 Q4FY12 result update 4/5 ₹36 5/5 ₹12



06-Dec-12 Detailed Report 4/5 ₹36 5/5 ₹18

05-Mar-13 Q3FY13 result update 4/5 ₹36 5/5 ₹16

07-June-13 Q4FY13 result update 4/5 ₹36 4/5 ₹29

10-Sep-13 Q1FY14 result update 4/5 ₹36 5/5 ₹24



23-May-14 Q4FY14 result update 4/5 ₹42 4/5 ₹37




23-Jun-15 Detailed report 4/5 ₹70 5/5 ₹46


08-Dec-15 Q2FY16 result update 4/5 ₹70 5/5 ₹37

27-June-16 Detailed report 4/5 ₹70 5/5 ₹51

18

Company Overview

Established in 1973, JM Financial is an integrated financial services player, offering a wide

range of capital market products and services to corporates, HNIs and retail investors

through its subsidiaries / joint ventures / associate companies.

Organisational structure


It has a diversified product portfolio, comprising IB, broking (institutional and retail),

commodity broking, portfolio management, asset management, NBFC, PE and ARC

businesses. These businesses are managed as strategic business units and organised as

separate companies headed by a team of professionals.

JM Financial Asset

Management

Ltd.

(Mutual Fund

Management)

Infinite India Investment Mgmt Ltd.

(Real Estate Asset Mgmt)

JM FinancialInvestment

Managers Ltd

(Private Equity Asset Mgmt.)

JM Financial Asset

Reconstruction

Co. Pvt. Ltd.

(Asset

Reconstruction)

JM Financial Trustee Company Pvt.

Ltd(Trusteeship)

100% 53.5% 90% 100% 100%50.01%

9%

91%

JM Financial Overseas

Holdings Pvt. Ltd.

(MauritiusInvestment

Advisor)

100%

100%

JM Financial Limited

Core Investment Holding Co.

JM Financial Singapore Pte

Ltd

SingaporeCorporate

Finance Advisory & Financial Advisory)

Astute Investments

JM Financial Securities Inc.

(USA)

100%

JM Financial Properties and Holdings Ltd.

(Property Holding)

100%

25%

CR Retail Malls (India) Ltd.

(Rental of Property)

SEBI Regulated

Others

Holding Co

Companies outside India

RBI Regulated

JM Financial Credit

Solutions

Limited

(NBFC)

50%

JM Financial Products Ltd.

(NBFC)

100%

JM Financial Commtrade

Ltd

(Commodity Broking)

40%

100% 60%

JM Financial Insurance

Broking Pvt

Ltd

100%

Note Includes Equity + CCPS

JM Financial Institutional

Securities Ltd.

(Merchant Banking &

Institutional equity)

JM Financial Services Ltd.

(Stock Broking & Investment

Advisory)

4.2%

4.2%

JM Financial Capital Limited

100%

19

Milestones

1973 ● Establishment of JM Financial & Investment Consultancy Services Pvt. Ltd

1986 ● Ventured into stock broking and securities broking business

1997 ● Joint venture with Morgan Stanley to offer IB and securities broking services

2006 ● Launch of PE fund, JM Financial India Fund, with US-based Old Lane Partners, LP

2007 ● Termination of joint venture with Morgan Stanley

● Acquired 60% stake in ASK Securities – specialised in institutional broking business

● Launch of real estate fund

2008-12 ● Acquired the remaining 40% stake in ASK Securities and rechristened JM Financial Institutional Securities Pvt. Ltd

● Strategic co-operation with Rand Merchant Bank of South Africa to offer M&A advisory services to Indian and African

corporates

● Expanded to international markets

● Commenced asset reconstruction business

2012-till

date ● Announced partnership in real estate NBFC, with an investment made by Vikram Pandit

