JM Financial's (JM Financial's) Q4FY14 revenues were broadly in line with CRISIL Research's expectations but overall profitability was higher because of improvement in profitability in investment banking (IB) business and higher profits of associates. Consolidated revenues grew 15% q-o-q to Rs 2,551 mn largely due to 52% and 2% increase in the IB and security lending businesses, respectively. PAT increased 34.6% q-o-q to Rs 594 mn led by the IB business. The securities lending book grew 14% q-o-q to Rs 30 bn and constituted 50% and 70% of overall revenues and PAT. We expect the activity in capital markets to pick up significantly as sentiments have improved following the formation of a stable government. Considering JM Financial's strong position in the capital-markets business, we expect the growth in IB and broking business to improve during the year. We maintain the fundamental grade of 4/5.
New NBFC, to be set up jointly with Mr Vikram Pandit, is at an advanced stage
The new NBFC which the company plans to jointly set up with Mr Vikram Pandit – with the latter investing nearly US$ 100 mn – is at an advanced stage. The existing commercial real estate securities lending business will be hived off to the new NBFC. The company has also put the operational team, comprising a part of the existing securities lending team, in place. Since the operational team has experience in commercial real estate lending, we expect the capital to be sufficiently utilised, and have factored in the same in our FY15 estimates.
Expect capital-markets activity to improve amid positive sentiments from the formation
of a stable government
While the IB segment witnessed improvement, particularly in deal execution and deal pipeline in the overseas markets, the capital-markets driven businesses, in general, continued to face headwinds in Q4FY14. The company closed an overseas M&A deal with revenues of SGD$3 mn and a few deals are at various stages of negotiation. Considering the positive market sentiments post the formation of a stable government, we expect capital-market activities to recover and related businesses to improve.
Raise FY15 revenue and PAT estimates to reflect better sentiments in capital markets
We have increased our FY15 revenue estimate from Rs 10.9 bn to Rs 11.5 bn, largely driven by incremental revenues from the new NBFC and improvement in growth in IB revenues. FY15 EBITDA estimate has been increased from Rs 6.7 bn to Rs 7.0 bn. PAT estimate has increased from Rs 2.1 bn to Rs 2.3 bn.
Valuations: Raise fair value to Rs 42, implying valuation grade of 4/5
We have valued JM Financial by the sum-of-the-parts (SoTP) method. We raise our fair value to Rs 42 per share, which implies P/E multiple of 14x FY15E earnings. At the current market price of Rs 37, our valuation grade is 4/5.
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.
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