Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1+’ ratings on the bank loan facilities of Share India Securities Limited (SISL; part of the Share India group).

 

The ratings reflect the comfortable capital position of the Share India group, the extensive experience of the promoters in the capital market business, which has supported the group’s market position, and its sound risk management practices. These strengths are partially offset by limited diversity in earnings with high dependence on proprietary trading income and vulnerability to regulatory changes and volatility inherent in the capital market business.

 

The Share India group has been operating in the capital market for more than 30 years and has a pan-India presence with a network of 293 branches and franchises as on March 31, 2024. The group is primarily engaged in strategy-based proprietary trading and high-frequency trading. The group also provides broking services to high-networth individuals, foreign portfolio investors and high-frequency traders. In recent years, the group has entered into merchant banking, lending, and distribution of financial products, to diversify its earnings. Given its long presence in the capital market, the group has established itself as one of the largest players in the proprietary trading business with a market share of 1.44% and 1.83% in the cash and futures and options (F&O) segments, respectively, for fiscal 2024.

 

On the capitalisation front, consolidated networth and gearing stood at Rs 1,747 crore and 0.22 time, respectively, as on March 31, 2024, compared with Rs 447 crore and 0.42 time, respectively, as on March 31, 2022. The group competed its right issue of Rs 800 core in fiscal 2024, of which, Rs 544 crore was converted in fiscal 2024 and Rs 230 crore is expected to be converted in the first half of fiscal 2025.

 

Proprietary trading activities account for 70% of the group’s income. The group reported profit after tax of Rs 426 crore in fiscal 2024 and total income of Rs 1,483 crore, up from Rs 330 crore and Rs 1,099 crore, respectively, in fiscal 2022. The cost to income ratio improved in fiscal 2024 to 63% from the historic level of 70-80%. The group’s ability to diversify the revenue profile while maintaining its cost to income ratio will remain a key rating sensitivity factor. The company has reported a PAT of Rs 102 crore on a total income of Rs 420 crore for Q1 of fiscal 2025 as compared to a PAT of Rs 82 crore on a total income of Rs 278 crore of corresponding period of the previous year.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SISL and its subsidiaries, collectively referred to as the Share India group, given their highly integrated business, strong operational synergies and common promoters and senior management.

 

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:

Extensive experience of the promoters

The promoters of the group - Mr Praveen Gupta, Mr Rajesh Gupta, Mr Sachin Gupta — have experience of over 30 years in the capital markets and have developed a strong business acumen. They are actively involved in strategic decision making and daily operations. Furthermore, senior management personnel Mr Kamlesh Shah (Managing Director) has been in the industry for more than 26 years and associated with the group for over three years. The promoters and top management have witnessed several cycles in the capital markets business. Their understanding of the market and ability to offer solutions while adapting to changes have helped the group retain clients and maintain scale of operations even during challenging market environment. The second generation of the promoters in the business is actively involved in daily operations of the group. Despite being active in proprietary trading activities, the group has not faced any loss or adverse impact in the past five years. CRISIL Ratings believes the Share India group will continue to benefit from the strong track record and extensive experience of the promoters.

 

Sound risk management practices

The group has implemented sound risk management systems, which largely offset risks arising from uncertainties inherent in the trading and broking business. The group sets client trading limits upfront and monitors client exposure on a real-time basis. It generally limits trades to liquid scrips so that positions can be squared off quickly and hedges its arbitrage positions immediately. Trading strategies to be adopted by dealers are decided beforehand by the senior management, and limits for fund allocation are set for each dealer. The risk department monitors trades on a real-time basis, to ensure dealers adhere to strategies and fund limits. The group adopts only market neutral strategies and hedging levels are also 100%. Most of the trades are intraday and the group is not exposed to any overnight event risk. Furthermore, stop losses are defined in advance and there are simulation models which indicate the unhedged risk undertaken by the trader.

 

The group has developed in-house algorithm software which can perform high-frequency trades seamlessly with minimal human intervention. Moreover, the management has a risk-averse approach to trading and there are no directional trades executed. The management maintains sufficient liquidity for placing margins. The trades are executed through automated algorithmic software which calculates the hedge ratio considering market volatility and volume and the position is hedged automatically.

 

All these risk measures have supported the financial performance of the group, resulting in nil write-offs and negligible receivables of over six months in the past three years. Furthermore, adequate risk management has helped avert losses, as is evident in consistent profits for the past eight years.

 

Adequate capitalisation with conservative gearing policy

Consolidated networth and gearing were Rs 1,747 crore and 0.22 time, respectively, as on March 31, 2024, as against Rs 447 crore and 0.42 time, respectively as on March 31, 2022. The networth has increased significantly over the past two years, supported by healthy cash accretion. The group had gross accretion of Rs 750 crore cumulatively between March 2022 and March 2024. It has completed its right issue of Rs 800 core (warrants) in fiscal 2024, out of which Rs 544 crore was converted in fiscal 2024 and Rs 230 crore is expected to be converted in the first half of fiscal 2025. Including warrant conversion of Rs 230 crore, the networth is expected to be around Rs 2,000 crore. Gearing remained below 1 time during the last five years because debt has been availed largely to fund the margin trading facility of clients. The gearing is not expected to increase materially over the medium term even as the group scales up operations.

