Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the short-term bank facilities of Geojit Financial Services Ltd (GFSL; formerly, Geojit BNP Paribas Financial Services Ltd) part of the Geojit group, at 'CRISIL A1'.

 

CRISIL ratings has noted the announcement made by GFSL on July 28, 2023 on stock exchanges. As per the announcement, GFSL, through business transfer agreement, will be transferring its securities business to its wholly owned subsidiary ‘Geojit Investments Limited’. The completion of the said transaction is subject to shareholders, regulatory and other statutory approvals. The proposed restructuring of business is primarily to ensure compliant with guidelines published by NSE Circular Ref 02/2022 on Jan 7, 2022. As per these regulations broking company is not permitted to engage in any business other than that of Securities/commodity derivative business. Further, the revised regulations also prohibit any fund investments made in group companies such as subsidiaries & associates etc., engaged in other business such as NBFC, Real Estate etc. which is not in connection with or incidental to or consequential upon the Securities/commodity derivatives business. Regulations also prohibits intercompany loan between group’s NBFC arm Geojit Credits Pvt Ltd, currently 94% held by GFSL (accounts for ~1% of group’s revenue for fiscal 2023) and entity engaged in securities business.

 

Geojit group’s securities business consists of security broking business (including clearing and settlement), margin financing business, depository participant services business, research analyst business and investment advisory business. As of fiscal 2023, securities business had revenue of Rs 300.2 crore which is 67% of its overall consolidated revenue of Rs 447.6 crore through the financial year. Post restructuring, securities business will be transferred to Geojit Investments Limited (wholly owned subsidiary of GFSL) without any change in current operations and management.

 

CRISIL Ratings believes the proposed restructuring will not impact credit risk profile at group level as fungibility of funds will continue to remain between the parent and its subsidiaries. Also, all entities will continue to remain highly integrated in terms of operations with common management.  However, CRISIL Ratings will continue to monitor any development regarding proposed restructuring and any potential impact on the business profile of Geojit Financial Services Ltd.

 

The rating continues to reflect the group's adequate capitalisation, sound risk management systems, experience of the promoters in the broking business, and established presence in retail broking. These rating strengths are partially offset by the inherent uncertainties in the core business of equity broking and exposure to risks relating to sustenance of the income profile across market cycles.

 

The group has reported networth of Rs 798 crore as on March 31, 2023, improving from Rs 768 crore as on March 31, 2022. It has low fund-based debt with gearing of 0.10 times as on Mar 31, 2023 as compared to 0.02 times as on March 31, 2021 and it is likely to remain below 0.5 time over the medium term. In terms of earning profile, the company has reported a profit after tax of Rs 101 crore on a total income of Rs 448 crore in fiscal 23. For quarter first of fiscal 24, the company has reported PAT of Rs 22 core on total income of Rs 116 crore.

 

The promoters have an experience of more than three decades in the financial services industry, having witnessed various bull and bear cycles. Further, the group has developed good brand affinity in the south Indian states of Kerala and Tamil Nadu, where it is a market leader in the equity broking segment. This has helped in building sound risk management practices with stricter margin and square-off policies for any outstanding positions. As a result, the overall bad debts have remained lower than 1% of the overall loans for the past several years.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of GFSL and its subsidiaries. That’s because all these entities, together referred to as the Geojit group, have integrated operations. GFSL, the flagship company of the group, undertakes retail broking and third-party product distribution. The other group companies are Geojit Credits Pvt Ltd, Geojit Techloan Pvt Ltd, Geojit Technologies Pvt Ltd, Qurum Business Group Geojit Securities LLC, Barjeel Geojit Financial services LLC, BBK Geojit securities KSC, Geojit IFSC Limited, Geojit Investments Limited

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Adequate capitalisation

The group is adequately capitalised for its current and planned scale of operations. The reported networth was Rs 798 crore with gearing of 0.10 times as on March 31, 2023, an improvement from Rs 768 crore as on March 31, 2022. However, the group is likely to make healthy dividend payout of 70-80% which will lead to a steady-state absolute net worth of around Rs 700 crore. Also, despite the cyclical nature of the business, the group has been making profits in the past five fiscals. The gearing has been low over this period and is expected to remain negligible over the medium term, in the absence of any aggressive growth plans for the fund-based business. The group is thus likely to remain adequately capitalised over this period. The strong networth should continue to lend stability to operations even during volatility in the capital market.

