JM Financial Ltd

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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL Fundamental Grade

5/5 4/5 3/5 2/5 1/5

Assessment
Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals

CRISIL Valuation Grade

5/5 4/5 3/5 2/5 1/5

Assessment
Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)

Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company.

Disclaimer:
This Company-commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.

January 27, 2011

JM Financial Ltd
Riding on a buoyant market
Fundamental Grade Valuation Grade Industry 4/5 (Superior fundamentals) 5/5 (Strong upside) Capital Markets
Fundamental Grade

Fair Value Rs 45 CMP Rs 28

CFV MATRIX
Excellent Fundamentals

5 4 3 2 1

JM Financial Ltd is one of the leading players in the financial services sector with business interests in investment banking, equity broking, wealth management, lending, asset management and alternative asset management. These diversified offerings have helped JM Financial establish itself as a one stop financial shop and develop strong relations with clients. Accordingly, we maintain the fundamental grade of 4/5, indicating that JM Financials fundamentals are superior relative to other listed securities in India. Buoyant capital markets drive investment banking and broking business Domestic capital markets are registering strong growth riding on buoyant economic conditions. This has resulted in strong growth in JM Financials broking revenues. The investment banking business has also benefitted from increase in primary market activities. JM Financial has a strong pipeline of equity capital and M&A deals which should continue to drive investment banking fees. Intense completion and pressure on broking yields Intense competition in the broking business and preference for low-yielding options vis-a-vis the cash segment has put significant pressure on brokerage yields. JM Financials is focusing on the high yield cash segment which should help it report stable yields going forward. Further, its emphasis on expanding its business through a cost-effective franchise-based model should help it to report strong operational performance. Strong balance sheet supports securities funding and other businesses JM Financial holds a strong balance sheet with low gearing of 1.08x at the group level and ~3x at the NBFC level which should support lending and other businesses. The securities funding book is registering strong growth with the run-up in primary and secondary markets. The asset reconstruction business is witnessing strong growth with a book size of Rs 12 bn. The strong balance sheet should help the company support its lending and other businesses. Expect two-year revenue CAGR of 11% CRISIL Equities expects the companys revenue to grow at a CAGR of 35.9% to Rs 11 bn during FY10 to FY12, buoyed by the expected strength in the capital markets. PAT is expected to increase at a CAGR of 30.5% to Rs 1.9 bn over FY10 to FY12. EPS is expected to be Rs 1.8 in FY11 and Rs 2.6 in FY12. Valuations: Strong upside from current levels We continue to value JM using the sum-of-the-parts method and maintain the fair value at Rs 45 per share. The stock price has corrected by 30% since our previous update report dated November 03, 2010. Hence, we are revising our valuation grade to 5/5.

Poor Fundamentals

Valuation Grade
Strong Downside Strong Upside

KEY STOCK STATISTICS

NIFTY / SENSEX NSE / BSE ticker Face value (Rs per share) Shares outstanding (mn) Market cap (Rs mn)/(US$ mn) Enterprise value (Rs mn)/(US$ mn) 52-week range (Rs) (H/L) Beta Free float (%) Avg daily volumes (30-days) Avg daily value (30-days) (Rs mn) 5687/18969 JMFINANCIL 1 750 21,144/460 38,127/829 49/26 1.45 44.0% 2,055,805 74.53

SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Sep-09 Promoter Dec-09 FII Mar-10 DII Jun-10 Sep-10 Others 66% 66% 66% 66% 66% 24% 0.4% 9% 24% 0.4% 9% 24% 0.0% 9% 24% 0.0% 10% 23% 0.0% 10%

PERFORMANCE VIS--VIS MARKET

Returns 1-m 3-m -31% 7% 6-m -19% 17% 12-m -33% 17% JM Financial NIFTY -10% -5%

KEY FORECAST
(Rs mn) Operating income EBITDA Adj Net income Adj EPS-Rs EPS growth (%) PE (x) P/BV (x) RoCE (%) RoE (%) EV/EBITDA (x) FY08 8,319 4,074 (1,876) (2.5) NM (21.1) 2.0 19.3 (13.9) 9.6 FY09 4,679 1,480 474 0.6 NM 32.5 0.8 5.4 2.5 7.3 FY10 5,988 2,317 1,132 1.5 138.7 25.0 1.4 7.5 5.9 16.5 FY11E 8,278 3,940 1,320 1.8 16.7 16.0 1.0 9.1 6.5 9.8 FY12E 11,060 5,264 1,926 2.6 45.9 11.0 1.0 10.0 9.1 8.7

ANALYTICAL CONTACT
Chetan Majithia (Head) Amit Kawle Vishal Rampuria Client servicing desk +91 22 3342 3561 clientservicing@crisil.com chetanmajithia@crisil.com akawle@crisil.com vrampuria@crisil.com

NM: Not meaningful; CMP: Current Market Price Source: Co mpan y, CRISIL Equ ities estimate CRISIL EQUITIES | 1

JM Financial Ltd
Table: 1 JM Financial: Business environment
Parameters Investment banking and securities business Securities funding and fund-based activities IPO financing, margin funding, loan against shares, Fixed Income trading, promoter funding, special situations fund Geographic presence Market position India India India Fragmented industry India Fragmented industry India Fragmented industry Private Equity, Real Estate funds Asset management Treasury Alternative asset Asset management management Others

Segment offerings

Equity broking, institutional broking, wealth management, investment banking

Fragmented industry; Fragmented industry JM is one of the leading players in the industry

Revenue contribution FY10 - FY12 Revenue CAGR (FY10-12) Key competitors

52% 51% 30%

23% 26% 39%

6% 6% 51%

5% 3% -4%

14% 14% 31%

India Infoline (4% market share by trading volume), Indiabulls Securities (~ 2.4%), Motilal Oswal (2.9%), Edelweiss Capital, and Reliance Capital

Indiabulls Financials, Religare Enterprises, Motilal Oswal, India Infoline etc.

