Geojit Financial Services+BNP PARIBAS Does the story gets RE-RATED?

Kuldeepjadeja · March 3, 2021, 4:39pm

About Geojit

A LEADING RETAIL FINANCIAL SERVICES PROVIDER

Geojit is a leading investment services company in India with a growing presence in the Middle East. The company rides on its rich experience in the capital market to offer its clients a wide portfolio of savings and investment solutions. The gamut of value-added products and services offered ranges from Equities and Derivatives to Mutual Funds, Life & General Insurance and third party Fixed Deposits. The needs of around 10,56,800 clients are met via multichannel services - a countrywide network of over 460 offices, phone service, dedicated Customer Care Centre and the Internet.

Geojit has membership in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). In 2007, global banking major BNP Paribas joined the company’s other shareholders - Mr. C. J. George, Founder and Managing Director, Kerala State Industrial Development Corporation (KSIDC) and Mr. Rakesh Jhunjhunwala – when it bought a stake and became the single largest shareholder.

The company also has a strategic presence in the Middle East region in the form of joint ventures and partnerships. Barjeel Geojit Financial Services LLC, its joint venture with the Al Saud Group, is headquartered in Dubai, in the United Arab Emirates, and has branches in Abu Dhabi, Al Ain, and Sharjah. Aloula Geojit Capital Company, the joint venture with the Al Johar Group in Saudi Arabia is headquartered in Riyadh with a branch in Dammam. BBK Geojit Securities KSC, located in Kuwait, is a joint venture with Bank of Bahrain, Kuwait and JZA. QBG Geojit Securities LLC in Oman LLC is the joint venture with QBG and National Securities Company and is based in Oman. In addition, the company has a business partnership with Bank of Bahrain and Kuwait in Bahrain.

PROS

Presence of BNP Paribas a french banking giant, Mr.Rakesh jhunjhunwala .
Highest ever 9 months profits.
*Rs.792 cr of cash and equivalents.
more than 5% dividend yield.
Company is almost debt free.
Company is expected to give good quarter
Company has been maintaining a healthy dividend payout of 87.43%
Debtor days have improved from 131.50 to 92.44 days.

CONS

The company has delivered a poor sales growth of 0.06% over past five years.
Company has a low return on equity of 11.44% for last 3 years.
Brokerage business is cyclic.

Profit & Loss

Consolidated Figures in Rs. Crores / View Standalone

PRODUCT SEGMENTS

	Mar 2009	Mar 2010	Mar 2011	Mar 2012	Mar 2013	Mar 2014	Mar 2015	Mar 2016	Mar 2017	Mar 2018	Mar 2019	Mar 2020	TTM
Sales +	188	298	275	250	254	230	321	269	301	363	308	306	386
Expenses +	167	211	213	191	179	163	196	196	200	238	221	205	217
Operating Profit	21	88	62	59	75	67	125	73	102	125	87	101	169
OPM %	11%	29%	22%	24%	29%	29%	39%	27%	34%	34%	28%	33%	44%
Other Income	44	5	6	7	51	-109	5	3	4	5	-6	-4	1
Interest	1	1	2	4	3	2	1	1	1	1	2	3	3
Depreciation	12	14	16	14	13	11	10	13	14	14	21	25	24
Profit before tax	51	77	50	48	110	-55	120	62	91	115	58	70	142
Tax %	20%	37%	37%	51%	20%	-40%	31%	29%	33%	33%	48%	27%
Net Profit	40	46	29	19	82	-73	77	38	56	73	23	47	106
EPS in Rs	1.79	2.05	1.27	0.85	3.58	-3.21	3.34	1.60	2.38	3.08	0.97	1.97	4.43
Dividend Payout %	28%	37%	59%	88%	28%	-3%	52%	62%	53%	65%	103%	76%

Compounded Sales Growth
10 Years: 0%
5 Years: -1%
3 Years: 0%
TTM: 29%

Compounded Profit Growth
10 Years: 1%
5 Years: -8%
3 Years: -4%
TTM: 193%

Stock Price CAGR
10 Years: 8%
5 Years: 11%
3 Years: -19%
1 Year: 115%

Return on Equity
10 Years: 9%
5 Years: 9%
3 Years: 9%
Last Year: 10%

Its my first Topic post in the group so please correct me if i am wrong any where…

Disc. :- Invested with 9% of my PF.

sv_verma · March 3, 2021, 11:52pm

I did notice the reduction in new customer additions last year. Maybe this indicates a switch to the newer online only brokerages? This could be a long-term trend to monitor.

