JM Financial - Measured growth, low risk tolerance to aid navigate the cycle well - ICICI Securities

JM Financial's (JMF) Q2FY21 earnings beat our expectations primarily due to strong momentum in fee-led IWS business revenues (up >40% YoY, double QoQ). Lending/ARC continued to be modest given weak real estate sentiment and non-conducive resolution environment. In wholesale mortgage lending, collection efficiency improved to 81% during the quarter and the company expects negligible restructuring. However, 18-20% of its loan portfolio would seek DCCO extension. With the cumulative Covid buffer at 3% of advances, credit cost is expected to be contained at around H1FY21 levels. High capitalisation, graded and calibrated approach to growth with low risk tolerance and superior risk-adjusted returns will help JMF sail through the current challenging phase relatively well. Maintain BUY with an SoTP-based target price of Rs114.

- IWS business contributes 50% of revenues - driven by fee income. Revenues in IWS grew 6% YoY and 40% QoQ (contributing almost 50% to total revenues) and PAT doubled QoQ (up >40% YoY) to Rs920mn (two-thirds of total PAT) led primarily by securities, investment banking and strong accretion in wealth management AUA. Company did not resort to episodic funding or bridge financing and revenues were driven more by fee income. Leveraging the entire business ecosystem through customised offerings is ensuring repeat business and scale up in wealth management assets.

- Consolidating wholesale mortgage; staying prepared for opportunity: Loan portfolio was flat QoQ as JMF is consolidating its exposures in Mumbai and NCR. However, there has been exceptional demand for residential projects, especially in Bengaluru, Hyderabad, etc. and the festive season is expected to be relatively strong. JMF has positioned itself favourably with adequate capital and strong balance sheet and is waiting to tap the right opportunities at a right time.

- Restructuring negligible; 18-22% of loan portfolio to seek DCCO extension: Collection efficiency in wholesale mortgage lending portfolio was 81% and escrow collections were at 88% of pre-Covid levels. Company does not expect any restructuring; however, 18-22% of overall lending book would seek DCCO extension. Pro forma GNPLs including standstill accounts would be 2.13% (up from 1.8% in Q1FY21) and SMA-2 at 3.42% (pro forma around 2.5%), which suggests GNPLs seems to have peaked out. Company created Covid buffer of Rs570mn in Q2FY21 - taking the cumulative buffer to Rs2.98bn and does not expect overall credit cost to exceed Rs500mn-550mn each quarter for the next couple of quarters

- Distressed credit business to see delayed resolutions: Earnings of distressed credit business halved to Rs94mn. Distressed AUM remained steady; however, due to sale of SRs of Rs2.6bn by outside investors, JMF's proportion in ARC AUM has increased. It will evaluate the portfolio in Feb'21 to take a call on incremental provisioning - and even if there is any additional requirement, it is not expected to be sizeable. Company has recently concluded resolutions for an entity acquired by JSW Steel and has received Rs5bn in cash and is expecting a couple of more resolutions in the coming six months.

- JMF is strategically evaluating synergistic inorganic opportunities, particularly in retail lending or broking. In retail lending, it will look at entities in housing or small-ticket LAP that will help it double the segmental portfolio.

Shares of JM FINANCIAL LTD. was last trading in BSE at Rs.80.8 as compared to the previous close of Rs. 79.25. The total number of shares traded during the day was 50590 in over 1191 trades.

The stock hit an intraday high of Rs. 80.8 and intraday low of 77.1. The net turnover during the day was Rs. 3988557.

Source : Equity Bulls

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