The company is trading at ~1.2x P/B, which is unusually low for businesses with a high proportion of asset-light fee-based income (investment banking, wealth management, asset management). Such businesses are usually valued on a P/E basis but JM Financial is valued on a Price-to-Book basis because of its exposure to lending and the P/B has been low for a prolonged period due to stress in the company’s wholesale lending and asset reconstruction business verticals. While investors may shun such businesses, and rightly so, some unrelated divisions that are a part of the company may be unjustifiably devalued as well. When good businesses get devalued for such reasons, value unlocking may happen through corporate restructuring. JM Financial presents a compelling investment opportunity, trading at a discount despite having a strong investment banking franchise, growing asset-light businesses, and a significant value unlocking from its ongoing corporate restructuring.
About the Company
JM Financial is a diversified financial services group with a broad range of business segments. The firm operates in four key areas:
Integrated Investment Banking (IB): Serving institutional, corporate, government, and ultra-high-net-worth clients, this segment encompasses investment banking, institutional equities and research, private equity, fixed income, private wealth management, portfolio management services (PMS), syndication, and financing solutions.
Asset Management, Wealth Management, and Securities (Platform AWS): An integrated investment platform catering to individual investors, this division includes elite and retail wealth management, broking, and mutual fund operations.
Mortgage Lending: This division includes both wholesale lending—primarily focused on real estate developers—and retail lending, which offers affordable home loans and secured loans for MSMEs.
Alternative and Distressed Credit: This business segment covers asset reconstruction and alternative credit funds, providing solutions for distressed asset management.
As of December 31, 2024, JM Financial reported a consolidated loan AUM of approximately Rs.8,690 crores, distressed credit AUM of Rs.12,840 crores, wealth management AUM of Rs.1,10,000 crores, and an average mutual fund AUM of Rs.13,570 crores.
Balance Sheet
Cash & Cash Equivalents: The firm has cash and cash equivalents of Rs. 5840 of which nearly Rs 1,400 crores is under non-lending entities.
However, the company is expected to engage in material transactions this quarter which would impact the net cash position by Rs. 426 crores as the increased shareholding would also lead to an increase in cash attributable to the company through higher ownership.
We assume a total of Rs. 5000 crores for the free cash available to the firm.
Investments: While the current value of the investments is Rs. 5810 for H1FY25, we value it at Rs. 4000 crores or 70% of the total value. The discount exists because Security Receipts (which are a part of the ARC business) account for 25% of the investments for FY24, and a more conservative 30% applied for H1FY25 since the details cannot be known. A conservative investor may further market the value down to Rs. 3500 crores as easily liquefiable investments, giving us a conservative estimate of Rs. 3500 crores to Rs. 4000 crores.
Business Segments
Discontinuing Businesses
According to strategic initiatives by the management, the company will move from the position of a lender with assets to co-investing or that of a syndicator, generating income from fees rather than interest. To achieve the same, the business has begun simplifying its corporate structure buy buying out its partners in various subsidiaries and consolidating the ownership of both the businesses under JM Financial Credit Solutions which will participate in syndication deals going forward. We assign a nil liquidation value to the business with the understanding that the assets in these businesses are more than sufficient to cover the outstanding debts. The value could be positive in the case of writebacks. The cash generated from these businesses has already been accounted for in the valuation.
Wholesale Lending
The wholesale lending book, historically a drag on valuation, is rapidly unwinding and expected to be fully rundown within the next five quarters (by end of FY26), further reducing risk. The subsidiary responsible for this business is JM Financial Credit Solutions, and it has cash and cash equivalents Rs. 3,010 crores as a result of the unwinding, which is already factored into the cash holding of the company and the shareholding will be increased from 47% to 90% for Rs. 1,282 crores after RBI approval. The company will eventually purchase the remaining 10% shareholding as well.
The risk of these businesses leading to business related outflows is minimal but are possible due to execution and asset quality risks.
Execution Risk: From December 2023 to December 2024, JM Financial Credit Solutions scaled down the loan book from Rs. 8,752 crores to Rs. 4,584 crores, a 48% decrease. This gives us confidence that the company will execute the plan according to the expected timelines.
Asset Quality Risk: Provision coverage ratio has increased to 94% during the quarter (77% as of September 30, 2024 and 65% as of June 30, 2024). As a result, necessary provisions have been made for Gross Non-Performing Assets.
Due to the low possibility of risks materializing, we do not assign a negative value to this vertical.
Asset Reconstruction
This business will also run-down over next 3 years. Assessing provisioning requirements here is a bit tricky, but we do not assign a negative value to the business based on management guidance on the quality of the assets currently owned. The effective ownership of the company in JM Financial Asset Reconstruction Company is 76.45%. We assume that the value of the going concern is nil, and that the cash and cash equivalents of the company already reflect any cash that will be generated by this subsidiary.
Continuing Businesses
The implied value of the continuing businesses can be derived from the difference between the market capitalisation and the value of the cash & equivalents and investments and discontinuing businesses. This method implies a value of Rs. 2500- Rs. 3,000 crores for the investment banking division, the Asset, Wealth Management and Securities (AWS) Platform and the affordable housing business.
From a downside perspective, it could be argued that the market values only the investment banking division, and that too extremely pessimistically. Given that the other two divisions are young and will take time to build, the market has valued them at nil. From a risk perspective, such a valuation explains the downside possibility, but a deeper understanding of the three segments will explain the possible upside. The upside valuation is a base case, not a bull case valuation and the markets may assign a higher value than described below. Our valuations do not take into consideration the profits from the syndication businesses as this business is yet to be built.
