Fundamental Analysis Of JM Financial: On the 6th of March 2024, shares of JM Financial crashed by 19% after the country’s Central Bank banned the Financial Institution from lending against Shares & Debentures. Then, just a few days later, SEBI barred JM from acting as a lead manager for public debt issues. This news sent the stock down another 8% in the early trade on March 11.
A lot seems to be going on in the Company as both RBI & SEBI are waiving off red flags. With that said, let us learn about what this Company does, and what segments it operates in & also try to understand what exactly the regulators are not happy about JM’s operations. In this article, we will learn about the Fundamental Analysis Of JM Financial with its future plans, financials and key metrics.
Table of Contents
Fundamental Analysis of JM Financial – Company Overview
Established in 1973, JM Financial is an integrated financial services group. The primary business includes being an Investment Bank that caters to the needs of Institutions, Corporations, and Ultra High Net Worth Clients. It also houses research firms, private equity funds, fixed income, and syndication.
The Company is also into mortgage lending for home and educational loans. JM also houses an asset management division that provides broking, Portfolio Management, and other wealth Management services.
FY24 was a big year for the Company as its Investment banking division held the Qualified Institutional Placement (QIP) of Bajaj Finance and Indian Bank. JM Financial was also the Book Running Lead Manager for Tata Technologies, Cello World, and Honasa Consumer Products. It also organized the block deal of Nippon Life India AMC worth Rs. 795 Cr.
Apart from Asset Management and lending, the Company is also invested in India’s Alternative and distressed credit market. The Company is currently pursuing full cash acquisition along with financial investors and other strategic partners.
However, in the coming years, the Company will be shifting towards a co-investment model which should result in a healthy mix of fee-based and fund-based revenue models. As of FY23, JM has acquired a total of Rs. 73,508 Cr worth of outstanding dues at a gross consideration value of Rs. 21,680 Cr.
As of FY23, the Company earned 39% of its revenue from mortgage lending, followed by Investment Banking which earned it 37% of revenue. Asset & Wealth Management is the 3rd largest segment contributing to 19% of the revenue. Although Investment Banking happens to be the 2nd largest revenue segment for the Company, it brought it 65% of FY23’s Profits After Tax.
Industry Overview
The Indian economy stood resilient throughout FY23 even as the global macroeconomic environment threw challenges in the form of tight monetary policy, reduced global demand, and high commodity prices especially crude.
India’s prudent fiscal planning aided in meeting the fiscal deficit target of 6.4% of GDP in FY23. Going forward, India has set a target a fiscal deficit target of 5.9% of GDP in FY24 and a record-high Capex of Rs. 10 lakh Cr.
India’s trade deficit reached as high as USD 29.3bn in Sep’22 vs USD 15.9bn avg. during FY22, which reduced significantly by the end of FY23 (USD 17.4bn in Feb). The improvement in the trade balance was on account of a sharp fall in imports vs exports, the decline in oil prices, and resilient services exports that helped cushion the Current Account Deficit.
The central bank (RBI) continued to remain hawkish throughout FY23 maintaining interest rates above 6%. Although the rate of hikes in interest rates has fallen in pace in the last fiscal year, RBI continues to remain cautious in trying to maintain inflation within the tolerance band of 4% +/- 2%.
During FY23, a total of 1276 Mergers & Acquisition deals were announced as compared to 1312 in FY22. The total value of the deals announced was worth Rs. 13.2 Lakh Cr, which increased from Rs. 9.4 Lakh Cr in FY22. 67% of the deals were domestic as compared to 33% cross border.
In the private equity segment, deals were Rs. 2.4 lakh Cr were announced as compared to Rs. 5.6 Lakh in FY22 as per JM Financial estimates. Maximum interest was experienced in IT/IT enables services, consumer tech, and Financial Services.
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Fundamental Analysis Of JM Financial – Financials
Revenue & Net Profit
JM Financial reported revenue of Rs. 3343 Cr in FY23, which dropped by 11% from Rs. 3763 Cr in FY22. The drop in revenue was majorly due to a drop in nominal income earned due to fair value changes, this income dropped from Rs. 588 Cr in FY22 to Rs. 183 Cr in FY23. Fees & Commission Income, and Brokerage income also reduced from FY22, leading to a drop in revenue.
Topline de-growth of JM Financials had a multiplier effect on the bottom line as Net Profits dropped by 23% from Rs. 773 Cr in FY22 to Rs. 597 Cr in FY23. The steep drop in net profits came as a result of rising interest rates which led to increased finance costs for the Company. Increased Employee costs also laid heavy on the bottom line.
