JM Financial - Pick Up In Lending Business; Non-Lending To Act As Catalyst Driving Valuation: ICICI Direct

ICICI Direct Report

Investment Rationale

Despite challenges during Covid, JM Financial Ltd. delivered a gradual recovery in performance with improvement in both business growth and asset quality. Though some business segments continue to remain cyclical, the performance excluding one-offs (provision in asset reconstruction company business, investment in asset management, wealth management, and securities business) remains encouraging.

Further, we believe the overall performance will improve given-

1. pick-up in lending business with assets under management growth expected in the 15-18% range;

2. improvement in recoveries in ARC business with minimum probability of substantial provisioning ahead;

3. recovery in investment banking revenue with focus continuing on wealth and asset management pie.

Thus, we expect revenue to grow at ~14% compound annual growth rate in FY24-25E to Rs 4327 crore while the earnings trajectory is seen staying healthy at 18.3% CAGR to Rs 837 crore in the same period.

Demerger of the business after it attains adequate scale stays a catalyst for unlocking . However, we have not factored this in our valuation.

Key triggers

• With a pick-up in retail sales coupled with a gradual increase in property prices, a recovery is seen in the wholesale book with 6% QoQ reported in Q4 FY23. Going ahead, a strong sales cycle could impact the growth momentum but an uptick in construction activity is expected to result in a healthy uptick of 15-20% YoY growth in the wholesale book.

• Focus on building the retail segment (affordable home loans, loan against property) with technology driven service and delivery coupled with investment in building physical distribution capabilities is expected to enable robust momentum ahead (93% QoQ, 55% YoY).

• JM’s ARC strategy is expected to continue focusing on acquisition and resolution of stressed assets with higher proportion of incremental business based on fee income. With one time provision and anticipated recovery of ~Rs 1200-1300 crore in FY24E, the probability of elevated provisioning seems bleak. In addition, JM ARC is also focused on diversification with the acquisition of a substantial proportion of retail asset with internal rate of return of 16-18%.

About the stock:

JM Financial is a diversified financial group engaged in various businesses providing a host of services including mortgage lending (wholesale and retail), distress asset management, investment banking, wealth management and securities and asset management company. On a consolidated basis, JM reported revenue at Rs 3343 crore and profit after tax at Rs 597 crore. The outstanding advance book was at Rs 15653 crore while ARC AUM was at Rs 13558 crore.

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