NBFCs were severely affected; some even went bankrupt, while others survived. One company that experienced significant volatility during this period was Edelweiss Financial Services (EFSL). Its share price plummeted by over 75% from ₹311 in June 2018 to ₹75 in October 2019, but it emerged from the crisis.
Fast forward to CY24, and EFSL’s share price surged by more than 100%, climbing from ₹60 to ₹140, driven by its strategic efforts to reduce debt and unlock value by listing its subsidiaries.
A similar story unfolds with JM Financial, which, too, found itself navigating through the storm. Once a victim of market volatility, JM Financial is gaining momentum through strategic restructuring by moving to an asset-light fee-based business, focusing on the emerging wealth and asset management business.
Will JM Financial follow a similar path to resurgence? The market seems to think so, as its share price has surged more than 100% in the last six months.
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JM Financial operates in the financial services industry and has a diversified business model. Investment banking (IB) contributes the most of its total revenue, at 40.9%.
In comparison, 31.7% comes from mortgage lending, 20.2% from asset management, wealth management, and securities business (platform AWS), and the rest from alternative and distressed debt. We will now examine each of these segments one by one.
Investment banking
Corporate advisory and capital markets: This segment includes IB, institutional equity and research, private equity funds, private wealth management, and portfolio management services (PMS). It provides services to institutional, corporate, government, and ultra-high-net-worth clients. IB is the group’s oldest business, with over five decades of experience.
Sector-wise, companies raised a record fund of ₹2.09 trillion from the Indian equity market in FY24, up 154% over FY23. This fundraising included 77 initial public offerings (IPOs) and 67 qualified institutional placements (QIPs), the highest in the last decade.
JM took advantage of the fund-raising boom, conducting 56 transactions worth ₹1.22 trillion and continuing to dominate the sector. Its FY24 annual report said it has successfully announced and/or completed 15 M&A and PE transactions worth ₹5.63 trillion.
Moreover, it is the leader in IPOs and QIPs, with 47% and 38% market shares, respectively. It has an 80% market share in the top 10 IPOs (by size) and 60% in the top 5 QIPs (by size).
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The company’s IB business is thriving due to strong business momentum. Its revenue grew 84% sequentially, while profit after tax (PAT) grew 153% during the same period. Moreover, the company expects this segment to perform even better going forward due to strong liquidity and fundraising plans.
Private wealth management (PWM)
The segment serves over 900 clients, including family offices, corporations, and institutions. Wealth management AUM recorded a robust growth of 21% to ₹68,105 crore in FY24, compared to ₹56,515 crore last year.
It intends to expand this segment into tier 2 and tier 3 cities. As per-capita and gross domestic product (GDP) increase, the PWM industry in India is expected to be the fastest-growing segment. JM aims to capitalize on this by expanding into tier II and III cities, where a new breed of millionaires will emerge in the coming decade.
Portfolio management services (PMS)
Due to the strong momentum of the equity market, not only its private wealth management but also the PMS vertical is growing. Its PMS asset under management (AUM) rose 61% from ₹1,094 crore in FY23 to ₹1,759 crore in FY24.
Its non-discretionary portfolio AUM grew 53% from ₹641 crore in FY23 to ₹982 crore, while its discretionary portfolio AUM grew 72% from ₹453 crore in FY23 to ₹777 crore in FY24. The growth is led by strong outperformance of its portfolio against the benchmark.
For your information, under discretionary PMS, the portfolio manager has full control over investment decisions, including buying or selling securities. However, under non-discretionary PMS, the manager provides investment advice, but the client makes all final decisions.
Segment financial performance
The IB division generated significant revenues in FY24, growing 52% year-on-year to ₹1,978 crore, and PAT stood at ₹706 crore, up 90% on-year. The strong performance continued in the first half of FY25 as well.
The second half of FY25 saw growth momentum continue, with revenue of ₹951 crore and PAT of ₹310 crore.
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Platform AWS segment
This segment consists of securities, advisory, distribution of financial products, and asset management. JM Financials has increased its focus on this segment, which is delivering positive results.
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Such is the sector’s momentum that the company crossed full-year FY24 AUM in the first half of this year. Not only this, the company is also expected to grow its FY25 revenue and PAT meaningfully.
This sector holds strong growth potential, driven by favourable market conditions and strategic ties to investment banking. With these advantages, management expects to grow its revenue at a CAGR of over 30% in the coming years.
It has an AUM of ₹1.1 trillion, of which 28% comes from retail, while the rest from non-retail. Talking about transactions, 80% of its AUM is transactional, while only 20% is recurring.
The company aims to increase its share of recurring AUM, as it provides stable and predictable revenue. This “sticky” revenue stream ensures better financial stability and long-term profitability.
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Further, high-yield margin financing has grown 58% y-o-y to ₹1,918 crore, and management expects it to grow to ₹2,500 crore by March 2025. It seeks to do this by cross-selling MTF products to high-net-worth clients and re-launching the loan facility against shares. JM earns a yield of 12-12.5% on these MTF facilities.
