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'.

 

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 exposure to intense competition and uncertainties inherent in capital-market-related businesses, including regulatory changes.

 

The group has reported networth of Rs 912 crore as on March 31, 2024, improving from Rs 798 crore as on March 31, 2023. It has low fund-based debt with gearing of 0.45 times as on March 31, 2024 and it is likely to remain below 1 time over the medium term. In terms of earning profile, the company has reported a profit after tax of Rs 149 crore on a total income of Rs 624 crore in fiscal 24 as compared with a profit after tax of Rs 101 core on total income of Rs 448 crore. The company earned around ~45% of total income from brokerage and the remaining 65% of income generated from other financial services offered by the company like portfolio management, mutual fund and insurance distribution, online financial planning etc. For quarter first of fiscal 25, the company has reported PAT of Rs 46 core on total income of Rs 181 crore.

 

The promoters have 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 capitalization: The group is adequately capitalised for its current and planned scale of operations. The reported networth was Rs 912 crore with gearing of 0.45 times as on March 31, 2024, an improvement Rs 798 crore with gearing of 0.10 times as on March 31, 2023. Additionally, the management has approved raising of raising funds to the tune of Rs 200 crore through the issue of equity shares on a rights basis in October 2024.

 

Furthermore, 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 a significant presence in the retail equity broking segment, especially in the cash market segment as reflected in its market share of around 0.6% in the cash segment fiscal 2024. The group largely caters to clients that have delivery-based requirements in the equity segment. As on June 30, 2024, the company has around 2.5 lakhs NSE active client base. 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 on the overall market share of the group. However, the client base remains sticky and there have been 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.

 

Weaknesses:

• Highly competitive capital market industry: Geojit group’s businesses are primarily linked to 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 few years, with technology-based discount brokers entering and dominating the market. 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.  Specifically, since March 2020, the stock markets have seen high retail participation and daily trading volume coinciding with the lockdown imposed to contain Covid-19 and people remaining at home. A significant proportion of client additions in the industry are of 25-30 years, without significant savings surplus. The upward movement of the key benchmark indices during this period, too, has further contributed to the lure of stock market trading and potential gains. While this has benefited the group as well as other broking players, sustainability of the market momentum will remain a key monitorable.

 

• Exposure to uncertainties inherent in capital-market-related businesses, including regulatory changes: The broking industry has seen constant regulatory revisions in the past couple of years. With the objective of enhancing transparency and limiting the misuse of funds, the Securities and Exchange Board of India (SEBI) introduced a few regulations in the past year. Some of these include upfront margin collection for intraday positions and limiting the use of power of attorney. The industry has been undergoing changes pertaining to margin collection and pledging practices effective September 1, 2020. The new margin collection practices will change the vintage business model of small and mid-sized broking companies, which rely on relationships by offering differential leverage and margin payment avenues to clients. This could reduce their competitiveness in favour of larger digital and bank-based brokers. The regulations for upfront margin collection for intraday trading are expected to decrease leverage in the industry to 4-5 times from the current 10-15 times. This essentially means the level of positions (in terms of volume) taken by retail investors will be impacted. 

 

Recently, SEBI has observed that a volume-based slab-wise charge structure is followed by some MIIs. These charges are levied in lieu of various services offered by MIIs and are recovered from the end clients by members (stock brokers, depository participants, clearing members). SEBI has also observed that members generally recover such charges from the end clients on a daily basis whereas MIIs receive aggregate charges from the members on a monthly basis. As a result, aggregated charges collected by the members from the end clients are higher than the end of month charges paid to the MII (due to the slab benefit). The difference is equivalent to a discount or rebate received by the members. Moreover, this may result in an incorrect or misleading disclosure to the end client about the charges levied by MIIs. With respect to broking companies, CRISIL Ratings notes that the discount/rebate benefit has supported the profitability of brokers. The extent, however, varies depending on factors such as volume and the rebate received. Hence, assuming the current charge structure on an as-is basis, the removal of the discount/rebate will have an immediate impact on the earnings profile. However, the actual extent of impact will depend on two factors: (1) the charges under the new redesigned structure to be finalised by the MIIs, and (2) the ability of brokers to reassess their revenue and cost structures.

 

CRISIL Ratings believes that broking companies have adequate time to reassess their revenue and cost models to offset the impact on earnings. The final impact will be known over the next 3-4 months as all stakeholders in the market attune to the new charge structure and revised business models.

 

Additionally, on account of the announcement on the Union Budget 2024-25, the extent of impact of the increased tax rates in long term capital gains (LTCG), short term capital gains (STCG) and securities transaction tax (STT) on the earnings profile of the broking companies, is to be monitored 

 

CRISIL Ratings, nevertheless, will continue to monitor regulations and its impact Geojit’s group’s performance on an ongoing basis.

Liquidity: Adequate

The company has low debt. It had unencumbered cash and bank balance of Rs 155.30 crore as on Mar 31, 2024. The company has undrawn lines of credit of around Rs 327.52 crore which is against receivables, property, FD and Intraday Facility (Lien on Current account balance with Axis bank).

Rating sensitivity factors

Upward factors:

• Enhancement in market position, with substantial scale up across various business segments, including non-broking businesses  
• Sustenance of trend in revenue diversity with share of non-broking income (excluding trading income) continuing to remain over 40%, and improvement in cost-to-income ratio from current levels on steady-state basis

 

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, 2024, the Geojit group had 500 offices (includes branches and franchisees) across India, and over 2.4 lakhs active clients on NSE. 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.

Any other information: Not Applicable