 

Sound risk management systems and promoters rich experience in equity broking industry

The group uses client-grading methodology through which clients are graded on a three-point scale, based on parameters such as turnover details, brokerage earned and performance of the account. Margin funding or loans against shares are provided to clients based on collateral security (cash or other shares in his depository participant account), after maintaining the minimum margin prescribed by the regulator. When the value of shares purchased goes below 50% (average percentage; depends on type of shares) in value of the collateral provided, a square off process is initiated, thus neutralising any adverse impact of risks associated with such products. The adequate risk mitigation measures implemented should minimise balance sheet risks. Mr C J George, the group managing director, has been engaged in equity broking since the early 1980s and established Geojit in 1987. His experience helps in providing guidance and direction to the group, which operates through many associates across India.

 

Strong and established market position in the retail equity broking segment

The group has significant presence in the retail equity broking segment, especially in the cash market segment as reflected in its market share of around 0.68% in the cash segment fiscal 2023, improved from 0.5% during fiscal 2021. The group largely caters to clients that have delivery-based requirements in the equity segment. Because of high speculative volumes in the intraday segment during the last fiscal, the delivery volumes as a proportion of overall cash volumes declined slightly, impacting the overall market share of the group. However, the client base remains sticky and there were steady requirements over the past several years. This helps to maintain overall turnover during low volume periods in the market. The group is largely present in the south Indian market where the retail clients largely engage in higher yielding delivery-based trade as compared with intraday and short-term trading.

 

Weakness:

Highly competitive capital market industry

Geojit group’s businesses are confined within the capital market industry, which faces intense competition, with multiple players offering low-cost products to clients. The industry has seen a huge transformation in the last 2-3 years, with technology-based discount brokers entering and dominating the market. The competition is expected to increase as more players with cash burn ability propose to enter this space, further intensifying the price war in the industry. The company's key broking business remains exposed to economic, political, and social factors that drive investor sentiments. Given the volatility in the business, brokerage volumes and earnings are highly dependent on the level of trading activity in capital markets. Nevertheless, the upward movement of the key benchmark indices during last 4-6 quarters has contributed to the lure of stock market trading and potential gains. CRISIL Ratings notes that while lock down restrictions were lifted post 2nd wave impact by most of the state governments, the momentum of increased retail participation has continued to sustain till December 2022. While this has benefited Geojit group as well as other broking players, long term sustainability of the market momentum will remain a key monitorable. Additionally, maintenance of active clients in total user base and along with continuous engagement of first-time investors in trading activity will also remain monitorable.

 

Susceptibility to the risk of regulatory changes

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, SEBI has introduced a few regulations in the last one year. Some of these regulations 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 have changed 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 prevalent across the industry. This reduction in leverage essentially means that the level of positions (in terms of volume) taken by retail investors will also get impacted. While these regulations have not affected Geojit group’s performance so far, CRISIL Ratings will continue to monitor the same on an ongoing basis. 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 the Geojit group) have already streamlined their systems in accordance with the revised regulations. However, this may impact small and mid-sized brokers given their not-so-advanced IT infrastructure and risk management systems. These revised regulations did not have any visible impact on large brokerage houses (including Geojit group) thus far. CRISIL Ratings believes that these regulations will benefit the industry with increased transparency and the de-risk broking platform for retail customers.

Liquidity: Adequate

The group largely utilises non-fund-based facilities. It had low debt of Rs 78 crore as on March 31, 2023. The unencumbered cash reserves and the cash and bank balance was adequate Rs 85 crore as on March 31, 2023.

Rating Sensitivity factors

Upward factors

• Scaling-up operations, thus improving and sustaining the overall retail cash market share at over 3.0% in volumes
• A significant decline in the cost-to-income ratio

 

Downward factors

• The cost-to-income ratio remaining at above 80%
• Significant weakening in capitalisation
• Substantial decline in the number of active clients

About the Company

GFSL, the flagship company of the Geojit group, was founded in 1987. The group offers services such as retail broking, depository, equity research, portfolio management, third-party product distribution, and loan against shares. As on March 31, 2023, the Geojit group had 500 offices (includes branches and franchisees) across India, and over 12.9 lakhs clients. It also set up broking joint ventures in Dubai, Saudi Arabia, Kuwait, and Oman, to offer equity broking and related services, mainly to non-resident Indians in these countries.

 

Geojit group (in line with most large brokers) has been focusing on enhancing online broking platform. As a result, the proportion of income from broking from online channel has been increasing. Further, group continues to have large presence of over 500 offices, which is used for cross selling and distribution of other investment products like mutual funds. This is resulting in improving share of income from distribution activities.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Levels	Rating Outstanding with Outlook
NA	Bank Guarantee	NA	NA	NA	117	NA	CRISIL A1
NA	Overdraft facility	NA	NA	NA	80	NA	CRISIL A1