And this section from the latest rating rationale could be interesting too:

The group businesses are confined within the capital market industry that has been highly competitive due to multiple players offering low- cost products to clients. The industry has seen significant transformation in the three fiscals through 2020 with tech-based discount brokers entering and creating their dominance in the market. The competitive intensity is expected to continue with more players proposing to enter in this space, which may further intensify the price war. The group’s key broking business remains exposed to economic, political and social factors that drive investor sentiments. Given the volatile nature of the business, brokerage volumes and earnings are highly dependent on the level of trading activity in capital markets. Specifically since March 2020, the stock markets has seen high retail participation and daily trading volumes coinciding with the lockdown and people remaining at home. The sharp upward movement of the key benchmark indices during this period has led to broad-based gains across portfolios and contributed to the lure of stock market trading. More importantly, traditional debt savings avenues are also offering relatively low interest rates. While this has benefited the group as well as other broking players, the ability to scale-up might not continue over the medium term. Hence, sustainability of the market momentum will remain a key monitorable.
The group’s topline and bottom line are dependent on the overall volumes in the capital market. It has witnessed several cycles of increase and decline in the overall earnings based on market conditions. While the earnings have improved significantly during the first half of fiscal 2021 with total revenue increasing by 37% to Rs 199.6 crore and profit after tax(PAT) increasing by 270% to Rs 56.8 crore over the corresponding period of the previous fiscal, sustainability of this growth remains to be seen over the medium term.

In essence, the earnings of these cos are very pro-cyclical, so timing the investment might also be a very important of success. This is also seen in the bad long term returns for this stock (10y +)

Also, do you have more information on the revenue split between India and the Middle East? That could also be another risk factor as the mid-east activity might be correlated with the commodities prices staying high.

Jose · March 15, 2021, 5:07pm

I have been following this company for some time. I have been in and out at various levels. Let me just point out some things

It’s true that bnp paribas holds 32% stake in the company, but the French banking giant is not involved in running the company. Earlier the company was called Geojit BNP Paribas and the bank wanted to take majority stake in the company which the management thwarted and finally they went on to acquire sharekhan and BNP Paribas nominees resigned from the board and the JV was dissolved and the company was renamed Geojit Financial services. However, the bank is still holding on to the shares.

The company has 792 crores and cash equivalents as on Q2’21, but it includes a bit of customer balances as well. As per the Q2 concall the cash position equivalent was around 500 from which a dividend of 1.5 rupees were paid. But the company came out with a q3 eps of around Rs 1.16. So the cash position should be around 500 crores which works out to be around Rs.21 per share.

There may be some calculation issue with

the receivable days, there is no way a traditional brokerage can have such a long receivable period. I saw this data in screener and got confused. Will try to find out why

It’s true that customer additions has not been as good as the discount brokers. But I don’t think the company will find it difficult to switch to the discount broker concept, if the existence of traditional brokerage business is threatened as it boasts about being the first to launch internet and mobile trading in India. And has also an arm called geojit technologies eventhough not a major contributor to revenue. But the management has time and again reiterated that they have no plan to go the discount broker way.

The contribution from middle list JVs are pretty low. But the company has a good old clientele from the middle east.

The company over the past few years have been trying to diversify from a traditional brokerage to a financial services player by concentrating more on their distribution business. The company was to a certain extend successful in improving their mutual fund and insurance distribution business which are currently about 14% of their revenue as on Q3 end. Due to the pandemic the distribution business was negatively affected. The idea was to cross sell other financial products and increase the wallet share.( mutual funds, gold etf, insurance, gold bonds etc). Fact that 74% of their revenue is from equity and equity related products shows that the company’s earnings are cyclical. Past demonetisation when market interests went down drastically, there were reports about increasing retail participation in equity related instruments and financialisation of Savings. And there was a bull run in all the brokers, but things went back to how it was before demonetisation.
However, there was large scale retail participation in equity during lockdown period, but the major beneficiaries were the discount brokers. From what I have seen it was zerodha which grabbed the bulk of these new customers. And geojit also accepted that they had some glitches in online account opening in initial periods of lockdown. If you scrutinize the new clientele added it is more or less in line with the precovid periods. Geojit mostly gets customers through their existing clients, so I expect them to be more sticky.

