CRISIL assigns valuation grade of 5/5 to JM Financial

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CRISIL assigns valuation grade of 5/5 to JM Financial

CRISIL Research has come out with its report on JM Financial. The research firm has maintained the fundamental grade of 4/5 to the company in its November 24, 2011 report.

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CRISIL Research has come out with its report on JM Financial . The research firm has maintained the fundamental grade of 4/5 to the company in its November 24, 2011 report.

JM Financial Ltd is an integrated capital market player with business interests in investment banking, equity broking, lending, asset management and alternative asset management. Though in the near term the market environment is expected to remain subdued, we are positive on the financial services industry given an under-penetrated market and strong macroeconomic outlook, and JM Financial's strong position in this industry. Hence, we maintain the fundamental grade of 4/5.

Dismal capital markets dent investment banking and broking business
JM Financial's broking business continues to be impacted by competition, low retail participation and fall in broking yields. Although it has a healthy investment banking deal pipeline, execution is a challenge. Hence, the investment banking and broking business' contribution to PBT fell from 51% in Q2FY10 to 23% in Q2FY12. We believe JM Financial's strong position in domestic investment banking and long-term relations with several large and medium companies should help it get back on track when the markets revive.

Strong balance sheet fuels securities funding and other businesses
JM Financial has a strong balance sheet with a low gearing of 1.2x at the group level and 3x at the NBFC level, which supports lending and other businesses. Further, we believe the current rising interest rate environment, which inevitably leads to higher NPAs in the banking system, should create significant opportunities for JM Financial in the asset reconstruction business.

AMC business expected to show lacklustre performance
Regulatory changes and weak markets continue to adversely affect JM Financial's asset management business. We expect the segment to continue its underperformance in the medium term.

Over-capitalisation suppresses return ratios
At the group level, JM Financial's leverage remains very low at ~1.2x. Further, it has a healthy cash balance of Rs 9,497 mn and investments of Rs 7,767 mn as of H1FY12. The under-leveraged security funding business along with high level of unyielding assets (investment) will likely keep return ratios subdued. However, as and when the investment (sponsor's contribution to alternative asset management) is monetised, RoE will improve.

Muted revenue growth: two-year CAGR of 6%
Given the lull in the capital markets in H1FY12, CRISIL Research expects the company's revenue to grow moderately at a CAGR of 6% to Rs 9.5 bn during FY11-13. Hence, PAT is expected to remain subdued at Rs 1.6 bn in FY13.

Valuations: Strong upside from current levels
We maintain our fair value of Rs 36 per share based on the sum-of-the-parts method. This fair value implies P/E multiples of 23.7x FY12E and 17.2x FY13E earnings. The valuation grade is 5/5.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

© CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"

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