Systematix Shares and Stocks (India) Limited

January 31, 2019

Summary of rating action

Previous Rated Current Rated
Instrument* Rating Action
Amount(Rs. crore) Amount(Rs. crore)
Long-term fund-based bank lines 21.50 21.50 [ICRA]BBB- (Stable); reaffirmed
Short-term non-fund based bank lines 78.50 78.50 [ICRA]A3; reaffirmed
Total 100.00 100.00
*Instrument details are provided in Annexure-1

Rationale
The reaffirmation of the ratings reflects Systematix Shares and Stocks (India) Limited’s (SSSIL) long-standing experience in
equity broking, its favourable capitalisation levels with negligible gearing levels, and adequate risk management systems.
The ratings are, however, constrained by the company’s modest scale of operations, low diversification of business
revenues with operations largely focused on retail broking, and high dependence on capital market related activities
which are inherently cyclical in nature. While reaffirming the ratings, ICRA has taken note of the company’s attempts at
scaling up its new lines of business, namely, portfolio and wealth management. The increase in operating expenses with
the significant ramp-up in the employee base for the new businesses resulted in losses at the operating and net level in
H1 FY2019. The closure of certain large-ticket transactions, currently underway, would help support the profitability for
the entire fiscal. Going forward, SSSIL’s ability to successfully ramp up the new businesses, diversify the revenue base
and improve the profitability level would remain critical from a credit perspective.

Outlook: Stable
While the company had reported profitable operations across market cycles in the past, the significant expenses arising
from the setting up of the new businesses resulted in a loss in H1 FY2019. The outlook may be revised to Negative if the
company is unable to achieve breakeven in the new businesses and close the ongoing transactions, thereby resulting in
continued losses. The outlook may be revised to Positive on significant scaling up of the new businesses along with
greater diversification in the revenue stream, healthy performance of the broking business, and a sustained and
meaningful improvement in profitability, which will further strengthen the company’s financial risk profile.

Key rating drivers

Credit strengths
Long track record of promoter group in equity broking business – The Systematix Group has a track record of nearly two
decades in equity broking and other capital market related businesses. Prior to the incorporation of SSSIL in 1995, the
promoters undertook broking activities in their personal capacity. The company draws considerably from the promoters’
experience in the business. The Systematix Group, through its other Group companies, has a diversified portfolio
including other capital market related business activities such as distribution of financial products, e-broking, portfolio
management services, wealth management, commodity broking and debt syndication apart from equity broking.

1
Healthy capitalisation level with negligible debt - The company’s capitalisation levels are comfortable with a net worth
of Rs. 38.16 crore and negligible debt levels as of September 30, 2018. Traditionally, the company has maintained a low
debt level. SSSIL’s liquidity profile is supported by the comfortable utilisation of the margins placed with the stock
exchanges (generally in the range of 60-65%), the presence of unutilised bank lines (Rs. 21.50 crore as of September 30,
2018) and ready access to clients’ assets (backed by share collateral) that can be monetised without a significant lag. The
company also has an intraday facility from Axis Bank (Rs. 20 crore) for meeting temporary increases in margin
requirements.

Credit challenges
Modest scale of broking operations dominated by retail broking volume - SSSIL’s broking volumes increased to Rs.
48,543 crore in FY2018 from Rs. 29,282 crore in FY2017, registering a growth of ~66%, supported by the favourable
capital markets. The company’s market share, however, remained low at 0.03% in FY2017 and FY2018. SSSIL’s market
share contracted further in H1 FY2019 to 0.02% due to degrowth in the cash segment coupled with stagnant futures and
options (F&O) turnover. SSSIL is primarily focused on the retail segment, which contributed over 90% to the total
volumes till FY2018. The company increased its focus on the institutional segment over the past few years with improved
coverage and quality of research and by adding more institutional clients. Supported by this, the share of the
institutional segment increased to 34% in FY2018 (40% in H1 FY2019) from 8% in FY2016.

Limited diversification in revenues, with operations focused on broking; losses in H1 FY2019 owing to foray in new
businesses - The broking business accounted for 77% of the total revenues in FY2018 while income from IPO,
commission and incentive received accounted for 11%. The company forayed into new segments like wealth
management and portfolio management in FY2018 and significantly scaled up the resources (for instance, the employee
base) for the same and even brought in senior professionals for leadership roles. This, in turn, led to a significant increase
in operating expenses resulting in a loss of Rs. 5.21 crore in H1 FY2019 compared to a net profit of Rs. 1.07 crore in
FY2018. SSSIL, however, has certain large-ticket transactions on the anvil, the closure of which would support the
profitability for the entire fiscal. Going forward, SSSIL’s ability to successfully ramp up the new businesses, diversify the
revenue base and improve the profitability level would remain critical from a credit perspective.

Dependence on inherently fluctuating and highly competitive capital markets – SSSIL’s revenues remain dependent on
capital markets, which are inherently volatile in nature. Moreover, with increasing competition in equity broking and the
advent of discount brokerage houses, average yields for broking players have been under pressure. With the competitive
intensity in the industry expected to remain high, the pressure on the industry margin is expected to continue. However,
the increasing financialisation of savings, coupled with the low share of wallet of the equity segment in household
savings, indicates untapped potential for rapid expansion in the broking market over the long term.

