![HDFC Securities Limited: Ratings Reaffirmed; [ICRA]A1+ Assigned to Enhanced CP Programme](http://data.docslib.org/img/bdb57e95aec8f7511f1f9d46724ebdb7-1.webp)
March 16, 2021
HDFC Securities Limited: Ratings reaffirmed; [ICRA]A1+ assigned to enhanced CP programme
Summary of rating action
Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Commercial paper 2,000.00 5,000.00 [ICRA]A1+; assigned/reaffirmed programme Long-term fund-based bank 200.00 200.00 [ICRA]AAA (Stable); reaffirmed lines Long-term/short-term [ICRA]AAA (Stable)/[ICRA]A1+; 100.00 100.00 unallocated bank lines reaffirmed Total 2,300.00 5,300.00
*Instrument details are provided in Annexure-1
Rationale
The assigned/reaffirmed ratings factor in the strong parentage of HDFC Securities Limited (HSL), which is a subsidiary of HDFC Bank Limited (HDFC Bank; 96.4% stake in HSL), its strong linkages with the parent and the shared brand name. The company draws managerial and operational support from HDFC Bank, as evident from the senior management deputations, customer sourcing and cross-selling support, and access to the bank’s retail clientele, branch network and infrastructure. The ratings also consider HSL’s strong retail franchise, supported by its position as a bank brokerage house, and its healthy financial profile characterised by its strong profitability and adequate capitalisation.
While assigning/reaffirming the ratings, ICRA has also factored in the company’s plans to grow its e-margin (margin trading facility; MTF) book. HSL’s gearing is expected to increase as ICRA expects the growth in the MTF book to be predominantly debt funded. The company’s healthy capitalisation profile at present (gearing of 0.82 times as of December 31, 2020) provides adequate headroom to grow the MTF business over the near term. The ratings also take into account the limited diversification in HSL’s business profile, the risks associated with capital markets related businesses, and the intense competition in the retail broking space. HSL’s ability to scale up the broking volumes and the MTF book while maintaining adequate capitalisation (as it is a dividend-paying entity) as well as asset quality (in the MTF book) will remain a key monitorable.
Key rating drivers and their description
Credit strengths
Strong parentage with well-demonstrated track record of support from the parent – HSL is a subsidiary of HDFC Bank, which holds a stake of ~96% in the company. HSL draws the advantage of strong operational linkages with HDFC Bank, as demonstrated by the senior management deputations to the company (from HDFC Bank). HSL helps augment the service portfolio of HDFC Bank and enjoys customer-sourcing and cross-selling support and access to the bank’s retail clientele, branch and infrastructure network. The strong parentage and shared brand name strengthen ICRA’s assumption that HSL will receive timely and adequate support (both financial and operational) from HDFC Bank, if required.
Strong retail broking presence – HSL, a full-service brokerage house, is primarily a retail broking player (~97% of the total broking volumes in 9M FY2021 were sourced from the retail segment) that focuses mainly on domestic and high net worth clients. The company has a strong retail franchise, supported by its position as a subsidiary of HDFC Bank. It registered a healthy uptick in trading volumes in the current fiscal with its average daily turnover (ADTO) increasing to Rs. 9,172 crore in 9M FY2021 (total volume of Rs. 17.24 lakh crore) from Rs. 6,990 crore in FY2020 (total volume of Rs. 17.27 lakh crore),
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registering a growth of 31% (ADTO was Rs. 5,419 crore in FY2019). The retail segment accounted for 97% of the broking volumes, up from 92% in FY2020. The share of the derivatives segment in HSL’s total broking volume is increasing, in line with the trend observed in the industry. The share of the derivatives segment’s volumes stood at 85% in 9M FY2021 compared to 86% in FY2020 and FY2019 and 80% in FY2018, though it was below the industry average (~97%). HSL had a share of 0.42% in the broking market in 9M FY2021 compared to 0.49% in FY2020.
Higher-than-industry-average broking yields – HSL’s average broking yields are higher than its peers due to the higher proportion of volumes from the retail cash segment (15% in 9M FY2021 and 14% in FY2020). The blended yield improved to 4.16 bps in 9M FY2021 from 3.27 bps in FY2020.
Healthy profitability and comfortable capitalisation – HSL’s operating costs are lower than the industry average due to the sharing of branch network and other infrastructure with HDFC Bank. In FY2020, the company’s cost-to-income ratio increased to 39.60% from 37.60% in FY2019 due to a ~29% increase in employee cost (HSL has set up a sperate team to cater to institutional clients). In 9M FY2021, the cost-to-income ratio moderated to 32.25% primarily due to the growth in the operating income. The net operating income (NOI) grew ~66% YoY to Rs. 917.5 crore in 9M FY2021 from Rs. 551.6 crore in 9M FY2020 owing to the strong growth in the broking volumes. HSL reported a profit after tax (PAT) of Rs. 458.7 crore (PAT to NOI of 50.00%) in 9M FY2021 compared to a PAT of Rs. 250.0 crore (PAT/NOI of 45.32%) in 9M FY2020. The company’s ability to maintain the margins and healthy asset quality in case of volatilities in the capital market would remain important. HSL has a comfortable capitalisation profile with a net worth of Rs. 1,507.3 crore as on December 31, 2020. ICRA notes that despite the healthy profitability, regular dividend payouts limit the accretion to reserves. The capitalisation profile is currently supported by the low debt level (gearing of 0.82 times as on December 31, 2020) though the gearing is expected to increase in the near term as the company is focusing on growing its MTF book.
