Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

* Expectation of continued support from promoters and promoter group companies

The promoters, Mr Nirmal Jain and Mr R Venkataraman are first-generation entrepreneurs and veterans in capital market businesses. Over the years, they have scaled diverse businesses like lending, securities and wealth management. As of June 30, 2024, the promoters and promoter group companies cumulatively held 32.79% stake in 5paisa as on June 30, 2024 and remain committed to the company’s future growth. They have participated in the various rounds of capital raising in the past, including Rs 45 crore that was raised in August 2022 by way of conversion of share warrants and Rs 250 crore infused earlier in May 2021. Beyond need based financial support, the promoters continue to provide strategic oversight on an ongoing basis. Further, 5paisa benefits from its linkage to other promoter-owned entities – IIFL Finance, IIFL Securities Ltd and 360 One WAM (erstwhile IIFL Wealth Management Ltd), which have demonstrated track record of providing funding support mainly via inter-corporate deposits (ICD). Presently, the company has a board approved ICD line of Rs 600 crore collectively from IIFL Group Companies.

Apart from the promotors, the company also benefits from the presence of an experienced senior management team.

In May 2024, Mr. Narayan Gangadhar tendered his resignation from the position of Chief Executive Officer (CEO) of 5Paisa, on account of personal reasons. The company has been in the process of evaluating new candidates to fill this position and is expected to finalize on the same soon. In the interim, the promoters continue to provide strategic guidance to the entity while the day-to-day operations are being managed by the senior management team.

* Established track record in the equity broking segment; ability to retain market share amid increasing competition remains critical

The company has been offering products and services through an online platform and mobile application since its inception in fiscal 2017. It benefitted significantly from the heightened retail market participation (both in terms of frequency and volume) witnessed during the lockdown imposed after the outbreak of Covid-19. Led by the same, the company’s active client base increased to 17.5 lakhs as of March 31, 2022, from 8.7 lakhs, a year ago. Correspondingly, its market share based on volumes traded increased to 1.3% in the cash segment and 1.6% in F&O segment during fiscal 2022.

However, with decline in retail participation in the equity markets followed by regulatory restriction on brokers to give incentives for opening accounts/transacting, the base of active clients for 5Paisa fell to 7 lakhs as on March 31, 2023 and further to 5 lakhs, a year later. During this period the company also revamped its approach towards client acquisition, which also contributed to the decline in the number of active clients. Nonetheless, over Q1 2025, the number of active clients increased marginally to 5.4 lakhs. In terms of client acquisition, backed by its price penetration strategy, the company onboarded around 7.4 lakh new customers in fiscal 2024, resulting in a total client base of 42.3 lakh on March 31, 2024, higher than 34.9 lakh client base as on March 31, 2023. It further increased to 44.7 lakh as on June 30, 2024. With regards to overall turnover, the market share [[1]] of the company for fiscal 2024 was ~0.9% in the cash segment, ~1% in F&O segment and at an overall level, it was ~1%. This was marginally lower than last year’s market share of 1.2% - influenced by decline in active client base. For the first quarter of fiscal 2025, the overall market share was 0.8%.

Over the medium term, the company’s ability to expand its base of active clients and restore its overall market share will remain a key monitorable.

* Adequate capitalisation

Regular fund infusions have aided the capitalisation of the entity, over the years. In the last round, the promotors infused Rs 45 crore in fiscal 2023 by means of conversion of share warrants. Prior to that, the company had received Rs 250 crore via preferential issue in May 2021. Reported networth and gearing stood at Rs 540 crore and 0.6 times, respectively, as on March 31, 2024 (Rs 463 crore and 0.4 times, respectively, as on March 31, 2023). The networth further increased to Rs 553 crore as on June 30, 2024 on account of internal accretion. The company has deployed these funds in upgrading its technology infrastructure to ultimately improve the quality of service to its customers. After the advent of new regulations on margin funding, while borrowings have increased corresponding to rise in portfolio, overall gearing is expected to remain comfortable at 1-1.5 times on a steady-state basis.

Over the medium term, networth remains comfortable for the current and proposed scale of operations and, will continue to lend stability to operations, particularly amid volatile phases in the capital market.

Weaknesses

* Exposure to intense competition and uncertainties inherent to capital-market-related businesses, including regulatory changes

As businesses are restricted within the capital market, 5paisa faces intense competition from multiple players offering low-cost products. The industry has seen a huge transformation in the last four years, with the entry of technology-based discount brokers, who are dominating the market share. The proposed entry of players with deeper pockets may intensify pricing pressure across the industry.

