| Geojit Financial Services Limited | ||||
| Rating reaffirmed at 'CRISIL A1 ' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale
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’s adjusted networth was Rs 638 crore as on December 31, 2021, improving from Rs 575 crore as on March 31, 2021. It has low fund-based debt with gearing of 0.1 times as on December 31, 2021 as compared to 0.03 times as on March 31, 2021 and it is likely to remain below 0.5 time over the medium term.
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, Geojit Investment Services Limited, Barjeel Geojit Financial services LLC, BBK Geojit securities KSC
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: The group is adequately capitalised for its current and planned scale of operations. The adjusted networth was Rs 638 crore (adjusted for fixed assets, intangible assets and investment in subsidiaries) with gearing of 0.1 times as on December 31, 2021, an improvement from Rs 575 crore as on March 31, 2021. However, the group is likely to make healthy dividend payout of 70-80% which will lead to a steady-state absolute net worth of Rs 450-500 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. 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 on the basis of 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 0.4% in the retail cash segment during the nine months through December 2021, declining from 0.5% during fiscal 2021. The group largely caters to clients that have delivery-based requirements in the equity segment. On account 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 2021. While this has benefited Geojit group as well as other broking players, long term sustainability of the market momentum will remain a key monitorable. Further, gross broking income by active clients (ARPU) has declined by around 6% in the Q3 of fiscal 2022 comparison to Q4 fiscal 2021. CRISIL Ratings believes Geojit’s ARPU may see further reduction, given markets being highly volatile during Q4 fiscal 2022 owing to prevailing global situation. 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 underwent 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 58 crore as on December 31, 2021. The unencumbered cash reserves and the cash and bank balance was adequate Rs 75.58 crore as on December 31, 2021. The group has current investments in liquid mutual funds that can be liquidated if needed. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Group 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 December 31, 2021, the Geojit group had 470 offices (includes branches and franchisees) across India, and over 10,70,000 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 400 branches, 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. |
Key Financial Indicators
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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)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||
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This Annexure has been updated on 29-Mar-2022 in line with the lender-wise facility details as on 30-Aug-2021 received from the rated entity.
Criteria Details
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