Source: Company

20

Annexure: Financials

# Abridged financials

Source: CRISIL Research

Income statement Balance Sheet

(₹ mn) FY13 FY14 FY15 FY16# FY17E (₹ mn) FY13 FY14 FY15 FY16# FY17E

Operating income 10,416 10,020 13,984 16,847 20,425 Liabilities

EBITDA 6,426 6,050 9,554 12,252 14,712 Equity share capital 752 755 784 789 789

EBITDA margin 61.7% 60.4% 68.3% 72.7% 72.0% Reserves 19,855 21,216 24,646 28,306 31,130

Depreciation 122 152 181 203 188 Minorities 1,403 1,650 6,546 6,685 7,056

EBIT 6,304 5,897 9,374 12,049 14,524 Share w arrants - - - - -

Interest 3,763 3,078 4,202 5,121 7,007 Net worth 22,010 23,621 31,976 35,780 38,975

Operating PBT 2,542 2,819 5,172 6,929 7,517 Convertible debt - - - - -

Other income (2) (13) (2) - - Other debt 42,691 29,927 47,239 66,707 71,239

Exceptional inc/(exp) (20) (20) (13) - - Total debt 42,691 29,927 47,239 66,707 71,239

PBT 2,519 2,785 5,157 6,929 7,517 Deferred tax liability (net) 954 906 873 853 863

Tax provision 729 784 1,557 2,224 2,405 Total liabilities 65,655 54,453 80,088 103,340 111,077

Assets

(39) (94) 301 699 371 Net f ixed assets 213 1,178 3,334 3,403 3,147

PAT (Reported) 1,829 2,095 3,300 4,005 4,740 Capital WIP 12 14 25 - -

Less: Exceptionals (20) (20) (13) - - Total fixed assets 225 1,193 3,359 3,403 3,147

Adjusted PAT 1,849 2,116 3,312 4,005 4,740 Investments 5,590 4,801 5,383 5,099 5,099

Current assets

Inventory (securities held as stock in trade) 5,978 5,342 3,510 2,569 2,238

Sundry debtors 2,253 2,292 2,627 3,548 3,837

Ratios Loans and advances 40,576 34,404 59,397 79,669 102,126

FY13 FY14 FY15 FY16# FY17E Cash & bank balance 3,840 4,139 2,031 15,268 848

Growth Marketable securities 10,443 5,750 7,311 - -

Operating income (%) 20.7 (3.8) 39.6 20.5 21.2 Total current assets 63,090 51,928 74,876 101,054 109,049

EBITDA (%) 33.8 (5.9) 57.9 28.2 20.1 Total current liabilities 4,051 4,568 4,650 7,269 7,271

Adj PAT (%) 52.5 14.4 56.5 20.9 18.4 Net current assets 59,039 47,360 70,226 93,785 101,778

Adj EPS (%) 52.1 13.9 50.3 20.6 18.4 Intangibles/Misc. expenditure 802 1,100 1,120 1,053 1,053

Total assets 65,655 54,453 80,088 103,340 111,077

Profitability

EBITDA margin (%) 61.7 60.4 68.3 72.7 72.0 Cash flow

Adj PAT Margin (%) 17.6 20.9 23.6 23.8 23.2 (₹ mn) FY13 FY14 FY15 FY16# FY17E

RoE (%) 9.1 9.9 13.9 14.7 15.5 Pre-tax profit 2,539 2,806 5,170 6,929 7,517

RoCE (%) 10.9 10.0 14.1 13.3 13.7 Total tax paid (747) (832) (1,590) (2,245) (2,395)

RoIC (%) 12.5 10.2 13.4 12.8 13.0 Depreciation 122 152 181 203 188

Working capital changes (11,235) 7,285 (23,413) (17,633) (22,413)

Valuations Net cash from operations (9,321) 9,412 (19,653) (12,747) (17,103)

Price-earnings (x) 20.9 18.4 12.1 10.0 8.5 Cash from investments

Price-book (x) 1.7 1.6 1.2 1.1 1.0 Capital expenditure (96) (1,419) (2,366) (181) 67

EV/EBITDA (x) 10.6 9.9 8.8 8.0 8.0 Investments and others (9,997) 5,482 (2,143) 7,595 -

