>JM FINANCIAL LIMITED: Q1FY11 result analysis

JM Financial Ltd’s revenues recorded an increase of 57.2% y-o-y to Rs 1.9 bn in Q1FY11,
backed by healthy growth in the investment banking and securities funding businesses.
However, PAT dipped by 2.4% to Rs 304 mn due to poor performance of the securities
broking business. Intense competition in the broking business and preference for lowyielding
options vis-a-vis the cash segment has put significant pressure on brokerage yields.
However, JM Financials’ diversified business model has buffered the impact and helped it
report stable earnings. We maintain our fundamental grade of ‘4/5’, indicating JM Financials’
fundamentals are ‘superior’ relative to other listed equity securities in India.

Q1FY11 result analysis
• The investment banking and securities businesses reported revenue growth of 44.1% y-oy
to Rs 1.1 bn in Q1FY11. The investment banking division completed six deals worth Rs
70.6 bn in Q1FY11. However, the performance of the broking business was impacted by a
dip in brokerage yields and an increase in costs related to scaling up of the institutional
desk. As a result, segmental profit declined by 50.6% y-o-y to Rs 94 mn in Q1FY11.
• Revenues from the securities funding business increased 156% y-o-y to Rs 651 mn in
Q1FY11. Earnings growth was lower at 10% y-o-y to Rs 198 mn due to a higher mix of
borrowed funds resulting in increased interest cost.
• The asset management (AMC) segment’s revenues increased by 17% y-o-y to Rs 91 mn
supported by higher average AUM at Rs 77.2 bn (14% y-o-y) in Q1FY11. This helped the
company cut losses from Rs 19.3 mn in Q1FY10 to Rs 11.7 mn in Q1FY11.

• The alternative investment segment registered a 73.6% y-o-y increase in revenues to Rs
176 mn while profit increased by 122.5% y-o-y to Rs 112 mn in Q1FY11. The alternative
AUM stands at Rs 17.2 bn and has recorded an increase in quality investment
opportunities, which will support good performance.

Scaling-up of institutional business to drive growth
During the quarter, JM Financial got empanelled with few more institutional clients. The
company’s research coverage has increased to 132 companies. We expect the business to
take around 12 -15 months to start contributing to the overall profitability.

Downward revision in FY11 and FY12 estimates
We have revised our top line forecast downward by ~3% each for FY11 and FY12 to reflect
the pressure on brokerage yields. The hardening in the yield curve will result in increased
funding cost to support the securities funding book. However, we expect the funding
business to do well and support JM Financials’ overall performance. Accordingly, we have
revised PAT estimates downwards by 18% and 14%, respectively, for FY11 and FY12 to
account for the pressure on brokerage yields and increased interest cost.

Valuations – strong upside from current levels
In line with the earnings revision, we have lowered our fair value estimate for JM Financials
from Rs 50 to Rs 45 per share. We maintain our valuation grade of ‘5/5’, indicating that the
stock has ‘strong upside’ from the current level of Rs 35.8 (as on August 11, 2010).

To read the full report: JM FINANCIAL