Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB/Stable/CRISIL A3+’ ratings on the bank loan facilities of Rs 350 crore of Religare Broking Ltd (RBL).

 

RBL is a wholly owned subsidiary of Religare Enterprise Ltd (REL), offering full range of retail-focused broking services (equity, commodity, and currency). RBL also offers other ancillary services like distribution of insurance and other financial products, facilitation of various services under the e-governance business. 

 

RBL has a wholly owned subsidiary - Religare Digital Solutions Ltd (RDSL) which was incorporated on April 7, 2022 with the objective to carry out the e-governance and financial inclusion business. RBL has filed a Scheme of Arrangement with the Hon’ble National Company Law Tribunal (NCLT) for transfer and vesting of its Business to RDSL, on a going concern basis by way of a slump sale[1]. This approval is yet to be received. Apart from RDSL, RBL has one more subsidiary – Religare Commodities Limited (RCL).

 

The ratings factor in the adequate capitalization of RBL with regard to its current and planned scale of business, its long track record of operations and adequate risk management systems. These strengths are partially offset by the modest market share of the company in the equity broking segment, its average, albeit improving, earnings profile and susceptibility to intense competition and uncertainties inherent to capital market business.

 

For the fiscal ended March 31, 2023, RBL had an overall market share of 0.15% and a share of 0.49% within the cash segment. As on September 30, 2023, RBL reported net worth of Rs 230.04 crore and a comfortable gearing of 0.97 time, thereby supporting the financial risk profile. For fiscal 2023, RBL reported profit after tax (PAT) of Rs 9.61 crore translating to a return on equity (RoE) of 4.51% vis-à-vis a PAT and RoE of Rs 19.30 crore and 11.07%, respectively, for the previous fiscal. For first half of fiscal 2024, the company reported a PAT of Rs 12.28 crore with an annualized RoE of 10.97%.

 

The ratings also consider the fact that RBL remained ringfenced from any debt restructuring related discussions of another subsidiary of its Holding company, REL. REL has extended capital support for growth plans of RBL, also reflective in the comfortable gearing position of the latter.  CRISIL Ratings expects RBL and REL to operate on an arm’s length basis over the medium term with the latter continuing to extend strategic guidance and capital support to RBL as its promoter.

[1] This transaction is in accordance with Section 2(42C) read with section 50B of the Income Tax Act, 1961

Analytical Approach

To arrive at the ratings, CRISIL Ratings has analysed the standalone business, financial and managerial risk profiles of RBL.

Key Rating Drivers & Detailed Description

Strengths:

• Adequate capitalisation in relation to the current and planned scale of operations

RBL reported a net worth of Rs 230.04 crore as on September 30, 2023, as against Rs 217.71 crore as on March 31, 2023, and Rs 207.87 crore on March 31, 2022. Correspondingly, gearing remained comfortable at 0.97 times as on September 30, 2023, and 1.05 times as on March 31, 2023, and 0.69 times, a year prior to that. This metric is expected to remain within 1-2 times on a steady state basis. Further, capitalisation has been also supported by REL’s stance and track record of supporting RBL through equity infusion and inter-corporate lines of credit. Since inception, the company has raised Rs 230.80 crore as equity capital from REL. This, along with sustained internal accruals, should support the company’s capital position over the medium term.

 

• Long track record of operations in the capital market business

The company has an established track record of operations in the equity broking and trading segments. Over the years, it has scaled its operations and currently functions through a network of around 69 branches, approximately ~1800 broking business partners and ~41000 e-governance franchisees in 400+ cities across India  The broking business and the  E-governance business were earlier housed under Religare Securities Ltd (RSL), then a wholly owned subsidiary of REL. Post the restructuring at  group level,  the broking business of RSL was transferred to RBL, while its investment portfolio was transferred to REL. Subsequently, as part of this scheme, approved by the National Company Law Tribunal (NCLT) on December 8, 2017, RSL was subsumed into REL.

 

The company is spearheaded by a professional management team with an average experience of over 15 Years in the financial services industry. The company’s established track record of operations should aid its business growth on a steady state basis.