EV/Sales (x) 7.2 6.5 6.5 5.8 5.8 Net cash from investments (10,093) 4,063 (4,509) 7,415 67

Dividend payout ratio (%) 36.7 21.3 32.1 23.7 20.0 Cash from financing

Dividend yield (%) 1.8 1.2 2.7 2.4 2.4 Equity raised/(repaid) 55 88 557 5 (0)

Debt raised/(repaid) 10,639 (12,765) 17,312 19,468 4,532

B/S ratios Dividend (incl. tax) (837) (586) (1,265) (1,131) (1,131)

Current ratio (x) 15.6 11.4 16.1 13.9 15.0 Others (incl extraordinaries) 15 67 5,437 225 (786)

Debt-equity (x) 1.9 1.3 1.5 1.9 1.8 Net cash from financing 9,871 (13,196) 22,042 18,568 2,615

Net debt/equity (x) 1.3 0.8 1.2 1.4 1.8 Change in cash position (9,522) 299 (2,108) 13,237 (14,420)

Interest coverage 1.7 1.9 2.2 2.4 2.1 Closing cash 3,840 4,139 2,031 15,268 848

Quarterly financials

(₹ mn) Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16

Total operating income 3,772 3,665 3,929 3,830 4,016

Change (q-o-q) 41.6% -2.8% 7.2% -2.5% 4.9%

EBITDA 2,521 2,574 2,753 2,706 2,913

Per share Change (q-o-q) 48.1% 2.1% 7.0% -1.7% 7.6%

FY13 FY14 FY15 FY16# FY17E EBITDA margin 66.8% 70.2% 70.1% 70.7% 72.5%

Adj EPS (₹) 2.5 2.8 4.2 5.1 6.0 Reported PAT 977 983 1,071 1,071 1,125

CEPS 2.6 3.0 4.4 5.3 6.2 Adj PAT 922 870 930 723 973

Book value 29.3 31.3 40.8 45.3 49.4 Change (q-o-q) 58.1% -5.6% 6.9% -22.3% 34.6%

Dividend (₹) 0.9 0.6 1.4 1.2 1.2 Adj PAT margin 24.4% 23.7% 23.7% 18.9% 24.2%

Actual o/s shares (mn) 752 755 784 789 789 Adj EPS 1.2 1.1 1.2 0.9 1.2

Minority interest/Share of

profit from associates

CRISIL Research Team

Senior Director

Nagarajan Narasimhan CRISIL Research +91 22 3342 3540 [email protected]

Analytical Contacts

Prasad Koparkar Senior Director, Industry & Customised Research +91 22 3342 3137 [email protected]

Binaifer Jehani Director, Customised Research +91 22 3342 4091 [email protected]

Manoj Damle Director, Customised Research +91 22 3342 3342 [email protected]

Jiju Vidyadharan Director, Funds & Fixed Income Research +91 22 3342 8091 [email protected]

Ajay Srinivasan Director, Industry Research +91 22 3342 3530 [email protected]

Rahul Prithiani Director, Industry Research +91 22 3342 3574 [email protected]

Bhaskar S. Bukrediwala Director +91 22 3342 1983 [email protected]

Miren Lodha Director +91 22 3342 1977 [email protected]

Business Development

Prosenjit Ghosh Director, Industry & Customised Research +91 99206 56299 [email protected]

Megha Agrawal Associate Director +91 98673 90805 [email protected]

Neeta Muliyil Associate Director +91 99201 99973 [email protected]

Dharmendra Sharma Associate Director (North) +91 98189 05544 [email protected]

Ankesh Baghel Regional Manager (West) +91 98191 21510 [email protected]

Sonal Srivastava Regional Manager (West) +91 98204 53187 [email protected]

Sarrthak Sayal Regional Manager (North) +91 95828 06789 [email protected]

Priyanka Murarka Regional Manager (East) +91 99030 60685 [email protected]

Sanjay Krishnaa Regional Manager (Tamil Nadu & AP) +91 98848 06606 [email protected]


















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