>JM FINANCIAL LIMITED: Buoyant capital markets drive business performance

JM Financial Ltd’s (JM’s) Q2FY11 revenues were in line with CRISIL Equities’
expectations driven by investment banking and securities funding businesses.
However, the securities broking business continued to be impacted due to
pressure on broking yields. Losses in the asset management business (AMC)
and poor performance of the broking business led to a slight decline in
profitability. Our outlook for the company’s second half remains stable on the
back of buoyant capital market activities. Consequently, we maintain our
earnings estimates for FY11 and FY12. We maintain our fundamental grade of
‘4/5’ for JM.

Q2FY11 result analysis
• JM’s revenues increased 33.3% y-o-y to Rs 2.3 bn supported by strong performance
in investment banking and securities funding businesses. However, PAT dipped by
2.3% y-o-y to Rs 564 mn mainly due to losses of Rs 33.5 mn in AMC and poor
performance in the broking business.
• The investment banking and securities businesses reported revenue growth of 27.3%
y-o-y to Rs 1.3 bn in Q2FY11. The investment banking division completed five deals
worth Rs 30.6 bn in Q2FY11. However, the performance of the broking business was
impacted by low brokerage yields and higher cost related to the institutional desk. As
a result, segmental profit increased at a low rate of 3.7% y-o-y to Rs 94 mn in
Q2FY11.
• Revenues from the securities funding business increased 70% y-o-y to Rs 721 mn in
Q2FY11. However segmental earnings declined 7.3% y-o-y to Rs 198 mn due to a
higher mix of borrowed funds and increased funding cost.
• AMC performance was impacted by regulatory changes and redemption pressure.
Average AUM declined 26% y-o-y to Rs 65.3 bn in 2QFY11. The segment reported
losses of Rs 33.5 mn. We believe the loss is largely due to one-time valuation losses
arising from the shift to the mark to market valuation regime for the bond portfolio,
which the company may have absorbed rather than passing on to the investors, inline
with most of the players in the mutual fund industry.
• The alternative investment segment had AUM of Rs 17.2 bn and reported profit of Rs
110 mn in Q2FY11, 26.3% lower than that in Q2FY10.

Valuations: Upside from current levels
We continue to value JM using the sum-of-the-parts method and maintain the
fair value at Rs 45 per share. The stock price has rallied by 15% since our
previous update report dated August 19, 2010. Hence, we are revising our
valuation grade to 4/5.

To read the full report: JM FINANCIAL LIMITED