Edelweiss Capital, JM Financials, Motilal Oswal, Enam, foreign brokers

Reliance Capital (15.3% market share by mutual fund AUM), HDFC AMC (13.2%), ICICI Prudential AMC (10%), Birla Sunlife (9.4%), UTI AMC (9.4%),SBI MF (5.6%), Kotak Mahindra AMC (3.9%), etc.

Many

Revenue drivers

Capital market conditions, retail participation

Economic conditions, interest rates, consumer sentiments

Economic conditions, capital market activities

Consumer sentiment, economic conditions

Capital market conditions, economic conditions, interest rates, consumer sentiments

Source: Co mpan y, CRISIL Equ ities

CRISIL EQUITIES | 2

JM Financial Ltd
GRADING RATIONALE Economic revival supporting capital market players
The Indian economy has grown at a strong pace over the past few years supported by favourable demographic conditions and regulatory environment. The economic slowdown in FY09 following the global financial crisis resulted in huge outflow of capital, withdrawal by retail participants and reduced activities in primary and secondary capital markets which impacted capital market players. With the revival in economic activities, the capital markets are witnessing increased participation by FIIs and domestic investors. FIIs have made net investments of US$30.2 bn in FY10 and US$38.8 bn to date in FY11. The economic revival also encouraged corporate fund raising, which amounted to Rs 576 bn through equity issuance in FY10. The secondary markets recorded a 56% y-o-y increase in turnover to Rs 2.3 tn in FY10. Based on the overall revival, capital market players reported strong financial performance in FY10. With the economy on an upswing, we expect capital market activities to remain strong and lead to healthy performances by capital market intermediaries.

FIIs have made net investments of US$30.2 bn in FY10 and US$38.8 bn to date in FY11

Figure 1: Registered FIIs in India on the rise

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 FY06 FY07 FY08 FII FY09 FY10 882 997 1,319 1635 1713

Figure 2: FIIs investments in India

(Rs bn) 40 30 20 10 10 0 -9.8 -10 -409% 10.4 9.4 6.8 16.4 30.3 38.8 4% -10% 141% 28% -28% -160% 200% 100% 0% -100% -200% -300% -400% -500%

Net FII Investments

y-o-y growth (RHS)

Sou rce: SEBI

Sou rce: SEBI

Figure 3: Secondary market turnover

(Rs bn) 2,500 2,318 1,846 1,487 1,333 1,032 1,000 482 239 290 721 742 513 552 385 1,102

Figure 4: Market capitalization of BSE and NSE

(Rs bn) 700 600 1,766 500 400 300 200 100 0 302 281 514 486 355 337 309 290 617 601

2,000

1,500

500

0 FY06 Cash FY07 FY08 F&O FY09 Total FY10

FY06

FY07 BSE

FY08

FY09 NSE

YTDFY11
FY10

FY04

FY05

FY06

FY07

FY08

FY09

Sou rce: SEBI

Sou rce: SEBI

CRISIL EQUITIES | 3

FY10

JM Financial Ltd
One-stop shop in the financial services domain
JM Financial enjoys a major advantage as it is an integrated player whose service offerings range from broking, investment banking, portfolio management and asset management services. It caters to both corporate and retail clients. The diversified offerings and years of experience has enhanced JMs ability to retain clients and generate cross-selling opportunities. This also results in costefficiencies, thus improving the profitability of the company. These combined with a strong track record act as key competitive strengths for the company.

Investment banking business benefits from strong primary market activities

The improved economic conditions have led to an uptick in corporate fund raising activities which has supported JM Financials investment banking business. JM Financial holds a strong position in the domestic investment banking business, and has developed long-term relations with several large and medium companies. The company has been ranked amongst the top 10

investment bankers in the country. In FY10, its market share was affected as it intentionally stayed away from managing certain large issues which offered low fees. JM Financial held ~ 3% share of the domestic equity issuance during 1HFY11. It has also started operations in Mauritius and is looking to expand operations in other international markets to offer India-focussed investment banking services to international clients. Going forward, with continued strong economic growth and resurgence in capital market transactions, corporate will also increase their fund raising activities. JM Financial has a strong deal pipeline both on the equity issuance front and on the M&A front, which should support investment banking fees and improve market share. We expect the investment banking revenues to increase at a two CAGR of 27% over FY10-FY12

JM Financial held ~ 3% share of the domestic equity issuance during 1HFY11.