The key broking business remains exposed to economic, political and social factors that drive investor sentiment. Given the cyclicality associated with the capital market, brokerage volume and earnings are highly dependent on the level of trading activity. Specifically, after March 2020, the stock markets saw high retail participation and daily trading volume on account of people staying at home during the lockdown to contain the Covid-19 pandemic. A significant proportion of client additions at the industry level are in the age bracket of 25-30 years without significant savings surplus. The upward movement of the key benchmark indices during this period further contributed to the lure of stock market trading and potential gains. Subsequently, even though the lockdown restrictions were lifted by many state governments by July 2020, the momentum of increased retail participation continued to sustain over the trailing 12 months. While this benefited 5paisa as well as other broking players, the heightened retail market participation corrected to its pre-pandemic level after the macro situation restored in fiscal 2023. In the long-term, sustainability of the market momentum will remain a key monitorable.

Further, over the last couple of years, the broking industry has witnessed continuous changes in regulations. In order to enhance transparency and curb misuse of funds, SEBI has introduced few regulations in the last one year, the latest one being directing Market Infrastructure Institutions to levy uniform transaction charges across volumes unlike earlier volume-based charges being paid to the exchange. The same will become effective from October 1, 2024. These also include upfront margin collection for intraday positions and restricting use of the power of attorney. Changes pertaining to margin collection and pledging practices also became effective from September 1, 2020. The newer margin collection practices will change the vintage business model of various small to mid-sized broking companies that relied on relationships, by offering differential leverage and margin payment avenues to clients. This may also lead to a decline in overall competitiveness towards larger digital and bank-based brokers.

Regulations of upfront margin collections for intraday trading are likely to reduce leverage to 4-5 times from 10-15 times prevalent across the industry. This reduction in leverage will also affect the level of positions (in terms of volume) taken by retail investors. The impact of this change on performance of 5paisa will be a monitorable.

Furthermore, as per new regulations, shares owned by investors can be lien marked with the respective broker instead of having to follow the current practice of transferring it to the broker’s pool account. CRISIL Ratings understands that most top brokers (including 5paisa) have already streamlined their systems in accordance with the new norms. However, small and mid-sized brokers could be more impacted, as they do not have advanced IT infrastructure and risk management systems. Though such revised regulations may impact the performance in the near term, the industry will benefit from increased transparency and the de-risk broking platform for retail customers in the longer run.

* Moderate, albeit stabilizing, earnings profile

5paisa reported a profit after tax (PAT) of Rs 54 crore on a total income of Rs 395 crore in fiscal 2024 as against a PAT of Rs 44 crore on a total income of Rs 339 crore in fiscal 2023. In fiscal 2024, the company incurred one off expenses of ~Rs 23.1 crore, including Rs 9 crore towards consultant fee for a special project, Rs 8.6 crore towards ESOP, Rs 3 crore professional expenses and Rs 2.5 crore of exchange margin penalty. In fiscal 2023, there was a one-off expense of Rs 7 crore towards reversal of margin penalty to clients. Based on reported PAT, the company’s RoE for the respective fiscals was 10.8% and 10.4% however, upon adjusting for the extraordinary expenses mentioned above, the adjusted RoE would be 15.3% and 12.2%, respectively. For fiscal 2024, the cost to income ratio was high albeit decreasing at 80% (82% for the previous year), largely on account of higher employee costs and one off expenses. Though its effect was offset by a corresponding rise in total revenue led by higher interest income and a growth of 12% in broking & related income. For the quarter ended June 30, 2024, the company earned a profit of Rs 20.1 crore on total income of Rs 102.3 crore compared with profit of Rs 14.5 crore on total income of Rs 84.6 crore for corresponding period of previous fiscal. This was supported by higher operating efficiency and stable total income. Excluding ESOP reversal, the profit for Q1 2025 stood at Rs 8.7crore.

Ever since it commenced operations in fiscal 2016, the company has made significant investment in technology infrastructure and hired relevant personnel across verticals. Still being in its growth phase, the entity’s operating expenses would remain elevated in the near term and thereafter, stabilize with economies of scale. The broking income is expected to remain the primary channel of earning. In near to medium term, impact of application of uniform transaction charges across volumes will remain a key monitorable. Secondly, its ability to manage cost and improve earnings profile across market cycles, remains critical.

[[1]] CRISIL Ratings’ market share calculation is based on a two legged approach (both buy and sell aspects of the transaction)