Credit challenges
Exposed to risks inherent in capital markets related businesses – HSL’s revenues remain dependent on capital markets, which are inherently volatile in nature. For 9M FY2021, HSL reported a sizeable (~73% YoY) increase in broking and fee income supported by the recovery in the capital markets after the sharp correction in March 2020. HSL’s net brokerage income accounted for ~65-80% of the NOI, reflecting its limited presence in other capital market businesses. However, the company has been trying to diversify by increasing its focus on the distribution business and the lending business in the form of MTF, to impart stability to the overall earnings profile. HSL’s fee income has increased over the years with its increased focus on the distribution business through cross-selling to HDFC Bank’s clients. However, it continued to account for a small proportion of the NOI at ~10-20%.
Intense competition in capital markets – With increasing competition in equity broking, the advent of discount brokerage houses and a significant surge in derivative volumes, the 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 and the low share of wallet of the equity segment in household savings indicate huge untapped potential for rapid expansion in the broking market over the longer term.
Liquidity position: Strong
HSL’s liquidity requirement is mainly for meeting the additional margin requirements at the exchange and supporting the MTF book. The company had an unencumbered cash and bank balance of ~Rs. 1,043 crore and liquid investments of Rs. 220.40 crore as on January 31, 2021. Further, it had unutilised fund-based bank lines of Rs. 450 crore and unutilised non-fund based bank lines of Rs. 116 crore as on January 31, 2021. As on January 31, 2021, the company’s total debt (including commercial paper (CP) borrowings of Rs. 1,450 crore; repayment spread over five months) was Rs. 1,650 crore. The borrowings are primarily for funding the MTF book. The on-balance sheet cash and liquid investments cover the near-term debt obligations and the liquidity remains strong.
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Rating sensitivities
Positive factors – Not applicable
Negative factors – Pressure on HSL’s ratings could arise if there is a deterioration in the credit profile of the parent, a significant change in the company’s shareholding or a decline in the linkages with the parent.
Analytical approach
Analytical Approach Comments Applicable Rating Methodologies Broking House Rating Methodology HSL is a subsidiary of HDFC Bank, which holds a ~96% stake in the company. The strong parentage and shared brand name strengthen ICRA’s assumption that HSL will receive timely and adequate support (financially as well as operationally) from Parent/Group Support HDFC Bank, if required. The company also draws the advantage of strong operational linkages with HDFC Bank, as evident from the senior management deputations from the bank, customer sourcing and cross-selling support. Consolidation/Standalone Standalone
About the company
HDFC Securities Limited (HSL), a subsidiary of HDFC Bank, is engaged in securities broking. The company was incorporated in 2000 as a joint venture between HDFC Bank Limited, HDFC Limited and Indocean eSecurities Holdings Limited for offering capital market services like the broking and distribution of financial products. HSL became a subsidiary of HDFC Bank in FY2006 following the acquisition of HDFC Limited’s stake by the bank. Subsequently in FY2014, HDFC Bank acquired the shares held by Indocean eSecurities Holdings Limited and increased its stake in HSL to ~89% and further to ~98% in FY2015. Since then, the bank has been actively engaged in the management of HSL. As on December 31, 2020, HDFC Bank’s stake in HSL stood at 96.36%.
Currently, HSL offers online and offline broking facilities and distribution of third-party products like mutual funds and insurance products. HSL’s net worth stood at Rs. 1,507.26 crore as on December 31, 2020. The company reported a PAT of Rs. 458.70 crore for 9M FY2021.