The dismal performance of the topline & bottom line continues in the long term as revenue de-grew by 1.14% CAGR while Net Profit increased by just 1.08% CAGR since FY21.
| Fiscal Year | Revenue | Net Profit |
|---|---|---|
| 2023 | ₹ 3,343.07 | ₹ 597.29 |
| 2022 | ₹ 3,763.28 | ₹ 773.16 |
| 2021 | ₹ 3,226.63 | ₹ 590.14 |
| 2020 | ₹ 3,453.55 | ₹ 544.98 |
| 2019 | ₹ 3,499.49 | ₹ 572.18 |
| 4-Year CAGR | -1.14% | 1.08% |
Profit Margins
The operating profit margins of the business remain quite strong at 46.58% in FY23, which slipped from 50.28% in FY22. These high margins are mostly from the investment banking segment, which contributes to 65% of the Profit after Tax, despite contributing to just 37% of the revenue.
Net profit margins dropped to 21.21% in FY22 from 26.37% in FY23. The 516 basis points drop in NPM resulted from the increased cost of borrowings and increased employee benefit expenses that contracted margins.
| Fiscal Year | Operating Profit Margin (%) | Net Profit Margin (%) |
|---|---|---|
| 2023 | 46.58% | 21.21% |
| 2022 | 50.28% | 26.37% |
| 2021 | 47.48% | 25.05% |
| 2020 | 44.09% | 22.53% |
| 2019 | 49.31% | 23.39% |
| 5 Year Average | 47.55% | 23.71% |
Return Ratios
Return on Equity of the Company has dropped to a 5-year low of 7.56% in FY23 due to decreasing income. The average return on equity stands at around 9.89%. Sustained growth in Net Income over current equity will help the Company achieve a higher ROE.
Return on Assets has also dropped to a 5-year low of just 2.7%. Although the ratio is commendable for a Non-Banking Financial Company, JM Financial is not a true NBFC to report such a low ROA. It earns most of its income as commission from its broking & Investment Banking business.
| Fiscal Year | ROE (%) | ROA (%) |
|---|---|---|
| 2023 | 7.56% | 2.69% |
| 2022 | 10.58% | 4.24% |
| 2021 | 9.17% | 3.77% |
| 2020 | 10.24% | 3.47% |
| 2019 | 11.88% | 3.42% |
| 5 Year Average | 9.89% | 3.52% |
Fundamental Analysis Of JM Financial – Key Metrics
The Key Metrics of JM Financial are given below.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹ 76.10 | Market Cap (Cr.) | ₹ 7,273.00 |
| EPS | ₹ 6.26 | Stock P/E (TTM) | 10.8 |
| ROE (%) | 7.56% | ROA (%) | 2.69% |
| Promoter Holding (%) | 56.40% | FII Holding (%) | 18% |
| Book Value | ₹ 88.08 | Price to Book Value | 0.9 |
| Operating Profit Margin | 46.58% | Net Profit Margin | 21.21% |
Fundamental Analysis Of JM Financial – Future Plans
- The Company will continue to invest further in the Platform AWS, the asset & wealth management division over the next 2-3 years.
- In the distressed asset acquisition segment, the Company will look towards full cash acquisitions with a co-investment model along with strategic partners.
- JM is currently working on its mobile application that is currently under the Closed User Group. It will be an all-in-one FinTech platform that will combine WealthTech, LendingTech, and InvestmentTech.
- On the wholesale mortgage lending side, the Company will continue to grow its loan book by 18%-20% and will continue to focus on slightly lower yields.
JM Financial’s recent stock plunge
The RBI on the 6th of March barred JM Financial from financing against shares & debentures after finding deficiencies concerning its loan sanctioning & disbursing of loans against IPO.
RBI said that JM Financial repeatedly helped its customers bid for various IPOs and NCDs on loans financed by JM themselves. RBI also says that the required due diligence was not followed & loans were lent out at meager margins. This dictate from RBI is what sent the stock crashing 19% during the day’s trade.
Following this order, JM Financial received yet another order from the country’s Stock Market regulator, SEBI. The regulator barred JM Financial from acting as a lead manager for public debt issues.
According to SEBI, it conducted a routine examination of the public issues of NCDs back in 2023. During this it found JM to manage the debt issue in a pre-determined manner to guarantee allotment to a few related entities. SEBI has asked JM to file a reply against these objections within 21 days.
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Conclusion
JM Financial, an integrated financial services group has been facing regulatory scrutiny from India’s two largest Financial regulators. JM Financial is a very diverse financial group offering services across capital markets, like broking, wealth management, lending services, and many others.
It has also ventured to maximize its focus on the lending space offering mortgage loans, educational loans, and loans to other financial institutions. However, irrespective of its diversification, the Company’s financial performance was quite muted. In the last year, Margins have also contracted.
With this kind of performance, JM was again hit with a hammer to its head with RBI & SEBI barring it from issuing loans against securities & being a merchant banker. Nevertheless, the stock price has now corrected to a Price-to-Earnings ratio of just 10.8x. Do you think the bad times for JM are over or will we see a further downturn? Let us know your thoughts in the comment below.
Written by Nasir Hussain
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