Emkay Global Financial Services Limited

Stock Opportunities Untested - but worth a good look
1

Hi,

Have a 5-15% allocation to the stock and bought at various points from 25-65 levels. So have a highly biased view and wanting some negative views. Highly illiquid . Its just for discussion.

Market Cap.: ₹ 175.97 Cr. Current Price: ₹ 72.00 Book Value: ₹ 45.77 Stock P/E: 10.10 Dividend Yield: 0.00% Face Value: ₹ 10.00 Listed on BSE and NSECompany Website 52 Week High/Low: ₹ 74.90 / ₹ 48.10 Debt to equity: 0.19 Debt: ₹ 20.62 Cr. Debtor days: 137.31

Positive Reasons for the Company

  1. The erroneous trade costed them 35-40 cr of loss but did not affect the business in last 3 years. This indicates client relationships are strong.

  2. More than 50-60% of the business comes from institutional broking where it has 200-250 clients. Also investment banking/pms operations slowly picking up.

  3. They got back cash from the settlement in the erroneous trade and now are a net cash co with around 50-75 cr cash. ( A concern is why 42 cr of trade receivables)

  4. High Promoter Shareholding and management has been focused mainly on the institutional broking. Although people consider Broking as a sad business but Institutional Broking is an interesting space where competition has reduced and in last decade it has become based on performance of the research/corporate access then relationships. Every MF has a detailed grading system. Emkay Global has inched up in the last few years in the grading.

  5. Last two qtr consol PAT is 10 cr approx and current market cap is 170-180 cr. Can do 20-25 cr PAT possibly in current scenario is my bet and better in good times for the market. In that case its at a P-E of 7-9 times.

  6. There are not many big players in the Domestic Institutional Brokers and the competition is reducing whereas flows into equity is increasing. Also to create a 200-250 client in institutional broking is tough. ( A good check is how many new institutional brokers have come up in last decade. There are more that have closed. )

  7. My bet is insti broking / Investment Banking business for the company can grow big time if we have a bull market in next 3-5 years if not the current valuations are not expensive. Also some part of the belief in the biz is as am a consultant to another Institutional Broking Outfit for last 4 years.

  8. There will be consolidation/takeovers though i doubt Emkay would be on the block but some other broker getting crazy valuation can be a lucky play. ( Antique , Fortune etc have been bought by a marquee name )

Negative Reasons

  1. No Pricing Power. SEBI decided max a domestic fund can pay is .12% . There could be further regulations. No regulations for Foreign money.

  2. Broking is a sad business especially the Retail Part. All major brokers are shifting more towards NBFCs and AMCs ( Edelweiss, India Infoline and Motilal Oswal)

  3. If they lost money on an erroneous trade why can it not happen again. ( although instances are negligible. )

  4. If markets were to correct and fall the business takes a hit.

Conclusion

If one believes Indian Equity Markets are to grow over the next few years - Emkay Global will be a direct beneficiary as its mainly institutional broking and investment banking. The stock is not expensive and the balance sheet is much cleaner today after 2-3 years.

Disclosure - Do not take this as a buy/sell recommendation. Do hold shares personally and vested interests. I am known to change my mind often with my positions so can sell or buy more on a whim :slight_smile: also.

Would like to invite views on the risks involved in the company. Also what could be the better bets to go for in the same sector.

5 Likes
2

By any chance, has anyone been tracking this lately and attended the AGM today? Please share your findings if any.

Results declared today were awesome - revenues up 65% and PAT up 5x to 8.2 cr yoy. This along with the recent allotment of ESOPs (multiple filings in the recent past) to management and the recent proposal for QIP of upto 150 cr (almost 1/3rd of the current market cap) indicates that something might be cooking inside.

Disclosure - I had taken a medium sized long term contrarian bet at 25 bucks a share few years back during NSEL scam. No trading in the past few years.

1 Like
3

I have not seen any filings corresponding to the QIP you speak of. Where have you heard this?

The shareholder base is quite interesting here. If they can branch out beyond broking, the story could become very interesting (certainly the brand recall is high). Promoters seem conservative but not very enterprising.

Disclosure: Have held shares for awhile

4

Hi @BreakingBad01 ,

They have got the approval of raising funds through means including QIP in the recent AGM (upto 150 crores which is ~30% of current market cap). You can refer to AGM resolution report.

