Ratings Sharekhan Financial Services Private Limited December 18, 2017 Instruments Commercial Paper Issue (IPO Financing) Details of instruments/facilities in Annexure-1 Amount (Rs. crore) 2000 (Rupees two thousand crore only) Ratings 1 CARE A1+ (A One Plus) Rating Action Assigned Rating Rationale and Key Rating Drivers The assigned rating factors in the strengths that Sharekhan Financial Services Private Limited (SFSPL) derives from its parent Sharekhan Limited (SKL) and the strategic importance of SFSPL to the BNP Paribas group (the ultimate parent of SFSPL) for expanding lending activities in India including margin funding and loan against shares (LAS) business. The rating is also supported by experienced management, longstanding experience of the parent in the capital markets along with strong retail customer base, strong risk management systems, moderate profitability with lower operating cost and comfortable capitalization and liquidity position. The rating also considers risk inherent in the capital market lending business and concentration of SKL s business in retail segment. Parent support, credit profile of Parent and BNP Paribas group, asset quality, capital adequacy and profitability of SFSPL are key rating sensitivities. Detailed description of the key rating drivers Key Rating Strengths Experienced management and strong parentage SFSPL is a wholly owned subsidiary of Sharekhan Limited (which in turn is a 100% subsidiary of BNP Paribas S.A. (France)). BNP Paribas has a presence in 74 countries and has more than 1,90,000 employees. Retail Banking & Services and Corporate & Institutional Banking are two core activities of BNP Paribas. BNP Paribas reported PAT of Euro 7.7 billion during year Jan-Dec 16. SFSPL complements the broking entity (SKL) by providing margin funding facility to the clients of SKL. The presence of a common management team and shared infrastructure further strengthens the operations of the company. The strong parentage of SFSPL considerably enhances its credit profile given the importance of the entity to the Sharekhan group for undertaking its lending business. Mr. Shankar Vailaya is a whole time director of Sharekhan Limited. He heads the operations, finance and legal functions. He is assisted by a team of experienced professional management. SFSPL complements the broking entity by providing margin funding facility to the clients of SKL. The presence of a common management team and shared infrastructure further strengthens the operations of the company. Longstanding experience of the parent in capital markets along with strong retail customer base SKL has been present in the capital market space for over two decades and is one of the biggest players in the retail equity broking space with over 14 lakh retail clients. SKL is primarily a retail broking player, with majority of its volumes being contributed by the retail segment. Given the large retail footprint of SKL, SFSPL is expected to accrue operational benefits from SKL in terms of ready access to clients and operational support. 1 Complete definition of the rating assigned are available at www.careratings.com and other CARE publications. 1 CARE Ratings Limited
Strong risk management systems of parent SKL has robust risk management systems in place, which mitigate the credit risk, market risk and the operational risk associated with the equity broking. SKL has a centralised risk management system to monitor its exposure on each client, sub-broker, and branch on a real time basis. Necessary timely actions are taken by risk team to ensure that margins remain within required limits. Moderate profitability with lower operating cost SKL is amongst the largest retail broking housing in the domestic broking landscape. The company has over 2,200 franchisees as on March 31, 2017 and considerable online presence. The client acquisition costs for SFSPL are thus lower which thus helps in lowering operating costs. The cost to income ratio for FY17 stood at 18.73%. During FY17, company reported PAT of Rs.14.62 crore (P.Y: Rs.12.51 crore) on the total income of Rs.37.00 crore (P.Y: Rs.38.27 crore). During FY17, SFSPL s ROTA stood at 2.94% (P.Y: 4.25%). Comfortable capitalization and liquidity position SFSPL s networth has increased significantly in FY17 on account of capital infusion by SKL. SFSPL tangible net worth increased from Rs.120.26 crore in FY16 to Rs.468.42 crore in FY17 on account of equity infusion of Rs.334 crore by SKL.As a result of capital infusion, the SFSPL s capital adequacy ratio stood comfortable at 142.83% as on March 31, 2017 with Tier I capital ratio being 142.60%. The average tenure of the loans for SFSPL is less than a year and hence it is financed through commercial papers. The current liquidity position of the company remains comfortable with significant cash and cash equivalent of Rs.520.63 crore as March 31, 2017. Key Rating Weaknesses Concentration of business of parent in the retail segment The operations of the SKL