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Our Take:

A longstanding four decades of operations in the financial services industry in India has resulted in establishing “JM Financial” as an established franchise. Over the years, it has grown from being a ‘corporate finance advisor’ to a ‘corporate finance provider’. JM Financial is an integrated and diversified financial services group. The Group’s primary businesses include Investment banking, wealth management and securities business (IWS), Mortgage Lending, Distressed credit and Asset Management. As of Q3FY21, the advances book was at Rs. 10,407Cr, which comprises of 1) Mortgage- Wholesale Rs. 7590Cr, Retail Rs. 674Cr; 2) Capital markets and corporate/promoter funding stood at Rs. 560Cr and Rs. 1459Cr respectively; 3) Wealth LAP Rs. 123Cr. Apart from lending, Wealth, Private Equity, AMC & ARC AUM stood at Rs. 56,757, Rs. 660Cr, Rs. 3700Cr and Rs. 10,915Cr respectively. In capital markets, its overall market share in equity markets on NSE as on Dec’ 20 stood at 0.36%.

The risk management efforts, especially during the liquidity crisis starting September 2018, have enabled them to manage asset quality. Since last 3-4 years the GNPA level has remained well below 2%. The Group’s capitalisation profile remains healthy, with lower leverage compared to peers. This provides cushion to mitigate potential asset-side slippages. CAR stood at 41.4% as of Q3FY21. It had raised Rs. 770 Cr equity through QIP route in Q1FY21, which had further enhanced the Group’s capitalisation profile. JM is one of the least levered NBFC in the listed space. Its Net D/E ratio has improved from 1.3x in Q3FY20 to 0.72x as on Q3FY21. However, in near term the challenging macro, struggling real estate sales and a non-conducive resolution environment could keep earnings of mortgage lending and asset reconstruction to be volatile over next couple of years. However, with favourable capital market environment, IWS business may support the earnings momentum.

View & Recommendation :

We have envisaged 3% CAGR growth in NII and 8% CAGR growth in Net Profit over FY20 to FY23E. Loan growth is expected to rise by 6% annually over same time frame. Management stated that IWS business has a very strong pipeline of investment banking transactions. They are witnessing strong traction in the institutional and non-institutional equities businesses. The company should deliver RoAA and RoAE of 4.0%/9.3% in FY23E. The asset quality might deteriorate in FY21E, but it should start normalizing from FY22E. Currently, wholesale segment contributes large portion of company’s revenue but the management has stated that they are strategically pursuing scaling up retail lending as well as broking business. It is currently trading at 0.8x FY23E ABV.

We feel that investors can buy JM Financial at dips of Rs. 79.5 and add more at Rs.70 for Base case fair value of Rs.86.5 (0.7x P/ABV FY23E) and the Bull case fair value of Rs.98.5 (0.85x P/ABV FY23E) over next 2 quarters.

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