Rating Rationale
March 07, 2022 | Mumbai
Asit C. Mehta Investment Interrmediates Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.40 Crore (Reduced from Rs.70 Crore)
Long Term RatingCRISIL BBB-/Stable (Reaffirmed)
Short Term RatingCRISIL A3 (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its CRISIL BBB-/Stable/CRISIL A3 ratings on the bank facilities of Asit C. Mehta Investment Interrmediates Limited (ACMIIL).

 

CRISIL Ratings has also withdrawn its rating on the bank facilities of Rs 30 crore on the request of the company and facility closure letter received from respective lenders. The withdrawal is in-line with CRISIL Ratings policy on rating withdrawal.

 

The ratings continue to reflect the promoters’ financial flexibility and healthy reputation in the Indian capital market, and the company’s adequate risk management systems and processes. These strengths are partially offset by average earnings, modest market position and susceptibility to uncertainties inherent in the capital markets.

 

The company’s networth improved to Rs 18.4 crore in September 2021 from Rs 5.1 crore in fiscal 2020. During fiscal 2021, the promoters converted preference shares of Rs 8 crore into equity, which has helped the company to improve its capital position. Further, the promoters, Mrs Deena Mehta and Mr Asit C Mehta, are well-known and reputed within the financial services industry. They continue to maintain healthy financial flexibility and support the entities under ownership.

 

After incurring a net loss in fiscal 2020, ACMIIL registered improved profitability in fiscal 2021. This improvement in earnings profile was supported by increase in topline owing to higher investor participation. The number of active clients increased to 23,944 as on December 31, 2021, from 19,990 as on March 31, 2020. Further, cost cutting measures were adopted to align the cost-to-income ratio. Overall expenses were reduced by eliminating certain non-core operational costs. Profit after tax (PAT) was Rs 1.1 crore in fiscal 2021 as against a loss of Rs 5.8 crore incurred in fiscal 2020. Further, for the first half of fiscal 2022, net PAT of Rs 3 crore was reported. The cost-to-income ratio improved to 83.2% as on December 31, 2021 from 93.7% as on March 31, 2021.

 

While there has been an improvement in the number of active clients, ACMIIL remains small within the overall industry. The market share in terms of active client proportion stood at 0.13% of the overall active clients at exchange level as of December 2021. ACMIIL continues to largely operate as a full-service broker and charges a commission from its clients based on overall turnover. Full-service brokers have remained less competitive than discount brokers in terms of acquiring new clients over the last 8-12 quarters. Nevertheless, in-line with the industry, the company has also launched its discount broking plan in order to attract more customers.

Analytical Approach

CRISIL Ratings has evaluated the standalone credit risk profile of ACMIIL and taken into consideration the strong financial flexibility of the promoters to support the company through equity infusions on an ongoing basis and in times of necessity.

Key Rating Drivers & Detailed Description

Strengths:

  • Promoters’ financial flexibility and healthy reputation in the financial services industry

The promoters have high financial flexibility to infuse capital for scalability and sustainability. During fiscal 2021, preference shares valued Rs 4 crore  were redeemed fully and issued on rights basis at a premium of Rs 10 each adding up to Rs 8 crore, which has been infused back into the company.  Therefore, networth and gearing on a standalone basis improved to Rs 18 crore and 1.3 times as on September 30, 2021, from Rs 4.5 crore and 6.9 times as on September 30, 2020. Gearing is expected to remain below 2 times over the medium term.

 

The promoters have experience of over 30 years in the retail equity broking business. Mr Mehta, ACMIIL’s chairman, is a qualified chartered accountant, securities law graduate, and a seasoned capital market professional. He has been engaged in equity broking since 1983 through a proprietorship firm, and incorporated ACMIIL in 1993. Mr Mehta’s experience helps in providing guidance and direction to ACMIIL, which operates through associates across India. Ms Mehta is a postgraduate in management studies (finance) and is an associate member of the Institute of Chartered Accountants of India. She is the managing director of ACMIIL and is in charge of daily affairs.

 

  • Adequate risk management systems and processes

The company uses a customised version of the ‘Now’ software developed by the National Stock Exchange to monitor client accounts in real time. It also uses a client-grading methodology, which grades clients on a three-point scale, based on parameters such as turnover details, brokerage earned and performance of account. The company has ventured into arbitrage trading, wherein it focuses on delta hedging. However, adequate risk mitigation measures have been implemented to minimise balance sheet risks.

 

Weaknesses:

  • Average albeit improving earnings profile

Earnings profile, though average, has witnessed some improvement in fiscal 2021 and the first half of fiscal 2022. The company reported a PAT of Rs 1.1 crore in fiscal 2021 as against a loss of Rs 5.8 crore in fiscal 2020. The adoption of cost control measures has resulted in improvement in cost-to-income ratio for fiscal 2021 as well as for the first half of fiscal 2022. The cost-to-income ratio improved to 83% in September 2021 from 144% for fiscal 2020.

 

Although profits and cost-to-income ratio have improved, they are lower when compared to peers. Therefore, considering the inherent cyclical nature of the capital markets, ability of the group to sustain its earnings profile and improve its cost-to-income ratio here on, will remain monitorables.