remain predominantly dependent on retail participation in capital markets. It has limited presence in institutional broking. Risk inherent in the capital market lending business Any adverse event in the capital markets could lead to erosion in value of underlying collateral stocks and would lead to loan call backs which could adversely affect SFSPL s financial performance. Industry Prospects Favourable market sentiments, Foreign Institutional Investment (FII) inflow and Domestic Institutional Investor (DII) growth have impacted the overall rise in market turnover in FY17. In FY17, total volume including Cash and F&O segments of both the exchanges i.e. NSE and BSE increased by 46% Y-o-Y to Rs.984 lakh crore. Cash segment volume increased by 10% Y-o-Y to Rs.59.81 lakh crore in FY17. FIIs were net buyers in Indian equity market and bought assets worth of Rs.25,362 crore (net) in FY17 as compared to net sellers of Rs.44,909 crore in FY16. Similarly, the DIIs were net buyers in Indian markets and purchased assets worth of Rs.29,932 crore in FY17 as compared to net purchases of Rs.78,687 crore in FY16. Analytical approach: CARE has assessed the standalone profile of SFSPL. Additionally, CARE has also taken into account SFSPL s strong linkages with its parent, SKL and the benefits derived thereof. 2 CARE Ratings Limited
Applicable Criteria CARE s policy on default recognition Criteria for short term instruments Criteria for Non-Banking Financial Companies Financial ratios Financial Sector Rating Methodology: Factoring Linkages in Ratings About the Company Sharekhan Financial Services Private Limited Sharekhan Financial Services Private Limited (SFSPL) is 100% subsidiary company of Sharekhan Limited and is registered with Reserve Bank of India (RBI) as Non Banking Financial Company (NBFC). SFSPL was set up with the objective of providing loans against collaterals including shares, public offers of debt and equity, employee stock option schemes (ESOP) and other financial products. The company also registered with Insurance Regulatory and Development Authority of India (IRDA) as Corporate Agent-Life. SFSPL has two subsidiaries called Sharekhan Consultants Private Limited and Sharekhan.com India Private Limited. Sharekhan Consultants Private Limited is in business of mutual fund distribution, while Sharekhan.com India Private Limited is in business of education and training of securities trading. Sharekhan Limited Sharekhan Limited (SKL) was initially setup by the Morakhia family which had been in the equity broking business for decades. In FY16, SKL was acquired by BNP Paribas S.A. (France). Currently, SKL is wholly owned subsidiary of the BNP Paribas S.A. (France). The main business activity of the company is retail share broking with small presence in the portfolio management services and in the distribution of mutual fund products. Sharekhan Limited is one of the leading retail broking houses in India with a nationwide presence through 2200 franchisees in 576 cities and serving 14 lakh retail customers. It also has international presence through its branches in the UAE. SKL, on a consolidated basis, reported a net profit of Rs.98.6 crore on a total income of Rs.639.4 crore in FY17 as compared to a net profit of Rs.145.4 crore on a total income of Rs.601.9 crore in FY16. Standalone Financial Performance SFSPL Brief Financials (Rs. crore) FY16 (A) FY17 (A) Total Income 38.27 37.00 PAT 12.51 16.62 Interest coverage (times) 2.14 3.01 Total Net Assets 248.74 746.01 Net NPA (%) 0.00 0.00 ROTA (%) 4.25 2.94 A- Audited Status of non-cooperation with previous CRA: Not Applicable Any other information: Not Applicable Rating History for last three years: Please refer Annexure-2 3 CARE Ratings Limited
Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications. Analyst Contact: Name: Mr Ravi Kumar Tel: 022-67543421 Mobile: + 91-9004607603 Email: ravi.kumar@careratings.com **For detailed Rationale Report and subscription information, please contact us at www.careratings.com About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. Disclaimer CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. 4 CARE Ratings Limited
Annexure-1: Details of Instruments/Facilities Name of the Instrument Commercial paper (IPO Financing) Date of Issuance Coupon Rate Maturity Date - - 7 days to one month Size of the Issue (Rs. crore) Rating assigned along with Rating Outlook 2000 CARE A1+ Annexure-2: Rating History of last three years Sr. No. Name of the Instrument/Bank Facilities Type Current Ratings Amount Rating Outstanding (Rs. crore) 1. Commercial Paper ST 1000.00 CARE A1+ assigned in 2017-2018 1)CARE A1+ (06-Oct-17) Rating history assigned in 2016-2017 assigned in 2015-2016 - - - assigned in 2014-2015 2. Commercial Paper- Commercial Paper (IPO Financing) ST 2000.00 CARE A1+ 1)Withdrawn (04-Dec-17) 2)CARE A1+ (26-Oct-17) 3)Withdrawn (25-Oct-17) 4)CARE A1+ (06-Oct-17) - - - 5 CARE Ratings Limited
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