 

• Adequate risk management systems

RBL has adequate risk management systems, which support the business risk profile of the company. The company endeavors to adhere to all the Securities and Exchange Board of India (SEBI) and exchange-prescribed regulations by instilling requisite systems and processes. The company sets client trading limits upfront and monitors client exposure on a real-time basis. It also sets scrip-wise exposure limits to keep a check on illiquid scrips or scrips under any kind of surveillance. The upfront margin along with peak margin is collected necessarily and clients are required to maintain adequate margin as prescribed by exchanges. In case of adverse/volatile price movements, real-time risk-based square off can be initiated at any time during the day.

 

Weakness:

• Modest market share in the broking segment

RBL is a small player in the securities industry, with an overall market share of 0.15% in fiscal 2023. Its market share in the cash segment was 0.49% and, in the futures, and options (F&O) segment – it was 0.05% for half year ended September 30, 2023. While the company has a long track of operations, its services have remained focused on its existing client base with very gradual traction in new clients. In the recent past, the company has expanded its product suit by offering a variety of financial products and services within the retail broking and investment space. This is expected to support its future growth prospects. Over the medium term, RBL’s market share is expected to remain at similar levels with majority of incremental growth coming from existing clients.

 

• Average, albeit improving, earnings profile

For first half of fiscal 2024, income from brokerage & depository services formed 59.68% of the total income followed by income from e-governance business (12.85%), interest income (22.84%) and balance by other sources like National Pension System -Point of Presence (NPS-POP), commission income, recovery of transaction fees, etc. As the revenue base is still dominated by income from broking business, which remains influenced by volatility in market volumes, the company is attempting to diversify its income streams for higher stability across business cycles.

 

RBL reported net profit of Rs 9.61 crore in fiscal 2023 vis-à-vis Rs 19.30 crore in the previous fiscal. For the preceding two fiscals 2019 & 2020, the company had reported losses due to growth constraints faced on account of group level challenges. During the first half of fiscal 2024, net profit stood at Rs 12.28 crore as against a net profit of Rs 5.16 crore for the corresponding half of the previous fiscal. This improvement was led by a rise in broking volumes and steady trading income. Cost to income ratio (operating expense as a percentage of total income) was 81.35% for first half of fiscal 2024 against 84.63% in fiscal 2023 and 86.12% in fiscal 2022. The ability to improve and diversify its earnings profile would be critical for RBL over the medium term.

 

• Exposure to intense competition and risk of regulatory changes

The business of RBL is confined to the capital market industry, which is intensely competitive with multiple players offering low-cost products. The broking industry has seen a huge transformation in the past decade, with technology-based discount brokers entering and dominating the market. The management of RBL is undertaking several steps to generate scale-based growth and restore its market position in the retail brokerage space and other allied services The company's broking business also remains exposed to economic, political and social factors that drive investor sentiments. The ability to maintain a resilient business model and grow market share while managing competition will be a key monitorable.

 

In terms of operating landscape, the broking industry has been witnessing a series of regulatory revisions in the recent past. To enhance transparency, curb misuse of funds and safeguard investor interests, Securities and Exchange Board of India (SEBI) has introduced several changes. These include the margin pledge/re-pledge mechanism, daily client collateral reporting and disclosure, collateral allocation at clearing corporations by brokers, and upfront margin collection for intraday positions. More recently, SEBI has approved blocking of funds facility for trading in secondary markets, and non-usage of client deposits for availing bank guarantees (BG) by brokers, in order to prevent misuse of client funds, broker defaults and consequent risk to investor capital. This is similar to the Application Supported by Blocked Amount (ASBA) facility already available for the primary market, which ensures movement of money only when an allotment happens.

 

With increasing compliance intensity, the associated cost is expected to increase. CRISIL Ratings understands that most top brokers, as well as some mid-sized broking companies such as RBL, have streamlined their systems in accordance with revised regulations. However, this could impact small and mid-sized brokers with not-so-advanced information technology infrastructure and risk management systems.

 

Fundamentally, while these revised regulations will benefit the broking industry in the long term by increasing transparency and lowering risk for customers, the changes do increase the compliance cost for brokers and require them to adapt their business models to keep pace.

Liquidity: Adequate

The liquidity profile of RBL is adequate. RBL’s total cash and bank balances stood at Rs 763.68 crore as on November  30, 2023, of which Rs 16.4 crore was cash and bank balance and balance was in the form of lien marked fixed deposits (FDs) pledged with banks (against bank guarantees and other credit facilities) and stock exchanges for margin purposes.