Figure 6: JMs ranking and market share of Figure 5: Funds raised from primary markets
(Rs bn) 1,200 12 1,000 10 800 8 600 400 200 0 FY07 IPO FPO FY08 Rights Issue FY09 QIP FY10 Total 6 4 2 4 0 FY08 FY09 Ranking (LHS) FY10 1HFY11 Market Share (RHS) 6 13 12 3.3% 7.0%

domestic equity offering

14 10.0% 10% 9% 8% 7% 6% 5% 3.0% 4% 3% 2% 1% 0%

Sou rce: SEBI

Sou rce: B loom be rg L eagu e T ab les

CRISIL EQUITIES | 4

JM Financial Ltd
Figure 7: JMs major investment banking deals
Deal Type Adani Power Ltd Oil India Ltd Pipavav Shipyard Ltd IL&FS Transport Networks Ltd Rural Electrification Corporation Ltd HCL Info System Ltd Parsvnath Developers Ltd JSL Ltd IPO IPO IPO IPO IPO QIP QIP QIP Book Size (Rs mn) FY10 30,170 27,270 4,990 7,000 35,300 4,730 1,680 2,470 Standard Chartered Bank IDR Jaypee Infratech Ltds public offerings SJVN Ltd Nitesh Estates Ltd Orient Green Power Company Ltd Deewan Housing Finance Corporation Ltd Indusind Bank Shriram Transport Finance Company Ltd IPO IPO IPO IPO IPO QIP QIP NCD Deal Type Book Size (Rs mn) 1HFY11 24,560 22,620 10,630 4,050 9,000 3,750 11,730 5,000

Sou rc e: Com pan y, CR I SIL Equ it ies

Strong capital market volumes to drive brokerage revenues

The capital markets are witnessing increased trading volumes, which has supported JM Financials brokerage revenues. It primarily caters to the HNI segment in the broking business and is a relatively small player compared with other large broking entities. The company is focussing on expanding its retail presence and is looking at the franchise route to expand its market share. We view this retail expansion positively as the retail segment accounts for ~ 52% of market volume and there is significant growth opportunities considering the low level of house-hold investments in stock. JM Financial presently operates through a network of 25-owned branches and 375 franchises, and plans to further expand its franchise base. The franchisee route offers a low-cost operating model and could support profitability during a downturn.

The company is focussing on expanding its retail presence and is looking at the franchise route to expand its market share.

Swiftly ramping up institutional brokerage business

JM Financial has quickly scaled up its institutional equities business, post its split from Morgan Stanley. JM continues to increase its research coverage, now over 139 stocks, which helps it to cater to the requirements of institutional clients. The institutional business is gaining traction with JM Financial presently offering trading services to 116 institutional clients. The company has also started offering F&O services to institutional clients and is witnessing strong volume growth. The business is still in an investment phase and will take at least 12 to 15 months before it starts contributing to the bottom line.

Securities broking - declining yields and intense competition

The overall securities broking industry has been impacted by a rapid shift in the market trading pattern towards options, which constituted 53% of total turnover in Q2FY11 compared with 35% in Q2FY10. While the overall market turnover has increased by 35.2%, it is attributable solely to the increase in option trading volume. The brokerage charges for options are far lower than the cash segments, leading to a decline in average brokerage yields, which has impacted the performance of broking players. JM Financial continues to focus on the highyield cash segment and its presence in the low-yield F&O segment remains low,

Securities broking industry has been impacted by a shift in trading pattern towards options, which constituted 53% of total turnover in Q2FY11

CRISIL EQUITIES | 5

JM Financial Ltd
which should help it report stable broking yields going forward. We expect revenues from the broking business to expand at a CAGR of 31% during FY10FY12.

Figure 8: Market volumes skewed towards options trading

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11

11% 11%

8%

9%

16%

27% 30% 29% 34% 35% 37%

44%

51% 53%

60% 63% 64% 60% 53% 48% 45% 43% 44% 39% 39%

36%

33% 31%

28% 26% 28% 31% 31% 25% 25% 28% 26% 24% 23% 20% 16% 16%

Options

Futures

Cash

Sou rce: B SE, N SE

Strong balance sheet supports securities funding business

JM Financial, through its subsidiary JM Financial Products Pvt. Ltd, offers IPO financing and margin funding services to its clients. It has also forayed into wholesale lending under which it provides promoter funding, corporate lending and loans to real estate companies. With a revival in the capital market, the securities funding business is gaining momentum. JMs securities funding book increased to Rs 16 bn as of 1HFY11 from Rs 8.9 bn as of FY09. With continued strength in the capital market conditions, LAS and wholesale lending business are also expected to get a boost. The strong balance sheet continues to support the funding business. The NBFC has a comfortable leverage of ~ 3x while at the group level the leverage remains a low of 1.08x.

JM Financial maintains a strong balance sheet with low leverage of 1.08x

Figure 9: Securities lending book

(Rs mn) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY07 FY08 FY09 LAS FY10 1HFY11 5,369 8,876 13,275 15,776 16,000

Sou rc e: Com pan y, CR I SIL Equ it ies

CRISIL EQUITIES | 6

JM Financial Ltd
Focus on the distressed asset business
JM Financial has also entered the asset reconstruction business. The economic downturn has resulted in a sharp rise in domestic distressed loans, creating strong opportunities in the asset reconstruction business. The company is aggressively building its distressed assets portfolio under the asset

reconstruction business.