Recently, it launched its digital broking platform, BlinkX, to compete with digital competitors in broking. The platform is gaining good traction, as the average daily turnover surged 60.7% y-o-y to ₹62,643 crore in Q2FY25.
It has also doubled its workforce in the segment and is aggressively investing to shore up its asset management and digital business. The company expects this segment to become profitable in 18-24 months.
Asset management company (AMC)
The company has been rebuilding its mutual business for two-three years. Riding on the industry tailwind, it has grown its AUM by 4.2 times from ₹2,962 crore to ₹12,516 crore in 2.5 years. Its Systematic Investment Plan (SIP) book is also snowballing, and this is expected to continue.
AMC segment posted a loss of ₹11 crore in H1FY25 on a revenue of ₹36 crore.
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JM’s strategy is to focus on the active management side of the business, which has a higher expense ratio. To support this approach, the company plans to invest significantly in investment teams, systems, and processes over the next two years.
JM is also looking to build an alternative investment platform within its AMC business. This will likely involve setting up and managing alternative investment funds (AIFs) for clients seeking investments beyond traditional asset classes.
These investments will keep the segment’s cost-to-income ratio elevated for the next 18 months. This is especially true for the MF business, which requires scale to turn profitable as margins are very thin. Once it attains the necessary scale, JM expects this will likely reach break-even by FY27.
Mortgage lending
It has two segments: wholesale and retail lending.
Retail lending: This segment mainly comprises affordable home loans with an average ticket size of ₹8-15 lakh. Its AUM grew 38% y-o-y to ₹2,366 crore from ₹1,714 crore in Q2FY24. The company expects the loan book to cross ₹3,000 crores by FY25’s end.
Most notably, its loan book is growing very fast. It has grown 6.3x in just 5.5 years, at a CAGR of 51% between FY20 and Q2 FY25. The management has set a very ambitious target of growing the AUM another 2X to ₹6,000 crore by FY27.
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Moreover, the book is well-diversified across many smaller loans rather than focusing on a few large loans, making it less risky.
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Like the industry, its gross net-performing assets (NPA) and net NPA have increased marginally by 0.2% and 0.1% sequentially. However, this is not a matter of concern as it has maintained adequate provisions against it.
The fresh provisions have resulted in a dip in its profit, which is expected to ease in the coming quarters. Also, any rate cut by the Reserve Bank of India (RBI) is expected to lower the cost of borrowing, providing a tailwind with a higher spread.
The company has taken a cautious approach to loan disbursement, but if conditions improve, it plans to deploy more cash, which could lead to a higher return on equity (ROE).
Further, per the loan book guidance, the company is expected to grow by over 35% in this vertical over the next two-three years.
Wholesale lending
Its wholesale business comprises real estate lending, distressed credit, and financial institution financing. Due to the higher risk in this sector, the cost of funds is higher than retail lending, which forces the management to take more risk to maximize expected returns.
This has made it a pain point for the group, leading to lower yields, asset impairments, provisions, and more losses. Hence, in Q4FY24, it has decided to move away from the traditional on-balance sheet business model and towards syndication. This approach allows it to facilitate loan disbursements while generating steady, recurring fee income.
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The pivot is expected to be completed in three-four years. Once that happens, it hopes to generate an incremental cash flow of about ₹2,000.
Asset reconstruction company (ARC)
This segment has been challenging for the company, requiring provisions in the past. As a result, it decided to transition this business to an off-balance-sheet distribution model. Accordingly, its AUM is scaling down here as well.
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Consolidated financial performance
Its revenue grew 10.7% sequentially to ₹1,211 crore in Q2FY25, while PAT rose 36% to ₹232 crore during the same period, led by the IB division. Revenue, on the other hand, remained stable y-o-y, while PAT grew 19.1%.
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What about JM Financial’s valuations?
It trades at a price-to-equity (PE) valuation of 21.7x, 72% higher than the 10-year median PE of 12.7x. Its current price-to-book (PB) valuation is 1.5, 15% higher than the 10-year median PB of 1.3.
We have also compared it with Edelweiss Financials, as both operate in the same segment and are closing their wholesale loans. Edelweiss is trading at a PE of 26.3, PB of 2.4.
Comparatively, JM Financial is trading at a discount on PE and PB.
It is worth noting that the business is shifting towards fee-based recurring revenue by exiting low-performing segments, which is expected to improve performance, profitability, and free cash. If the transition plays out, it could fetch a higher valuation than it is currently trading at.
However, it is a cyclical business linked to capital market activities, which makes it vulnerable to any slowdown. Moreover, as it aims to scale heights by focusing on AMC and WM segments, the current concentration on IB makes it vulnerable if fund-raising slows down.
Having said that, the company’s focus is on high-growth areas, which are expected to gain significant momentum in the coming years. Hence, it might be a good idea to add the stock to your watchlist and see how this shift plays out.
Note: Throughout this article, we have relied on data from www.Screener.in and Tijorifinance. Only in cases where the data was unavailable have we used an alternate but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.
Disclosure: The writer does not hold the stocks discussed in this article.