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Key financial indicators (audited)
HDFC Securities Limited FY2019 FY2020 9M FY2021* Brokerage Income (Rs. crore) 525.98 565.37 719.34 Distribution Fee Income (other than broking; Rs. crore) 126.18 122.42 84.19 Net Interest Income (Rs. crore) 69.69 117.65 100.97 Other Non-interest Income (Rs. crore) 10.37 10.68 12.97 Net Operating Income (NOI; Rs. crore) 732.22 816.12 917.47 Total Operating Expenses (Rs. crore) 275.28 323.15 295.85 Profit before Tax (Rs. crore) 495.23 509.01 627.62 Profit after Tax (PAT) (Rs. crore) 329.82 384.15 458.70 Net Worth (Rs. crore) 1,193.76 1,247.61 1,507.26 Borrowings (Rs. crore) 0.00 690.91 1,243.40 Gearing (times) 0.00 0.55 0.82 Cost-to-Income Ratio (%) 37.60% 39.60% 32.25% Return to Net Worth (%) 29.57% 31.47% 44.40% PAT/NOI (%) 45.04% 47.07% 50.00% Source: Company, ICRA research; * Provisional numbers; All ratios as per ICRA calculations
Status of non-cooperation with previous CRA: Not applicable
Any other information: None
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Rating history for past three years
Chronology of Rating History Current Rating (FY2021) for the past 3 years Amount Date & Date & Date & Rating in Amount Outstandi Instrument Date & Rating in FY2021 Rating in Rating in Rated ng as of FY2020 Type FY2019 FY2018 (Rs. Feb 28, Mar 16, Jan 22, Jul 23, Jan 23, Nov 29, Aug 20, Sep 01, crore) 2021 (Rs. crore) 2021 2021 2020 2020 2019 2018 2017 Long-term Long [ICRA]AAA [ICRA]AAA [ICRA]AAA [ICRA]AAA [ICRA]AAA [ICRA]AAA [ICRA]AAA 1 fund-based 200.00 Nil term (Stable) (Stable) (Stable) (Stable) (Stable) (Stable) (Stable) bank lines Long- Long term/short- [ICRA]AAA [ICRA]AAA [ICRA]AAA [ICRA]AAA [ICRA]AAA [ICRA]AAA [ICRA]AAA term / 2 term 100.00 Nil (Stable)/ (Stable)/ (Stable)/ (Stable)/ (Stable)/ (Stable)/ (Stable)/ short unallocated [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ term bank lines CP Short [ICRA] [ICRA] [ICRA] 3 5,000.00 1,800.00 [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ programme term A1+ A1+ A1+ Short-term non-fund Short 4 ------[ICRA]A1+ [ICRA]A1+ [ICRA]A1+ based bank term lines
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
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Annexure-1: Instrument details
Instrument Date of Issuance / Coupo Amount Rated Current Rating and ISIN No Maturity Date Name Sanction n Rate (Rs. crore) Outlook Long-term fund- 200.00 [ICRA]AAA (Stable) NA - - - based bank lines Long- term/short-term [ICRA]AAA (Stable) / NA - - - 100.00 unallocated [ICRA}A1+ bank lines INE700G14272 CP programme November 4, 2020 3.83% June 18, 2021 50.00 [ICRA]A1+ INE700G14306 CP programme December 2, 2020 3.20% March 3, 2021 100.00 [ICRA]A1+ INE700G14314 CP programme December 15, 2020 3.40% March 9, 2021 100.00 [ICRA]A1+ INE700G14314 CP programme December 15, 2020 3.40% March 9, 2021 50.00 [ICRA]A1+ INE700G14314 CP programme December 16, 2020 3.36% March 9, 2021 50.00 [ICRA]A1+ INE700G14330 CP programme December 24, 2020 3.43% March 24, 2021 100.00 [ICRA]A1+ INE700G14348 CP programme December 24, 2020 3.87% April 30, 2021 100.00 [ICRA]A1+ INE700G14355 CP programme January 12, 2021 3.54% April 9, 2021 100.00 [ICRA]A1+ INE700G14363 CP programme January 19, 2021 3.79% April 20, 2021 250.00 [ICRA]A1+ INE700G14371 CP programme January 20, 2021 3.79% April 16, 2021 50.00 [ICRA]A1+ INE700G14371 CP programme January 20, 2021 3.79% April 16, 2021 50.00 [ICRA]A1+ INE700G14389 CP programme January 20, 2021 3.95% April 27, 2021 16.20 [ICRA]A1+ INE700G14389 CP programme January 20, 2021 3.95% April 27, 2021 3.80 [ICRA]A1+ INE700G14389 CP programme January 20, 2021 3.95% April 27, 2021 3.35 [ICRA]A1+ INE700G14389 CP programme January 20, 2021 3.95% April 27, 2021 7.70 [ICRA]A1+ INE700G14389 CP programme January 20, 2021 3.95% April 27, 2021 11.95 [ICRA]A1+ INE700G14389 CP programme January 20, 2021 3.95% April 27, 2021 7.00 [ICRA]A1+ INE700G14397 CP programme January 28, 2021 4.05% April 28, 2021 100.00 [ICRA]A1+ INE700G14405 CP programme February 2, 2021 3.97% May 3, 2021 100.00 [ICRA]A1+ ING700G14413 CP programme February 3, 2021 3.97% May 4, 2021 100.00 [ICRA]A1+ INE700G14421 CP programme February 16, 2021 3.84% May 18, 2021 100.00 [ICRA]A1+ INE700G14439 CP programme February 17, 2021 3.84% May 19, 2021 100.00 [ICRA]A1+ INE700G14447 CP programme February 24, 2021 3.70% May 25, 2021 50.00 [ICRA]A1+ INE700G14447 CP programme February 24, 2021 3.70% May 25, 2021 100.00 [ICRA]A1+ INE700G14454 CP programme February 26, 2021 3.70% May 27, 2021 100.00 [ICRA]A1+ CP programme – [ICRA]A1+ NA Yet to be placed - - 7-365 3,200.00 Source: Company; As on February 28, 2021 Annexure-2: List of entities considered for consolidated analysis Not applicable
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