As of 1HFY11, JM Financial has acquired ~ Rs 12 bn

As of 1HFY11, JM has acquired Rs 12 bn worth of distressed assets for ~ Rs 1.3 bn.

worth of assets for ~ Rs 1.3 bn. Crisil Equities expects a large proportion of loans restructured by banks to slip to non-performing assets (NPAs) in the next two years which will provide huge opportunities for the distressed assets business. With the business still in an evolutionary phase and regulations still evolving, we believe it will take two-three years for the business to be start contributing to profitabilty.

Figure 10: Gross NPAs and restructured assets as a percentage of total advances
4.0% 3.3% 3.4% 3.6% 1600 1400 1200 1000 800 2.3% 600 400 1.5% 519 1.0% Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 E Mar-11 P 506 567 701 1086 1.7% 1512 0 200

3.5%

3.0% 2.5% 2.5% 2.5% 2.0% 2.3% 3.1%

Absolute GNPA

Gross NPAs

Restructured assets

Sou rce: CR ISIL Res ea rch

Regulatory headwind persists in AMC business

JM Financial holds a marginal presence in the AMC business with AUM of Rs 65.2 bn and a market share of ~ 1% as of September 2010. The AMC business is witnessing intense pressure on account of regulatory changes with SEBI

The AMC business is witnessing intense pressure on account of regulatory changes with SEBI banning mutual funds from charging entry loads to Investors.

banning mutual funds from charging entry loads to investors. This has resulted in increased marketing cost for fund houses and affected their ability to scale up AUM. JM Financial has registered a moderation in its asset management

business with AUM slipping to Rs 65.2 bn in September 2010 from Rs 80 bn in FY10. This has significantly impacted the profitability of the AMC business, resulting in losses which are in line with the majority of the players in the industry. We expect it to take some time for JM Financial to adjust the AMC business model profitabily in line with the regulatory changes.

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JM Financial Ltd
Figure 11: JM Financials AUM
(Rs bn) 100 90 80 70 60 50 40 30 20 10 0 55 70 78 77 87 88 88 89 89 90 95 80 86 90 57 60 71 65 0.0% 0.6% 0.4% 0.2% (%) 1.4% 1.2% 1.0% 0.8%

Jun-09

Jan-10

May-09

Nov-09

May-10

Feb-10

Mar-10

Dec-09

Sep-09

Jun-10

JM Financial AUM (LHS)

Market share (RHS)

Sou rc e: Com pan y, CR I SIL Equ it ies

Alternative asset management enjoys strong traction

JM Financial is witnessing strong opportunities in the alternative investment management business under which it operates private equity and real estate funds for institutional investors, corporates and high networth individuals. The company has launched a private equity, real estate and special situations fund under its alternative asset management arm. As of 1HFY11, the combined AUM of the private equity fund, real estate fund, and special situations group stands at around Rs.1,725 crore and is fully drawn. With the India growth story on a strong momentum, JM Financial is witnessing strong investment opportunities in the alternative asset management space and is in the process of launching a second fund with AUM of US$225 million by March 2011.

Sep-10

Jul-09

Apr-09

Aug-09

Apr-10

Jul-10

Aug-10

Oct-09

JM Financial is in the process of launching a second Alternative Asset Management fund

CRISIL EQUITIES | 8

JM Financial Ltd
Key Risks
Inherent volatility in the businesses due to linkages with the equity market
The business prospects of the company are invariably related to the level of trading activity in the equity markets. The capital markets are inherently volatile, driven by economic and political factors as well as public sentiment. Moreover, global factors also influence the fortunes of the market. Though the companys diversified business portfolio and healthy market position in each of them is likely to provide some elbowroom, investment banking, wholesale financing and asset management are also essentially linked to the performance of the equity markets. Thus CRISIL Equities believes that the companys business will continue to be driven by the state of the equity market whereby any instability in the equity markets will significantly impair its ability to deliver strong earnings growth.

CRISIL EQUITIES | 9

JM Financial Ltd
Financial Outlook
Revived capital market activities to boost revenue
CRISIL Equities expects the companys revenue to grow at a CAGR of 35% to Rs 11 bn during FY10 to FY12, buoyed by the expected strength in the capital markets. Investment banking and securities business would continue to be chief contributor to the overall revenue supported by the resurgence in primary and secondary capital market activities. However, the brokerage rates would remain under pressure as the segment is highly fragmented. The securities funding business would continue to surge with the anticipated run up in capital markets. The AMC business is expected to report muted performance on account of the regulatory changes and competition.

Figure 12: Two-year revenue CAGR of 35% likely

(Rs bn) 12,000 10,000 8,319 8,000 6,000 4,000 2,000 0 FY08 -44% FY09 FY10 FY11E FY12E 28% 5,988 4,679 8,278 38% 34% 70% 11,060 80% 60% 40% 20% 0% -20% -40% -60%

Figure 13: Segmental break-up of revenues

(Rs bn) 14000 12000 10000 8000 6000 4000 2000 0 FY08 FY09 FY10 FY11E FY12E Investment Banking and Securities Securities Funding and Fund based activities Asset Management Alternative Asset Management Others

Revenues [LHS]

Growth (y-o-y) [RHS]