Integrated Investment Banking:
The Implied Valuation:
A pessimistic valuation would assume no growth prospects. At ~Rs. 2000 crores, the implied yearly profit is Rs. 240 crores (Valuing it as perpetuity with a 12% discount rate or 8.3 P/E multiple). DAM Capital, on the other hand, is worth Rs. 2000 crores and has a profit of Rs. 70 crore for FY24, 1/10th that of JM Financial’s Investment Bank. The valuation is extremely pessimistic given that Investment Banking Division reported a profit of Rs. 464 crores for 9MFY25 a nearly 14% growth YoY and Rs. 706 crores in FY24. The average investment banking profits over FY21-FY25(E) would be approximately Rs. 450 to Rs. 500 crores.
The market is valuing the business at ~50% lower than the no growth valuation, and the market would only be right if investors rightly believe that the Indian equity capital markets would be weaker in the coming future or that JM would significantly lose market share in the future in a growing capital market.
Both cases seem unlikely and are explained in the estimated valuation.
The Estimated Valuation:
The estimated valuation, based on a 6% growth rate over the cyclically adjusted profit would still be significantly higher than the currently implied valuation. The growth assumptions are conservative given that the company is one of the top performing investment banks as evident from its standing in the league tables.
As shown in the table above, JM has an extremely high share of the merchant banking industry and maintains a market share of at least 25% over the last cycle. The business is based on relationships which makes business lumpy depending on the needs of promoters such bankers have relationships with, in addition to the capital market cyclicality. Additionally, the departure of key bankers could lead to loss of relationships for a firm. On this basis, a 6% growth over the cycle seems conservative, but fair.
2. Platform AWS:
The reported profits of the business significantly underrepresent the earning capacity of the business. Over the last 3 years, there have been significant investments made into the asset and wealth management businesses which have been expensed directly through the Profit & Loss Statement. However, these expenses are expected to stop in the next 12-15 months. We can conservatively value this business on a 12-13 P/FY27E.
It must be noted that the Asset Management Division is loss making and will break even in FY27. The Wealth Management Division is currently the main contributor of profits, contributing unadjusted Rs. 100 crores and adjusted Rs. 148 crores for 9MFY25E.
*Investments made in Asset Management and Digital business
a. Wealth Management: Significant investments have been made in rebuilding the wealth management division over the last 3 years. The UHNI + Family Office sales force has doubled in the past 2 years, while the stock trading BlinkX Application was launched early in 2024 to improve the user experience. As a result of such investments and good market conditions, the company has witnessed a strong traction in terms of Average Daily Turnover and Margin Financing.
b. Asset Management: The asset management business is yet to hit scale and is expected to breakeven by FY27. However, the business has scaled up rapidly from a mutual fund AUM of ~Rs. 3000 crores in FY23 to nearly Rs. 14,000 crores in Q3FY25. By FY27, the business is expected to have an AUM of Rs. 25,000 crores, growing at a CAGR of ~30%.
3. Affordable Housing:
The affordable housing business is a new growth area for the business and has grown at a tremendous pace since FY20. The Return on Assets of over 2.4%, CRAR (Capital to Risk-Weighted Assets Ratio) of 44%, Debt to Equity of 1.9 and average ticket size of ~Rs. 11 lakhs suggest that the business can be highly profitable when appropriately levered, has significant room for leverage and is conservative in its lending practices, respectively.
ATS – Average Ticket Size for Home Loans
As the table above shows, there is a material relationship between Asset Quality and Valuations. While growth is important, all players have demonstrated the ability to grow while not all have demonstrated the ability to grow while maintaining asset quality. JM Financial Home Loans has an NPA of 1% for 9MFY25, highlighting that the asset quality is good and can command a decent valuation. While it may be difficult to state that it would command a premium or similar valuation to the likes of Aavas and Aptus given that the loan book is yet to scale up, the valuations would be closer to such peers rather than LIC Housing Finance, which has a lower asset quality. A valuation of around 2(x) Price to FY 28 Book value would be fair after incorporating execution and asset quality risk. However, we maintain that this segment must be actively monitored over the holding period given the short history.
Probable Reasons for the Discount:
We are not certain that this list is exhaustive, the following reasons seem probable:
Unusual Opportunity: The company does not offer a standard investment opportunity which is usually signified by historic growth metrics. In fact, the company has two unhealthy business and two businesses under incubation, which create a significant divergence of earnings from the actual earnings potential. On the surface, it is simple to say that the business has not performed well.
Cyclical Business: The investment banking business is cyclical business and investors may shun such a business due to their focus on businesses with a higher earnings quality. Unlike a large number of cyclical businesses, the business is capital light. Given that the market has performed well, investors may look towards other industries with the belief that a correction may reduce the profitability of investment banking businesses.
Complex Structure: The business operated through a large number of subsidiaries and has both lending and non-lending businesses that may make the business difficult to understand. As a result, some investors may avoid it entirely. While the structure is currently complex, the management has started taking steps to simplify the structure by bringing JM Financial Asset Reconstruction Company under JM Financial Credit Solutions, and has increased the firm’s ownership in both these subsidiaries.
Conservative Balance Sheet: The cash and investments provide for an extremely liquid balance sheet which limits downside risk. However, unutilised cash may make investors wary about growth prospects and/or the intention of the management to return cash to shareholders. However, nearly Rs. 3000 crores of cash has been generated over the last 2 years in subsidiaries as a result of the wind-up where the parent company is increasing its ownership to 90%+ levels from sub 50% levels. This highlights that the company will gain effective possession of the cash and would be able to use it effectively.
Lack of faith in the management: The situation exists because the company has entered businesses where they have not been able to generate significant wealth for shareholders. While it could be argued that macroeconomic factors had a role to play, we offer no justifications for the management. The management has taken decisive steps to correct past mistakes which signifies that the future would look different from the past.