 

The unutilized margin offers adequate liquidity cushion to RBL in case of any eventualities. The company also has an unutilized bank line limit of Rs 60.25 crore (including overdraft against fixed deposit of Rs 41.37 Crore) as on November 30, 2023.

Outlook Stable

CRISIL Ratings believes RBL will continue to maintain healthy capitalisation metrics while benefiting from its long-standing presence in the capital market space and adequate risk management systems. The ability to improve its market position and profitability will have to be monitored.

Rating Sensitivity factors

Upward factors

• Cost-to-income ratio (operating expense/ total income) improving to and remaining below 60% on a steady-state basis - leading to improvement in overall earnings profile.
• Significant and sustained improvement in market share

 

Downward factors

• Weakening of the earnings profile or cost-to-income ratio (operating expense/ total income) increasing to and remaining above 85% for a prolonged period
• Deterioration in capitalization metrics

About the Company

Religare Broking Limited, a wholly owned subsidiary of Religare Enterprises Limited, provides a comprehensive range of services to retail clients. The broking business was started by Religare group more than 25 years ago and currently, offers a full range of broking services such as equities, commodities, and currencies, depository participant services, bonds & mutual fund distribution, besides selling insurance policies as an IRDA registered Corporate Agent and offering research capabilities to its customers.

 

RBL is also registered with Pension Fund Regulatory and Development Authority (PFRDA) and SEBI to act as Point of Presence (PoP) for National Pension Scheme (NPS) and Registrars to an issue and share Transfer Agent (RTA) respectively.

 

RBL also offers government services, financial inclusion services and citizen e-services and other ancillary and allied services including but not limited to the following: Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN) and e-TDS returns, Business Correspondent for banking services, Bharat Bill Payment Systems (BBPS) & Recharges, Ticketing for airline, railways, bus or tourism through any online/ offline platform, Digital Signature Certificate and Token (DSC) and Central Record Keeping Agency Facilitation Centre (CRA-FC). The company operates through a network of around 69 branches, approximately ~1800 broking business partners and ~41000 e-governance franchisees in 400+ cities across India. It has more than 1 million broking clients.

Key Financial Indicators

As On/ period/ year ended	Unit	Sep’23	Mar’23	Mar’22
Total assets	Rs crore	1217	1005	974
Total income	Rs crore	169	288	281
Profit after tax	Rs crore	12	10	19
Cost to income (total income)	%	81.35%	84.63%	86.12%
Cost to income (net of interest income)	%	89.10%	92.18%	90.91%
Return on net worth	%	10.97%	4.51%	11.07%
Gearing	Times	0.97	1.05	0.69

 ^ On an annualized basis

Any other information

Impact from developments in other REL group entities is unlikely.

 

RBL is a wholly owned subsidiary of Religare Enterprise Ltd (REL) and the retail broking arm of Religare Group.

 

Since inception, the REL has infused equity capital of Rs 231 crore in RBL and, the REL intends to continue supporting this entity over the medium term. REL does not intend to start upstreaming dividends any time soon as the plan is to let RBL’s revised business strategy stabilize and let the business become self-sufficient.

 

Religare Finvest Ltd (RFL), another subsidiary of REL, has completed a One Time Settlement (OTS) with 16 lenders in March 2023. Overall, the entity has repaid over Rs. 2,300 crores to the lenders as part of OTS and closed all the legacy issues borne out of erstwhile promoters’ actions except 1 pending with ICICI Bank (Rs 250 crore).  Thus, there are no expected foreseeable implications of legacy issues faced by this entity on any of the other group companies going ahead. On December 19, 2023, the Delhi Hight Court has directed the removal of 'fraud' label from RFL. 

 

REL’s new management, which took over in 2018, has demonstrated the ability to raise capital as reflected by Rs 570 crore of capital raised in June 2021 via preferential issuance of shares to existing shareholders as well as select new investors. REL has demonstrated its ability to raise capital and extend need-based support to its group entities in the recent past. The parent company is thus expected to remain self-sustaining and, to continue to provide financial and strategic support as the holding company of the group.

 

CRISIL Ratings has also taken note of the on-going discussions around change in shareholding of REL and shall continue to closely monitor the developments stemming from it.

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Proposed Long Term Bank Loan Facility*	NA	NA	NA	25	NA	CRISIL BBB/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	325	NA	CRISIL A3+

* Interchangeable with short-term bank loan facility