Sou rc e: Com pan y, CR I SIL Equ it ies

Sou rc e: Com pan y, CR I SIL Equ it ies

Profitability to improve on increased revenues and cost rationalisation

On the operating side, the companys margins are likely to improve to around 47.6% in the next two years. JM Financial is expected to benefit from its business expanisons through the franchise route, which offers a low cost operating model. Though the employee cost is expected to rise from the current levels (on account of expanding its research strength on the institutional side), it will be largely set off by the benefits arising from rationalisation of

administrative expenses and other expenses. Adjusted PAT is expected to increase at a CAGR of 30.5% to Rs 1.9 bn in FY10-FY12. improve from Rs 1.8 in FY10 to Rs 2.6 in FY12. EPS is expected to

CRISIL EQUITIES | 10

JM Financial Ltd
Figure 14: Adj. PAT and PAT margin trend
(Rs bn) 3,000 19% 2,000 10% 1,000 0 -1,000 -2,000 -3,000 FY08 FY09 Adj PAT [LHS] FY10 FY11E FY12E -1,876 474 1,132 1,320 1,926 10% 7 0% -10% -20% -30% 0 -7 -14 -21 -13.9 FY08 FY09 ROE (%) FY10 FY11E ROCE (%) FY12E 2.5 16% 17% 30% 20%

Figure 15: Trend in RoE and RoCE

(%) 28 21 14 5.4 19.3

7.5

9.1

10.0

5.9

6.5

9.1

-23%

PAT Margin [RHS]

Sou rc e: Com pan y, CR I SIL Equ it ies

Sou rc e: Com pan y, CR I SIL Equ it ies

CRISIL EQUITIES | 11

JM Financial Ltd
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance.

Experienced management and established track record

JM Financial, led by Mr. Nimesh Kampani, offers financial services, which includes investment banking, broking (retail and institutional), wealth

management, non-banking financing, and asset management. The company mainly operates through subsidiaries, joint ventures and associate companies. Each of these businesses is headed by experienced professionals having an indepth understanding of the financial markets and their relevant business segments. Mr. Nimesh Kampani himself has over three decades of experience in the Indian capital market, and has played a pivotal role in not only making JM Financial an integrated player but also fostered the development of the financial market. CRISIL Equities expects the strong relationships fostered by the experienced senior management will hold JM Financial in good stead in the financial services space.

Competent second-ine management

JM Financial possesses a reasonably experienced second-level management who support the business built by the promoters. Several members of the senior

management, who lead various business segments and manage day-to-day operations of the company, have been with the company for more than a decade. This has provided a strong degree of stability to the firms operations. The respective business units enjoy sufficient autonomy in decision making, which enhances operational flexibility. However, in new businesses such as alternative asset management (encompassing private equity and real estate investments and investments in listed securities) and asset reconstruction, the companys mettle is as yet, unproven.

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JM Financial Ltd
Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Equities analyses the shareholding structure, board composition, typical board processes, disclosure standards and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a companys corporate governance. Overall, corporate governance at JM Financials presents good practices

supported by a strong and fairly independent board, good and relevant experience and board processes and structures broadly conforming to minimum standards.

Board composition
JM Financials board consists of well-qualified directors having experience in various fields. Based on our discussions and the companys disclosure levels, we are of the opinion that the boards structure, processes and disclosure conform to the required standards. JM Financials board consists of seven members, six of whom are non-executive directors. Of the six, five are independent directors. This is well above the minimum stipulated standards set in the SEBI listing guidelines. The audit committee is chaired by an independent director, Mr E A Kshirsagar, and has two other independent directors on board. The independent directors have an excellent reputation and standing in the business community. Many of them also serve on the boards of other large corporations. We believe that their diverse experience and profile adds strength to board dynamics and processes at JM Financial Board processes: Based on discussions, we believe that processes being followed by the company related to board meetings, agenda papers,

documentation etc are good, and the level of engagement of independent directors is high.

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JM Financial Ltd
Valuation Grade: 5/5
We have arrived at a fair value of Rs 45 per share based on the SoTP method

We continue to value JM Financial based on the sum-of-the-parts valuation method. Based on our valuation, we have fundamentally value the company at Rs 45 per share. This fair value implies P/E multiples of 25.5x FY11E and 17.4x FY12E earnings. The stock price has corrected by 30% since our previous update report dated November 03, 2010. Hence, we are revising our valuation grade to 5/5, indicating that the fair value has strong upside from the current level.

Key elements of our valuation

We have used the P/E multiple to value JM Financials investment banking and broking business. We have assigned the business a forward P/E multiple of 13 times based on FY12 earnings. We have used the P/BV multiple to value its

securities funding business. We have valued the business at 1.5x the book value of the NBFC. The asset management business and the alternative asset management business are valued using the percentage of AUM method. Other Investments and Cash are valued at book value. Overall the business is valued at FY12 P/BV of 1.6x Valuation Business Investment Banking and Securities Securities Funding and Fund based activities Asset Management * Alternative Asset Management Other investments and cash Price/Book Value (P/BV) % of AUM % of AUM 1.5 2% 4% Asset Management Alternative assets - average fund valuation Valued at Book Value Total valuation No of shares (nos. million) Fair Value/share 130 680 12,077 33,606 750 45 Parameter Price/Earnings (P/E) Multiple Remarks 13 In line with average market P/E In line with other NBFCs (Rs mn) 8,515 12,204

