| Kotak Securities Limited | ||
| Rating reaffirmed at 'CRISIL A1+ ' | ||
| Rating Action | ||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||
| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ ratings on the commercial paper of Kotak Securities Ltd (KSL; part of the Kotak group).
The ratings continue to reflect the strategic importance to, and strong expectation of support from, the ultimate parent, Kotak Mahindra Bank Ltd (KMBL; ‘CRISIL AAA/CRISIL AA+/CRISIL AAA/Stable/CRISIL A1+’). The ratings also factor in comfortable capitalisation and robust risk management systems. These strengths are partially offset by susceptibility to risks associated with capital-market-related businesses. |
Analytical Approach The ratings reflect the strong support that KSL receives from its parent, KMBL. That’s because the two companies have extensive business and operational linkages. KMBL should continue to provide support to KSL, considering the strategic importance of the latter, shared name and 100% ultimate shareholding. |
Key Rating Drivers & Detailed Description Strengths: * Expectation of strong support from the ultimate parent, KMBL KSL is an important subsidiary for KMBL, as it complements the bank’s product offerings by enabling the group to provide capital market-related products and also enhances diversification of the group’s revenue profile. Further, there exists synergic operational and managerial integration between KMBL and KSL. The latter benefits significantly from the strong retail franchise and nation-wide branch infrastructure of the parent. KMBL shares its strong technology platform and risk management practices with the company. KSL also has board representation from KMBL. The bank is the ultimate 100% shareholder of KSL and CRISIL Ratings believes that KMBL would provide both funding and capital assistance to it. CRISIL Ratings believes that the strong operational, managerial and financial linkages, along with significant shareholding and shared brand name, imply a strong moral obligation on KMBL to support KSL, both on an ongoing basis and in the event of distress.
* Comfortable capitalisation KSL is well capitalised, with a networth of Rs 7157 crore and low gearing of 0.5 times as on March 31, 2023 (Rs 6385 crore and 0.7 time as on March 31, 2022). Given that borrowing needs are largely to meet margin requirement at exchanges and for the margin trade funding business, the gearing is expected to remain low over the medium term. Further, the networth should remain comfortable for the current and planned scale of operation. The standalone capitalisation remains supported by linkage with the parent, given the strong capitalisation of the Kotak group.
* Strong market position in the equity broking business KSL ranks among the top equity brokers by number of active clients, as on May 31, 2023, in the highly fragmented broking industry. As on the same date, the company had around 12 lakh active customers on National Stock Exchange (NSE). Its market share of the combined volumes (including proprietary trading) on the Bombay Stock Exchange (BSE) and NSE in both the cash and derivatives segments for fiscal 2023 was around 2.7%, with higher market share in high-yielding cash segment at 8.9% in fiscal 2023. Around 3% of the total broking turnover in fiscal 2023 was from the institutional segment. For retail customers, the focus continues to be on the high-yield cash segment. For institutional customers, the focus is on both cash as well as the derivatives segments.
* Robust risk management systems The risk management and monitoring systems are adequate to manage inherent risks associated with the broking business. For online broking, a three-in-one model is followed wherein the client’s bank, dematerialisation and trading accounts are inter-linked. In the institutional broking segment, given that most of the transactions are custodian trades, the risk is expected to be minimal. The risk management framework for other businesses such as margin financing and proprietary trading is also strong. The company has invested in a strong information technology architecture over the years. Back-office operations are centralised and the system allows real-time monitoring of all trades and executions.
Weakness: * Exposure to uncertainties inherent in capital market-related businesses While the company has diversified sources of revenue, the dependence on capital market-related activity remains high. Businesses like broking, margin funding and proprietary trading are exposed to various economic, political and social factors that drive investor sentiments. Given the cyclical nature of these businesses, brokerage volumes and earnings are highly dependent on the level of trading in the capital markets. While businesses like distribution of financial products and depository services lend some stability to the earnings, overall earnings are expected to remain volatile. |
Liquidity : Superior Liquidity position of KSL is superior due to the agency nature of business. There was a healthy liquidity cushion in the form of cash and liquid investments and unutilised bank lines of Rs 8355 crore as on May 31, 2023. Apart from this, the company has healthy inflow from its other assets that can be liquidated and realised at short notice. The borrowing as on the same date was Rs 2900 crore, in the form of commercial paper. The company also benefits from the support from the Kotak group. |
Rating Sensitivity factors Downward factors: * Downward change in the credit risk profile of KMBL by more than 1 category could have a similar rating change on KSL * Any material change in the shareholding or support philosophy of KMBL, impacting the quantum and timing of support |
About the Group and Company KMBL is the flagship company of the Kotak group and has diversified operations covering commercial vehicle financing, consumer loans, corporate finance and asset reconstruction. Through its subsidiaries, the bank is engaged in investment banking, equity broking, securities-based lending and car finance. KMBL was reconstituted as a commercial bank from a non-banking financial company (NBFC) in fiscal 2003 to provide a more comprehensive range of financial services. Effective April 1, 2015, ING Vysya Bank was merged with KMBL and the integration process has been completed.
Other than KMBL, the key operating companies of the Kotak group are Kotak Mahindra Prime Ltd (car financing), Kotak Mahindra Capital Company (investment banking), Kotak Securities Ltd (retail and institutional equities broking, and portfolio management services), Kotak Mahindra Investments Ltd (commercial real estate lending and securities-based lending) and Kotak Investment Advisors Ltd (alternate assets space). The group also operates in the life and general insurance business through Kotak Mahindra Life Insurance Company Ltd and Kotak Mahindra General Insurance Company Ltd, respectively. It is also present in the asset management business through Kotak Mahindra AMC and Trustee Company Ltd, and recently launched Kotak Infrastructure Debt Fund. The acquisition of BSS Microfinance Ltd (formerly, BSS Microfinance Pvt Ltd), an NBFC-microfinance institution, was completed during fiscal 2018.
KSL is one of India’s leading broking companies and a 100% subsidiary of KMBL. It was incorporated in 1994 when the brokerage business of Uday S Kotak Share and Stock Broker and the distribution business of the erstwhile Kotak Mahindra Finance Ltd were moved to a separate company. KSL’s operations include stock broking, margin funding, and distribution of various financial products.
KSL’s profit after tax (PAT) was Rs 839 crore on a total income of Rs 2840 crore for fiscal 2023, against Rs 1049 crore and Rs 2987 crore, respectively, for fiscal 2022. Income from broking was around 50% of total income in fiscal 2022.The decline in profits is due to reduced broking income on account of market conditions and higher discounts on Commercial Papers has led to higher finance cost |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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