 

Weaknesses:

Average, albeit improving, earnings with high dependence on proprietary income

The Share India group has historically been highly active in proprietary trading activities. The extensive experience of the promoters and top management has enabled them to build a proprietary trading desk. The high focus on proprietary trading has resulted in a skew in revenue, with proprietary trading accounting for 70-80% of revenue during the past eight years. In fiscal 2024, the group reported total income of Rs 1,483 as compared with Rs 871 crore two years back. Most of the revenue growth has come in the recent past and the ability of the group to sustain the same will be monitorable. The group has also started focusing on retail broking and has acquired three fintech companies, which will be used to create a technology platform to cater to retail customers. In the past two years, the group acquired UTrade Solution Pvt Ltd (UTrade), Algowire Trading Technologies Pvt Ltd (Algowire) and Silver Leaf Technologies. Apart from focusing on expanding the broking business, the group is also looking to diversify revenue by enhancing distribution activities of financial products such as mutual funds and insurance. The income from other distribution products is expected to increase over the medium term. The group’s ability to steadily diversify revenue and generate sufficient earnings from sources other than proprietary trading will be monitorable. 

 

As the revenue is highly dependent on capital market activities, with broking and proprietary trading accounting for more than 90%, it is highly susceptible to market risk resulting in significant volatility in earnings. Trading activity in capital markets is driven by economic, political and social factors guiding investor sentiments. Global factors also influence the fortunes of the domestic market. However, the group’s long track record in the proprietary trading segment is a strong mitigant. The group has reported positive income over the past eight years. Also, as a large part of the income is generated from proprietary trading activities, there is less exposure to risk on account of fund withdrawal by clients due to changing market dynamics, unlike broking entities. Therefore, volatility risk is low vis-à-vis broking firms. Furthermore, the arbitrage nature of business insulates the group from downcycles in the capital market.

 

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. The Share India group is primarily engaged in proprietary, arbitrage, delta hedging. Hence, this revised regulation will not impact the group’s business significantly.

 

Recently, SEBI 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.

 

Given that this circular will be effective from October 1, 2024, 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 Share India group’s performance on an ongoing basis.

Liquidity: Adequate

Liquidity is adequate for the current scale of operations, given the absence of any fund-based borrowing or fixed term debt obligation. All the bank facilities are for working capital and are matched against exposure towards trades. As on March 31, 2024, the company had sanctioned bank guarantee limit of around Rs 1,500 crore to manage margin requirements, which is backed by fixed deposits. The group also has a sanctioned intraday limit of Rs 1,850 crore. Cash and equivalents stood at Rs 2,018 crore as on March 31, 2024, with unencumbered cash and equivalents at Rs 400-500 crore. In addition, unutilised bank overdraft facility stood at Rs 500 crore as on March 31, 2024. The proprietary trading book is liquid, which means that the group has the flexibility to square off its position in a short timeframe to meet any liquidity requirement.

Outlook: Stable

The Share India group will continue to benefit from the extensive experience of its promoters and sustain its comfortable capital position over the medium term.

Rating Sensitivity factors

Upward factors

• Cost-to-income ratio improving to below 50% on a steady-state basis
• Increase and diversification in revenue, supported by sustained profitability

 

Downward factors

• Weakening earnings or sustained increase in cost-to-income ratio to over 95%
• Drop in market share impacting revenue
• Change in regulatory environment impacting the business and financial risk profiles

About the Company

Incorporated in 1994, the Share India group provides a wide array of financial services such as stock broking, commodity broking, mutual fund distribution, currency derivatives broking, portfolio management and research analysis to its retail and institutional clients. It is a registered member of the National Stock Exchange (NSE; both cash and F&O segments) and Bombay Stock exchange (BSE), Multi Commodity Exchange of India Ltd (MCX), National Commodity & Derivatives Exchange Ltd (NCDEX), Indian Commodity Exchange of India Ltd (ICEX), and depository participant of National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL).

 

Since 2019, the group has started expanding its business portfolio. Merger with Total Group in 2019 helped expand the business significantly. The group has also diversified its portfolio by entering mutual fund and insurance distribution and lending and merchant banking services. To further scale up and diversify revenue, the group acquired three fintech companies mainly Algo wire Trading Technologies and U trade solutions. With these acquisitions, the group intends to provide financial analytics, advisory and trading platforms to retail clients. Recently in April 2024 the company acquired Silver Leaf Capital Financial Service.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Short Term Loan	NA	NA	NA	190	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	1810	NA	CRISIL A+/Stable