Peer comparison
Companies JM Financial Peers Motilal Oswal Financial Services India Infoline Religare Enterprises Ltd 23,856 24,719 64,555 424 1,520 923 1,722 2,241 126 1,987 2,842 2,523 3.0 5.4 12.3 10.8 7.5 0.9 13.0 9.5 18.9 55.4 21.3 64.0 14.2 11.8 NM 11.7 9.5 25.7 4.98 2.9 2.5 NA 1.3 2.5 NA 1.2 2.3 M Cap (Rs mn) 24,593 Net Profit (Rs mn) FY10 FY11E FY12E 1,132 1,450 2,021 EPS FY10 FY11E FY12E 1.51 1.76 2.57 Price/earnings (x) FY10 FY11E FY12E 25.0 16.0 11.0 Price/book (x) FY10 FY11E FY12E 1.4 1.0 1.0

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JM Financial Ltd
Figure 16: One-year forward P/E band
(Rs) 80 70 60 50 40 30 20 10 0

Figure 17: One-year forward P/BV band

(Rs) 80 70 60 50 40 30 20 10 0 Jul-08 Jul-09 Jan-09 Jan-10 Jul-10

Jan-09

Jan-10

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J M Financial Ltd. 1.5x

0.5x 2.0x

1.0x 2.5x

J M Financial Ltd.

12x

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Sou rce: N SE, CR ISIL Equ iti es

Sou rce: N SE, CR ISIL Equ iti es

Figure 18: P/E premium / discount to NIFTY

400%

Figure 19: P/E movement

120 100 80

300%

200%

60
100%

+1 std dev 40 20 -1 std dev 0

0%

-100% Jan-09 Jan-10 Apr-08 Apr-09 Apr-10 Oct-08 Oct-09 Oct-10 Jan-11 Jul-08 Jul-09 Jul-10

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Premium/Discount to NIFTY

Median premium/discount to NIFTY

1yr Fwd PE (x)

Median PE

Sou rce: N SE, CR ISIL Equ iti es

Sou rce: N SE, CR ISIL Equ iti es

CRISIL EQUITIES | 15

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JM Financial Ltd
EARNINGS REVISION SUMMARY
Based on our interaction with the management, we have revised our earnings estimates for JM Financials. The management indicated that they have started making provisions for employee bonuses on a quarterly basis as against the earlier process of provisioning in the fourth quarter, which has been included in the employees salaries. We had assumed one time provisioning cost to be made in the fourth quarter and assumed higher levels of empoyee cost. To reflect this change we have lowered our employee expense estimates. As a result, the

estimated EBITDA margin has increased to 47.6% for FY11 and FY12 from 43.6%. In line with this PAT estimates have been revised upwards by 3.9% and 4.2% respectively for FY11 and FY12. FY11E Unit (Rs mn) (Rs mn) % (Rs mn) % Rs Old 8,295 3,570 43.0% 1,271 15% 1.7 New 8,278 3,940 47.6% 1,320 17.50% 1.8 % change -0.21% 10.35% 460 bps 3.9% 252 bps 3.9% Old 11,105 4,777 43% 1,849 17% 2.5 FY12E New 11,060 5,264 47.60% 1,926 18.30% 2.6 % change -0.41% 10.20% 459 bps 4.2% 128 bps 4.2%

Particulars Operating income EBITDA EBITDA margin PAT PAT margin EPS

CRISIL EQUITIES | 16

JM Financial Ltd
Company Overview
Incorporated in 1975, JM Financial is an integrated financial services player offering a range of products and services across the capital market space to corporates, HNIs and retail investors. The company has interests in investment banking, broking institutional and retail, institutional equity sales and trading, commodity broking, wealth management, portfolio management, asset

management, NBFC activities, private equity and asset reconstruction business. These businesses are managed as strategic business units and organised as a separate company headed by a team of professionals. The years of experience and ability to offer financial solution meeting the requirements of its clients have helped JM establish itself as a leading player in the Indian capital markets.

JM Financial organisation structure

JM Financial Limited

JM Financial Asset Management Pvt. Ltd.

JM Financial Products Pvt. Ltd.

JM Financial Investment Managers Ltd.

JM Financial Consultants Pvt. Ltd.

JM Financial Holdings (Mauritius) Limited

JMF-BR Investment Holdings (Mauritius) Limited

JM Financial Ventures Ltd.

Infinite India Investment Management Pvt. Ltd.

JM Financial Securities Pvt. Ltd.

JM Financial Services Pvt. Ltd.

JM Financial Institutional Securities

JM Financial Overseas Holdings Pvt. Ltd.

Oracle Enterprises Pvt. Ltd.

JM Financial Commtrade Ltd.

JM Financial Insurance Broking Pvt. Ltd.

Persepolis Investment Ltd.

Persepolis PIPE & Investment Ltd.

Sou rc e: Com pan y, CR I SIL Equ it ies

Business overview
JM offers a range of capital market products and services through its several subsidiaries/joint ventures and associate companies. The businesses are broadly grouped as follows.