I generally don’t pay any heed to who other shareholders are, as it might create a confirmation bias in your mind. But yes, both Dolly Khanna and Porunju (who has more than 1% of shares on his own name and ~5+% for his PMS firm) are present with promoters at close to ~75% - if that’s what you mean by interesting.

They are mainly institutional brokerage firm as of now - I am sure they are thinking of branching out otherwise I don’t think they have any usage of equity money in the tune of ~150 cr given that equity brokerage is a very asset light business. They also did a tieup with DBS of Spore recently for research.

5

Thanks. I think like other NBFCs that started as brokerages but branched out into lending (IIFL, Edelweiss, JM, MOSL etc), sooner or later Emkay would be well served to consider that, though it doesn’t seem to be an interest area of the current promoters. That would be the big driver of scale.
These research tieups such as DBS are good to market but don’t add to the top or bottomline much. I’d rather they tieup with some NBFC for lending and use their name to attract customers.

6

Here is the Q3 results: http://www.bseindia.com/xml-data/corpfiling/AttachLive/7c496e3d-09d5-4c8d-bba0-30f9d513fad5.pdf.

From all aspects, I think it’s an excellent result. Net profit of Rs.9.53 crores, as against Rs.3.07 crores during Q3’17 and Rs.6.25 crores in Q2’18.

2 Likes
7

can i take this result as opportunity ??

8

Hi @sameer_patel18in, I am considering this as an opportunity, for the following reasons:

The current valuations seem to be very attractive. Even if we assume a moderate profit growth of 5% QoQ over the next 4 quarters, the EPS after Q3 results next year would be Rs. 4.72. That would mean an EPS of Rs. 17.56 for the whole period from Jan-18 to Dec-18.

Emkay had attained a P/E of close to 40 during Sep-17, when its stock price had reached Rs.321. Subsequently, the stock underperformed. I do not see any reason for the above under-performance, except for the fact that investors were not finding the overall NBFC sector (especially the companies that do lending) very hot, unlike the earlier few quarters. This can be attributed to the rising bond yields and the realization that the interest rates have already bottomed out.

As companies like Emkay and Arihant Capital Markets do very little lending (unlike IIFL, Edelweiss, Motilal etc.) and bulk of their revenues come from brokerage services, I feel that, rising interest rates will have lesser impact on them, as compared to the other companies in the NBFC sector.

Emkay’s current TTM P/E is 19.21 (for an EPS of Rs.11.42). Both Motilal & Geojit have a P/E of 37+, IIFL has 29 and Edelweiss has 33. Some of these companies had more than 50 P/E during Sep-17. Considering its performance over the past few quarters and the expactation that the current bull run in the stock market will continue for a long period, I feel, it is justifiable to expect a P/E of 25 for Emkay, especially after its recent excellent Q3 numbers. For an EPS of Rs. 17.56 and P/E of 25, the price derived would be Rs. 439 (after the Dec-18 Quarter results). On the other end, if Emkay is able to achieve 10% QoQ growth and a P/E of 30, the stock price could reach Rs. 594.

Please note that, I have derived the above figures just for illustration purpose and request you to use your own judgement while making any investment decisions. I feel, the key risks involved would be the continued overall negative sentiments (relatively speaking) by the markets over the NBFC sector and any unforeseeable chance of the bull run ending in the Indian stock market.

I do feel that, there is a good chance of a prolonged bull run in the Indian market. Please refer to the following discussion thread for more of my thought process on that:

Disc: Invested today

2 Likes
9

Thanks for so detail explanation. I have seen this script to become double in 15 days i.e 100 to 200. So i know its capacity to move and you made all aspects clear.

10

After today’s budget, I am seeing one more opportunity with the stock broking companies. The difference between tax rates for STCG and LTCG from now onwards would just be 5%. I think, this will encourage people to do more short-term trading, which in turn will generate more revenues for the stock broking companies (and for the Government also, in terms of STT and STCG).

2 Likes
11

One thing i am not able to unserstand - in spite of good results this company is on a secular decline. I ma not able to see any specific negatives.m
Any thoughts on this?

12

Anyone tracking this? Results for Q1 expected on 14 Aug. I am.still wondering why Q4 profit was declined? @madhavikkutti, @nooreshtech