Liquidity position
The company’s liquidity position is supported by the margin deposits from clients and sanctioned bank lines. As of
October 1, 2018, the company had Rs. 84.98 crore of deposits under lien with exchanges while Rs. 60.01 crore was the
margin placed by its client. The company also had unutilised bank lines of Rs. 21.50 crore as of September 30, 2018 and
ready access to clients’ assets. It also has an intraday facility from Axis Bank (Rs. 20 crore) for meeting temporary
increases in margin requirements.

Analytical approach
Analytical Approach
Applicable Rating Methodologies
Parent/Group Support
Consolidation/Standalone
Comments
Rating Methodology for Brokerage Houses
Not applicable
The rating is based on the standalone financial statements

2
About the company
Incorporated in 1995, Systematix Shares and Stocks (India) Limited (SSSIL) is primarily engaged in retail and institutional
equity broking, and also provides wealth management and portfolio management services. SSSIL is a subsidiary of
Systematix Corporate Services Limited (SCSL) and is a part of the Systematix Group, which refers to the group of
companies promoted and managed by Mr. C.P. Khandelwal. Incorporated in 1985, SCSL is listed on the Bombay Stock
Exchange and National Stock Exchange (NSE). It serves as the flagship company of the Systematix Group and holds a
category 1 merchant banking licence issued by the Securities and Exchange Board of India (SEBI). The other Group
companies within the Systematix Group are engaged in commodity trading, loan against shares, and corporate advisory.
SSSIL has pan-India operations with a presence in more than 500 locations via branches and franchisees servicing 58,000
plus clients spread across 19 states and ~132 cities.

Key financial indicators (standalone)

Particulars FY2017 FY2018 H1 FY2019

Brokerage Income (net) 15.06 21.42 8.89

Net Interest Income 1.24 1.33 0.63
Other Non-interest Income 3.19 5.01 1.84
Net Operating Income (NOI) 19.49 27.76 11.36
Total Operating Expenses 17.32 27.46 16.59
Profit before Tax (PBT) 2.09 1.56 -5.23
Adjusted Profit after Tax (PAT) 1.43 1.07 -5.21
Net Worth 42.3 43.37 38.16
Cost to Income Ratio 88.87% 98.92% 146.04%
PBT/NOI 10.72% 5.62% NM
Adjusted PAT/NOI 7.34% 3.85% NM
Return on Net Worth 3.44% 2.50% NM
Amounts in Rs. crore; All ratios as per ICRA calculations
NM: Not meaningful

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

3
Rating history for last three years
Instrument Current Rating (FY2019) Chronology of Rating History for the Past
3 Years
Type Amount Amount FY2018 FY2017 FY2016
Rated Outstanding
(Rs. (Rs. crore)
crore)
Jan-19 Dec-17 Sep-16 May-15
1 Long-term fund-based Long 21.5 21.5 [ICRA]BBB- [ICRA]BBB- [ICRA]BBB- [ICRA]BBB-
bank lines Term (Stable) (Stable) (Stable) (Stable)
2 Short-term non-fund Short 78.5 78.5 [ICRA]A3 [ICRA]A3 [ICRA]A3 [ICRA]A3
based bank lines Term

Complexity level of the rated instrument

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The
classification of instruments according to their complexity levels is available on the website www.icra.in

4
Annexure-1: Instrument details
Date of Amount
Issuance / Maturity Rated Current Rating
ISIN No Instrument Name Sanction Coupon Rate Date (Rs. crore) and Outlook
Long-term fund-based [ICRA]BBB-
NA NA NA NA 21.50
bank lines (Stable)
Short-term non-fund
NA NA NA NA 78.50 [ICRA]A3
based bank lines
Source: Systematix Shares and Stocks (India) Limited

Annexure-2: List of entities considered for consolidated analysis – Not applicable

5
ANALYST CONTACTS
Karthik Srinivasan Samriddhi Chowdhary
+91 22 6114 3444 +91 22 6114 3462
karthiks@icraindia.com samriddhi.chowdhary@icraindia.com

Sudam S Shingade Sainath Chandrasekaran

+91 22 6169 3425 +91 22 6114 3439
sudam.shingade@icraindia.com sainath.chandrasekaran@icraindia.com

RELATIONSHIP CONTACT
Mr. L. Shivakumar
+91 22 6169 3406
shivakumar@icraindia.com

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com

Helpline for business queries:

+91-124-2866928 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services
companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit
Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.

For more information, visit www.icra.in

6
ICRA Limited
Corporate Office
Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002
Tel: +91 124 4545300
Email: info@icraindia.com
Website: www.icra.in

Registered Office
1105, Kailash Building, 11th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001
Tel: +91 11 23357940-50

Branches

Mumbai + (91 22) 24331046/53/62/74/86/87

Chennai + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294,
Kolkata + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008,
Bangalore + (91 80) 2559 7401/4049
Ahmedabad+ (91 79) 2658 4924/5049/2008
Hyderabad + (91 40) 2373 5061/7251
Pune + (91 20) 2556 0194/ 6606 9999

© Copyright, 2019 ICRA Limited. All Rights Reserved.

Contents may be used freely with due acknowledgement to ICRA.

ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of
surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA’s current opinion on the relative capability of the issuer
concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any ICRA
office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to
be accurate and reliable, including the rated issuer. ICRA however has not conducted any audit of the rated issuer or of the information provided by it.
While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any
kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such
information. Also, ICRA or any of its group companies may have provided services other than rating to the issuer rated. All information contained
herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication
or its contents