CRISIL EQUITIES | 17

JM Financial Ltd
JM Financial break-up of businesses
JM FINANCIAL

Investment Banking and

Securities Funding and Fund Based

Loan against securities

Alternative Investment
Private Equity Fund

Asset Management

Capital Raising

Mutual Fund

M/A and Restructuring Priavte Equity Advisory

IPO funding

Real Estate Fund Special Situations Fund

Sponsor funding

Stock Broking Private Wealth Managem ent Portfolio Managem ent Depository Services

Securitisation

Asset Reconstruction

Sou rc e: Com pan y, CR I SIL Equ it ies

Milestones
1975 1986 1997 Establishment of JM Financial & Investment Consultancy Services Pvt. Ltd Ventured into stock broking and securities broking business Joint venture with Morgan Stanley to offer investment banking and securities broking services 2006 Launch of private equity fund, JM Financial India Fund, with US-based Old Lane Partners, LP 2007 Termination of Joint Venture with Morgan Stanley Acquired 60% stake in ASK securities specialised in institutional broking business Launch of Real Estate Fund 2008 Acquired the remaining 40% stake in ASK securities and was rechristened as JM Financial Institutional Securities Pvt. Ltd. 2010 Strategic co-operation with Rand Merchant Bank of South Africa to offer M&A advisory services to Indian and African corporates.

CRISIL EQUITIES | 18

JM Financial Ltd
Annexure: Financials
Income statement (Rs mn) Operating income EBITDA EBITDA margin Depreciation EBIT Interest Operating PBT Other income Exceptional inc/(exp) PBT Tax provision Minority interest PAT (Reported) Less: Exceptionals Adjusted PAT Ratios FY08 Growth Operating income (%) EBITDA (%) Adj PAT (%) Adj EPS (%) Profitability EBITDA margin (%) Adj PAT Margin (%) RoE (%) RoC E (%) RoIC (%) Valuations Price-earnings (x) Price-book (x) EV/EBITDA (x) EV/Sales (x) Dividend payout ratio (%) Dividend yield (%) B/S ratios Inventory days Creditors days Debtor days Working capital days Gross asset turnover (x) Net asset turnover (x) Sales/operating assets (x) Current ratio (x) Debt-equity (x) Net debt/equity (x) Interest coverage Per share FY08 Adj EPS (Rs) CEPS Book value Dividend (Rs) Actual o/s shares (mn) (2.5) (2.4) 26.3 1.2 749.8 FY09 0.6 0.8 25.0 0.2 749.8 FY10 1.5 1.7 26.5 0.6 749.8 FY11E 1.8 1.9 27.6 0.6 749.8 FY12E 2.6 2.7 29.1 0.8 749.8 5.1 0.5 (0.1) 3.1 7.4 0.1 (0.3) 2.2 9.6 0.9 0.4 3.7 7.0 1.2 0.8 2.2 8.3 1.6 1.1 2.3 Quarterly financials (Rs mn) Net Sales C hange (q-o-q) EBITDA C hange (q-o-q) EBITDA margin PAT Adj PAT C hange (q-o-q) Adj PAT margin Adj EPS Q2FY10 1,747 -25% 1,004 -20% 57.5% 578 578 2% 33.1% 0.76 Q3FY10 1,571 -10% 587 -42% 37.4% 352 352 -39% 22.4% 0.48 Q4FY10 1,715 9% 476 -19% 27.8% 212 212 -40% 12.4% 0.28 Q1FY11 1,930 13% 807 70% 41.8% 304 304 43% 15.8% 0.41 Q2FY11 2,328 21% 1,254 55% 53.9% 564 564 86% 24.2% 0.77 NM NM NM NM 13.7 34.7 NM NM NM NM 5.9 13.5 NM NM NM NM 6.9 16.7 NM NM NM NM 9.5 29.7 NM NM NM NM 12.4 61.5 (21.1) 2.0 9.6 4.8 6.6 2.2 32.5 0.8 7.3 2.4 (16.3) 1.1 25.0 1.4 16.5 7.0 28.5 1.6 16.0 1.0 9.8 4.7 32.5 2.0 11.0 1.0 8.7 4.1 32.5 3.0 49.0 (22.5) (13.9) 19.3 295.9 31.6 10.1 2.5 5.4 (15.7) 38.7 18.9 5.9 7.5 13.0 47.6 16.0 6.5 9.1 9.4 47.6 17.4 9.1 10.0 10.3 Cash flow (Rs mn) Pre-tax profit Total tax paid Depreciation Working capital changes Net cash from operations Cash from investments C apital expenditure Investments and others Net cash from investments Cash from financing Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Net cash from financing C hange in cash positon C losing cash (36) 6,334 (878) (15,179) (9,759) 8,339 9,024 (1) (8,895) (176) 1,818 (7,254) (3,778) 5,246 17,080 (439) (390) 16,251 (392) 4,854 7,039 (502) 0 6,538 (866) 3,988 9,092 (732) 8,360 1,591 5,579 (1,301) (6,481) (7,781) (661) 2,871 2,210 (65) (3,932) (3,998) (40) (800) (840) (40) (700) (740) FY08 17,890 (3,403) 98 (8,379) 6,205 FY09 (799) (409) 121 3,905 2,819 FY10 2,019 (499) 120 (14,695) (13,055) FY11E 2,063 (743) 121 (8,005) (6,563) FY12E 2,875 (949) 118 (8,074) (6,029) 69.6 69.2 (252.4) (252.4) (43.8) (63.7) (125.3) (125.3) 28.0 56.6 138.7 138.7 38.2 70.0 16.7 16.7 33.6 33.6 45.9 45.9 FY09 FY10 FY11E FY12E FY08 8,319 4,074 49.0% 98 3,977 1,297 2,679 15,211 17,890 4,555 13,335 15,211 (1,875.6) FY09 4,679 1,480 31.6% 121 1,359 604 755 (1,553) (799) 281 (1,079) (1,553) 474.1 FY10 5,988 2,317 38.7% 120 2,197 588 1,609 409 2,019 478 1,541 409 1,131.5 FY11E 8,278 3,940 48.0% 121 3,818 1,755 2,063 2,063 743 1,320 1,320.3 FY12E 11,060 5,264 47.6% 118 5,145 2,270 2,875 2,875 949 1,926 1,926.4 Balance Sheet (Rs mn) Liabilities Equity share capital Reserves Minorities Net worth C onvertible debt Other debt Total debt Deferred tax liability (net) Total liabilities Assets Net fixed assets C apital WIP Total fixed assets Investments Current assets Inventory Sundry debtors Loans and advances C ash & bank balance Marketable securities Total current assets Total current liabilities Net current assets Intangibles/Misc. expenditure Total assets 49 2,666 14,744 9,024 3,111 29,593 5,766 23,828 1,130 31,082 789 428 8,891 5,246 1,919 17,274 2,320 14,954 1,597 21,067 7,462 1,143 17,654 4,854 5,015 36,128 3,777 32,351 1,608 39,247 12,473 3,402 21,210 3,988 5,315 46,388 6,597 39,791 1,608 47,105 13,635 4,545 27,210 5,579 5,515 56,484 6,828 49,655 1,608 57,392 306 31 337 5,787 386 24 410 4,107 333 12 344 4,944 224 39 263 5,444 136 49 185 5,944 300 18,029 1,381 19,710 10,235 10,235 1,137 31,082 750 16,725 1,244 18,719 1,340 1,340 1,009 21,068 750 17,819 1,271 19,840 18,420 18,420 988 39,247 750 18,638 1,271 20,658 25,459 25,459 988 47,105 750 19,832 1,271 21,853 34,552 34,552 988 57,392 FY08 FY09 FY10 FY11E FY12E

