Description

JM Financial is leading mid-market investment banking business in India with market share of 19% in ECM and 6.5% in M&A transactions in India by volume and value respectively. This is where we believe the assessment of the market ends for JM Financial – largely if not completely ignorant of the franchise that the promoter Mr. Vishal Kampani has built. Of the USD 900M of equity in FY21 (March ending), only 14.4% is in investment banking while the rest is being used to cultivate long term leadership driven businesses where JM Financial should have a strong edge in our view.  While typical lending businesses have minimal tangible moat, we believe JM Financial is highly differentiated, something the market should recognize as the business environment improves post-Covid. Our view stems from the adjacent capabilities JM Financial is building, leveraging its core engine of investment banking which provide the company an edge in underwriting quality, deal assessment and cross sell, all of which should enable the business to compound its skillset and earnings over the next 5 years while gaining market share.

In JM Financial, the company has a USD7.8bn wealth management franchise which is in the building phase in a market where barely 13% of financial wealth of UHNIs is managed by a formal advisor. JM has been building a larger team despite the pandemic and sharpening it’s focus on creating a separate product and sales architecture for retail and HNW/UHNW wealth management. This segment benefits from direct access to both new economy and traditional corporate families through its 4-decade relationship as an investment banker which should provide not only access to wealth management avenues but also deal making to the company’s Financial Products segment. The Financial Products business specializes in structured finance which generates leads from its investment banking business. Given the natural access to diligence, history and depth of how corporate promoters behave in India, JMs edge culminates into high quality underwriting which generic lenders do not possess. This is in the building phase with only USD394m of loan book but generating 15%+ ROE. As JM deals with all sorts of corporates from B to AAA rated, not only does this bode well for its structured finance business but also in its wholesale financing business given that JM in most cases has been either an equity placement or a bond placement agent for such borrowers. This book is USD1.5bn and being built. Wholesale financing was dominated by government owned lenders and some non-banking entities, all of which have vacated the space over the last 2 years given the lack of edge which translated to high NPAs for these operators, an area where JM Financial has the 2^nd best track record in the country driven by the edge we speak of above. JM has also built an asset reconstruction franchise which manages assets of USD8.2bn. This business is again highly differentiated from pure play lenders in that the diligence and access required to underwrite assets and bid based on a high degree of conviction first comes to those who have had strategic long-term relationships with promoter’s which JM possesses. In addition, JM Financial is also building a retail housing finance business which is USD99m in book size today by leveraging its decades old infrastructure of retail broking offices it 170 cities in India. The key differentiator for JM is that while other housing finance entities must source clients through DSAs and/or set up large cold calling teams, JM’s long held relationships with the retail audience from its broking business provide a direct cross sell opportunity.

Despite the demonstrable edge which can be interpreted from the very strong asset quality in its lending business and a highly differentiated sourcing style for its wealth management and ARC business, the company is trading at below book multiples. An SOTP shows that assigning a low 10x P/E (significantly lower than investment banking peers in India who trade between 15-25x P/E) to its investment banking and wealth business in a growing market, the entire lending business, where compounding and market share gain story is yet to play out is available at 0.9x book along with USD184m of free equity which is roughly 20% of market cap – highly undervalued with margin of safety in an industry which is growing and where JM should rightly gain market share. In India, businesses with no edge but 15% ROEs trade at 2-3x book value which tells us that the market’s view is yet to change in valuing JM from a P/E approach to a P/B approach.  We are also highly comforted by the promoter’s high skin in the game where he owns 55% of the company and any irrational growth costs him personal wealth and dilution, something which Mr. Kampani has refrained from doing over more than a decade of review that we conducted on the business.

Catalyst

Continued growth in each of its core segments should lead to an overal realization of value as each segment hits scale.