Rationale

The rating reaffirmation factors in the demonstrated track record and established franchise of the JM Financial Group (the Group) in the domestic financial services industry, its diversified revenue stream and healthy financial profile with steady profitability and an adequate capitalisation level. While assigning the rating, ICRA has taken a consolidated view of the Group (i.e. JM Financial Limited, JMFL, on a consolidated basis) due to the close linkages between the Group entities, given the common promoters and senior management team, shared brand name, and strong financial and operational synergies. Moreover, ICRA expects the financial, managerial and operational support from the Group to continue to be available to all key Group companies. The strengths are partially offset by the exposure to the volatility in capital markets, the inherent risk profile of key segments like real estate and promoter funding, and the portfolio concentration in the wholesale lending segment (~88% of the total book as on September 30, 2020), which could result in a sharp deterioration in the asset quality in case of slippages. The real estate sector has been facing a prolonged slowdown due to subdued sales and lack of funding access. The spread of the Covid-19 pandemic and the resulting nationwide lockdown further impacted the real estate sector. While the pressure on the developers during the lockdown was mitigated due to the moratorium offered for their loan instalments under the Covid-19-related regulatory package announced by the Reserve Bank of India (RBI), a sustained pickup in sales across geographies is key for the developers over the medium term. The asset quality, though healthy, moderated in recent quarters with the gross non-performing assets (GNPAs) increasing to 1.69%1 of the loan book as on September 30, 2020 from 1.27% as on September 30, 2019 and 0.68% as on March 31, 2019 (partly also due to the base effect of a declining loan book). The SMA 2 accounts also increased to 2.86%1 of the loan book as on September 30, 2020 from 2.40% as on September 30, 2019 and 1.25% as on March 31, 2019. While the asset quality remains to be a key monitorable, the presence of adequate collateral along with the Group's conservative underwriting norms, adequate risk management systems and proactive monitoring and resolution process provides comfort. The Group's capitalisation profile is healthy, with the leverage being lower than that of its peers, which provides it with financial flexibility as well as the ability to absorb losses, if needed. JMFL's consolidated net worth was Rs. 9,062 crore as on September 30, 2020, with a capital adequacy ratio of 42.5%. JMFL raised equity capital of Rs. 770 crore in June 2020 to shield itself from the uncertainties surrounding the Covid-19 pandemic and its impact on the economy. Supported by the capital raise, the Group's net gearing improved to 0.89 times as on September 30, 2020 from 1.04 times as on March 31, 2020. While the deployment of fresh capital is unlikely in the near term given the limited lending, the same is likely to support the capital structure from any large slippages in the asset quality. The Group made additional provisions (including a fair value loss) of Rs. 175.21 crore in Q4 FY2020 and Rs. 123.25 crore in H1 FY2021 (1.4% of average total assets on a cumulative basis) towards the potential impact of the pandemic, as assessed by the management, on the Group's business. Going forward, the Group's ability to manage its asset quality over the near-to-medium-term would remain critical. The ratings also take into account the risks associated with the distressed assets business, given the nature of the underlying assets, the focus on large ticket exposures, the protracted resolution process and the uncertainty associated with the same. While assigning the ratings, ICRA has noted the continued challenges in resource mobilisation stemming from the current operating environment and the risk-averse sentiment of investors towards non-banks, particularly wholesale-oriented entities. The Group's elevated cost of funds, despite a ~30 bps decline in H1 FY2021 to 9.9% (it had increased by ~80 bps in FY2020), is expected to limit its growth potential in the lending business in the nearto-medium-term. However, ICRA notes that the Group raised ~Rs. 450 crore from banks in Q1 FY2021 under the targeted long-term repo operations (TLTRO) of the RBI and ~Rs. 500 crore in Q2 FY2021. Following the onset of the liquidity crisis for non-banking financial companies (NBFCs), there has been a change in the Group's debt maturity profile with the share of short-term debt declining to ~9% as on March 31, 2020 from ~27% as on March 31, 2019. The share of short-term debt has since increased to ~17% as on September 30, 2020 largely in line with the increase in the short-term assets. Given the prominence of the lending business in the Group's revenue profile, its ability to manage its asset and liability profile, particularly considering the current operating environment, would remain critical. ICRA takes comfort from the Group's adequate liquid assets and its ability to raise funds from the market when required, as demonstrated in the past. As on September 30, 2020, the Group had cash and cash equivalents of Rs. 2,831 crore (~26% of gross debt) and unutilised credit lines of Rs. 726 crore, covering the short-term debt repayments. Going forward, the Group's ability to generate adequate fee income and scale up its lending operations, while keeping the asset quality under check and maintaining healthy profitability, capitalisation and asset liability profile, would remain critical from the credit perspective.