Source: CRISIL Equities

CRISIL EQUITIES | 19

JM Financial Ltd
Focus Charts
FII Investments in India on the rise
(Rs bn)

Funds raised from primary markets

(Rs bn)

40 30 20 10 10 0 10.4 9.4 6.8 4% -10%

141% 28% -28% -160%

200% 100% 0% -100% -200%

1,200 1,000 800 600 400 200 0 FY07 IPO FPO FY08 Rights Issue FY09 QIP FY10 Total

16.4 -9.8

30.3 -409%

38.8

-300% -400% -500%

-10

Net FII Investments

y-o-y growth (RHS)

Sou rc e: Com pan y, CR I SIL Equ it ies

YTDFY11

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Sou rc e: Com pan y, CR I SIL Equ it ies

JMs ranking and market share of domestic equity offering

14 10.0% 12 7.0% 10 8 6 4 2 4 0 FY08 FY09 Ranking (LHS) FY10 1HFY11 Market Share (RHS) 6 13 12 3.3% 10% 9% 8% 7% 6% 5% 3.0% 4% 3% 2% 1% 0%

Two-year revenue CAGR of 35% likely

(Rs bn)

12,000 10,000

70%

11,060

80% 60%

8,319 8,000 6,000 4,000 2,000 0 FY08 -44% FY09

28% 5,988 4,679

8,278 38% 34%

40% 20% 0% -20% -40% -60%

FY10

FY11E

FY12E

Revenues [LHS]

Growth (y-o-y) [RHS]

Sou rc e: Com pan y, CR I SIL Equ it ies

Sou rc e: Com pan y, CR I SIL Equ it ies

PAT and PAT margin trend

(Rs bn)

Shareholding pattern over the quarters

100% 30% 90% 80% 70% 24% 0% 9% 24% 0% 9% 24% 0% 9% 24% 0% 10% 23% 0% 10%

3,000 19% 2,000 10% 1,000 0 -1,000 -2,000 -3,000 FY08 FY09 Adj PAT [LHS] FY10 FY11E FY12E -1,876 474 1,132 1,320 1,926 16% 17%

20% 10% 0% -10% -20% -30%

60% 50% 40% 30% 20% 10% 0% Sep-09 Promoter Dec-09 FII Mar-10 DII Jun-10 Sep-10 Others 66% 66% 66% 66% 66%

-23%

PAT Margin [RHS]

Sou rc e: Com pan y, CR I SIL Equ it ies

Sou rc e: Com pan y, CR I SIL Equ it ies

CRISIL EQUITIES | 20

CRISIL Independent Equity Research Team

Mukesh Agarwal Tarun Bhatia Chetan Majithia Sudhir Nair Nagarajan Narasimhan Ajay D'Souza Manoj Mohta Sachin Mathur Sridhar C Director Director, Capital Markets Head, Equities Head, Equities Director, Research Head, Research Head, Research Head, Research Head, Research +91 (22) 3342 3035 +91 (22) 3342 3226 +91 (22) 3342 4148 +91 (22) 3342 3526 +91 (22) 3342 3536 +91 (22) 3342 3567 +91 (22) 3342 3554 +91 (22) 3342 3541 +91 (22) 3342 3546 magarwal@crisil.com tbhatia@crisil.com chetanmajithia@crisil.com snair@crisil.com nnarasimhan@crisil.com adsouza@crisil.com mmohta@crisil.com smathur@crisil.com sridharc@crisil.com

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