 

  • Modest market position

Market share in the retail equity broking business (measured in terms of turnover) remained modest, at 0.001% in the first half of fiscal 2022 declining from 0.24% in fiscal 2020. Being a full-service broker, the company is likely to focus on high-networth individuals (HNIs) where yield on overall turnover is higher. However, in terms of customer growth, the company might not be as competitive as discount brokers on account of low tariff. The customer base remains small at around 23,944 clients. The company avoids acquiring customers from competitors. Despite benefits from presence in smaller cities through business and marketing associates, the market position will remain modest over the medium term.

 

  • Susceptibility to uncertainties inherent in the capital markets business

Over the last couple of years, the broking industry has witnessed continuous regulatory revisions. With the objective of further enhancing the transparency levels and limiting the misuse of funds, the Securities and Exchange Board of India has introduced a few regulations in the last one year. These include, upfront margin collection for intraday positions and limiting the usage of power of attorney. The industry is undergoing changes pertaining to margin collection and pledging practices effective 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 is likely to lead to decline in the overall competitiveness towards larger digital and bank-based brokers.

 

The regulations of upfront margin collections for intraday trading are expected to decrease the leverage levels in the industry to 4-5 times from the current 10-15 times. This reduction in leverage essentially means that the level of positions (in terms of volume) taken by retail investors will also get impacted. The likely impact of this change on the company’s performance on an ongoing basis will be a monitorable. Furthermore, as per new regulations, the 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 ACMIIL) have already streamlined their systems in accordance with the revised regulations. However, this may impact small and mid-sized brokers in particular given their not-so-advanced IT infrastructure and risk management systems. While these revised regulations may affect the performance in the near term, in the long run, the industry will benefit from increased transparency and the de-risk broking platform for retail customers.

Liquidity: Adequate

Liquidity is adequate for the current scale of operations. ACMIIL is a broking company and maintains cash of Rs 1.0-1.5 crore on a steady state basis. As on December 31, 2021 the company had cash and bank balance of Rs 6.64 crore and Rs 15.34 crore investments in liquid mutual fund The company covers its interest and commission obligation through interest income and accrual from the broking business. The overdraft facility and short-term loan were utilised 95-98% on average over the six months through December 2021, and utilisation is expected to remain at a similar level.

Outlook: Stable

CRISIL Ratings believes ACMIIL will continue to benefit from the extensive experience of its promoters and maintain adequate risk management systems.

Rating Sensitivity factors

Upward factors

  • If the cost-to-income ratio remains below 70% on a sustained basis
  • Increase in market share in the client broking segment

 

Downward factors

  • Decline in earnings with cost-to-income ratio remaining above 100%
  • Increase in gearing to above 5 times

About the Company

ACMIIL is the flagship company of the Asit C Mehta group. The company undertakes equity and derivatives trading, advisory, mutual fund and initial public offering distribution and depository services. ACMIIL was founded by Mr Asit C Mehta in 1986 as a proprietary business engaged in equity broking. By fiscal 1993, the company had entered the debt, money, capital and currency markets as broker/advisor. In December 1993, the firm was reconstituted as a company. In the retail broking business, ACMIIL has presence across India through three branches and 160 business associates as on September 30, 2021

Key Financial Indicators

Particulars

Unit

September 30/ H1 FY22

(Provisional)

2021

2020

Total assets

Rs crore

116.4

98.1

103.0

Total Income

Rs crore

12.6

18.9

17.6

Profit after tax (PAT)

Rs crore

3.3

1.9

-5.9

Cost to income

%

83.2

93.7

144

Gearing

Times

1.3

1.7

8.0

Return on networth

%

40.8*

20.0

-90.0

*On an annualized basis

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon
rate (%)

Maturity
date

Issue size
(Rs crore)

Complexity
level

Rating assigned
with outlook

NA

Bank Guarantee

NA

NA

NA

7

NA

CRISIL A3

NA

Overdraft Facility

NA

10.75

NA

30

NA

CRISIL BBB-/Stable

NA

Overdraft Facility

NA

12.30

NA

1.3

NA

CRISIL BBB-/Stable

NA

Proposed Long Term Bank Loan Facility

NA

NA

NA

1.7

NA

CRISIL BBB-/Stable

NA

Bank Guarantee

NA

NA

NA

15

NA

Withdrawn

NA

Bank Guarantee

NA

NA

NA

15

NA

Withdrawn

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 33.0 CRISIL BBB-/Stable 28-01-22 CRISIL BBB-/Stable   -- 27-11-20 CRISIL BBB-/Stable 30-08-19 CRISIL BBB-/Stable CRISIL BBB-/Stable
Non-Fund Based Facilities ST 37.0 CRISIL A3 28-01-22 CRISIL A3   -- 27-11-20 CRISIL A3 30-08-19 CRISIL A3 CRISIL A3
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bank Guarantee 15 Bank of India Withdrawn
Bank Guarantee 15 State Bank of India Withdrawn
Bank Guarantee 7 Bank of India CRISIL A3
Overdraft Facility 1.3 Bank of India CRISIL BBB-/Stable
Overdraft Facility 30 State Bank of India CRISIL BBB-/Stable
Proposed Long Term Bank Loan Facility 1.7 Not Applicable CRISIL BBB-/Stable

This Annexure has been updated on 07-Mar-22 in line with the lender-wise facility details as on 02-Aug-21 received from the rated entity.

Criteria Details
Links to related criteria
Rating Criteria for Securities Companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for rating short term debt

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