JM Financial - Mastering the relationship-return-risk riddle - ICICI Securities

JM Financial (JMF), over the past decade, has effectively transitioned to a comprehensive corporate finance advisor-cum-provider and is now actively pursuing scaling up the retail pie as well. What distinguishes JMF from other financiers: 1) leveraging sticky relationships with institutional, wealth and corporate clients through diversified albeit niche offerings; 2) differentiated business approach in operating segments; 3) graded and calibrated growth (not chasing size) with low risk tolerance and superior risk-adjusted returns (>3.5%); 4) focus on building optimal blend of principal and flow business, and linear and non-linear revenue streams; and 5) high capitalisation (<4x leverage) all through its existence. Weak real estate sentiment and delayed resolution of distressed credit may weigh on earnings in the immediate term (flat in FY21E), partially offset by sustained momentum in IWS (Investment banking, Wealth management & Securities) business. Valuing operating businesses separately, we arrive at an SoTP-based target price of Rs114. Initiate coverage with BUY.

- Relationship-led synergistic business model: JMF's approach has been to deepen relationship with its institutional / corporates / wealth clients developed as a reputed and experienced capital market advisor, by navigating into corporate finance provider. It has leveraged the entire business ecosystem through customised offerings ensuring repeat business. In the process, it has created a perfect blend of fee and fund based model (~35-40% fee-based and 45% fund-based revenues). Also, building businesses across a broad spectrum enables it to navigate through short-term volatility in business cycles with minimal impact on profitability.

- Measured growth, low risk tolerance, superior RoA - threads binding business ideology: JMF's business ideology is focused on client-centric approach and gradually building a profitable, sustainable and resilient business model. It has not chased scale or size over risk or return. Also, it follows a more differentiated approach in operating segments than peers. For example, in real estate lending, JMF positions itself as a senior secured lender and avoids lumpy exposure (largest exposure is <5% and top-10 exposures are one-third of the book). In retail lending, underwriting and credit is centralised. Distressed credit business approach comprises a blend of fee as well as fund income with optimal pricing and decision-making control while acquiring the stressed assets.

- Road ahead: i) The IWS business is expected to support earnings and lending/ARC to be volatile given weak real estate sentiment and non-conducive resolution environment (earnings growth of >15% over FY20-FY23E); ii) consolidation of real-estate exposures (<10% CAGR over 24 months) till dust settles, but position itself favourably to tap any emerging opportunities; iii) restructuring is imminent but manageable (15-20% of wholesale lending is a fair assumption); iv) renegotiations / lower IRR is likely for some distressed assets; company may build a retail stressed asset book; v) significantly scale up retail lending, continue investment in IWS business (especially wealth management, AMC); vi) strategically evaluate synergistic inorganic opportunities, particularly in retail lending, broking or wealth management.

Shares of JM FINANCIAL LTD. was last trading in BSE at Rs.79.7 as compared to the previous close of Rs. 79.5. The total number of shares traded during the day was 9493 in over 115 trades.

The stock hit an intraday high of Rs. 80.2 and intraday low of 78.6. The net turnover during the day was Rs. 756876.

Source : Equity Bulls

Keywords