Geojit is trying to improve its customer experience, they have launched a few PMS funds, some smart folios and recently announced a tie up with lotus dew to launch an AI based portfolio . The company has also enabled global investments. No idea how much of this will be converted into earnings.

There was a mention of company starting loan intermediation services, however due to the pandemic it didn’t take off well. I have no idea how the company plans to execute the idea. But the idea looks good. As per the management there will be a very small contribution from this services in the current year.

All said, the company is still cyclical due to its very high dependence on equity and equity related income.

Dividend yield is currently close to 5 % which is close to risk free interest rate, this may go down if earnings are affected.
Being a company which has negligible working capital requirements why is the company holding close to 500 crores of cash. Are they looking for acquisitions?

Discl: invested as a cyclical bet. May exit at any point of time.

dnj14773 · June 18, 2022, 5:30am

AkshayBharde · October 1, 2024, 11:44pm

Disclaimer: Biased view as I hold this stock.

Hi All. Don’t see much traction here since 2022. Looking at India’s SIP trend, equity culture growth & financialization of savings, I think all these players should do really well over the next 10-15 years. Geojit has a high integrity management. They look hungry for growth now (by their last few concalls & execution). The only point is, it’s not a pure play wealth management/AMC business. So there is always going to be regulatory hang like what happened yesterday. We know that this is going to impact brokerages & stock exchanges the most. But in case of diversified financial services businesses like Motilal Oswal or Geojit, how can we asses the impact of the regulations on the terminal value? Geojit is now 45% revenue coming out of broking. Over the period of time I think it should be substantially lower than this. But in the meantime, how to think about broking part of the business? Wealth side is sticker revenue as it’s fee based.

AkshayBharde · October 2, 2024, 12:11am

According to FY24 AR of Geojit, 80% of Brokerage revenue comes from Cash segment. They are proactive it seems. The impact seems low. Need to get a similar idea about other diversified businesses like MOFSL.

Jose · October 3, 2024, 4:47am

The effect of the recent regulation is only a very short term issue. The company is trying hard to reinvent itself as a wealth management player. It boasts of a lot of firsts in the industry. After low growth for a very long period of time, they are slowly moving into the next leg of growth. PMS and distribution business seem to be growing well.

There has been some growth in JVs as well.

Geojit is also planning to start an entity at Dubai International Financial Centre (DIFC)
They are also issuing rights at 50 per share in the ratio 1:6.

Biggest risk is that Brokerage income tend to be quite cyclical.
Discl: Invested, biased

AkshayBharde · October 4, 2024, 6:16am

Thanks Jose for your views. I agree with everything you said. Brokerage is cyclical & we will most likely see the evidence of that soon. I read one report from ValueQuest Deep Dive on Walth sector. They compared how this whole sector panned out in the US. AMCs do better than Brokers & Exchanges, Wealth Managers do better than AMCs & AIF do better than the Wealth Managers. I think in the early stages, everyone will try to do everything in India but eventually specialists will emerge. Geojit is focusing on Wealth & Broking. I think AIF, PMS, the new MF Lite thing, wealth management all these services should do really well over the next decade & beyond. Oh & yes, the Rights Issue is very very tempting. Added more today to be eligible for the rights issue. BTW how do REs work? Do you get to buy all that you are eligble for?

Discl: Invested, biased

Jose · October 7, 2024, 5:58am

RE land in your account proportional to the no of shares. You can trade the REs as well. You can even apply for more than what you are eligible for

AkshayBharde · October 15, 2024, 7:03am

Hi Joes,

I am going to apply for additional Rights Equity Shares. Just wanted to know whether it makes more sense to submit one application with all the quantity or first application for the bid of the alloted quantity & then another bid for the additional quantity? Not sure if multiple applications make sense. Please advise as this is my first time applying for additional number of rights shares.

Thanks.