Share India Securities - A Worthwhile Stock Pick?

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Table of Contents

Overview on Share India Securities

Share India Securities is a leading financial services provider catering to retail and corporate clients through offerings across broking, commodity trading, merchant banking and mutual fund distribution verticals. Backed by its tech-focused model and wide range of services, the company has demonstrated strong growth – Sales and Profits have grown at 51% and 87% CAGR over last 5 years. Reasonable valuations, healthy balance sheet, digitization trends and underpenetrated industry make Share India Securities well positioned for long term gains. The company seems to have the credentials to deliver market beating returns over medium to long term.

Company Introduction and Profile

Share India Securities Ltd (BSE: 540725) is a financial services company established in 1994 that offers a range of products including equity and derivatives broking, currency and commodity trading, mutual fund distribution, and merchant banking services. Over the last 5 years, the company has demonstrated strong growth with sales and profits growing at 51% and 87% CAGR respectively. As of Mar’23, Share India Securities has a market capitalization of ₹6,101 crores. Some key financial metrics are – debt to equity of 0.47x, ROCE of 52%, and cash & cash equivalents of ₹1,488 crores, indicating a healthy balance sheet position. The company’s focus on adopting technology to build customized offerings for clients seems to be working well.

Should We Buy, Sell or Hold This Stock and Why?

Based on the operating and financial performance, Share India Securities looks to be a good stock to buy or hold for long-term gains. The company has consistently delivered over 45% ROE over the last 3 years. Sales and profit growth have averaged over 50% over a 5-year period. Promoter shareholding remains high at 53% and only 41% is pledged, indicating management’s confidence. Valuations seem reasonable with P/E of 15.6x and P/B of 5x, lower than industry averages. High cash balance and low debt provide comfort. The tech-focused model and wide range of offerings provide a competitive edge. Adoption of digital channels post-covid makes the business scalable. However, investors should track pledge levels, growth rates, and maintainable ROE levels closely. Any deterioration would warrant a re-look at incremental investments.

Vital Company Ratios for a Layman

Here are some key ratios of Share India Securities that can help evaluate the business fundamentals for a regular investor:

1. Sales Growth (5 Year CAGR) – 51%

Indicates strong growth momentum in the core operations.

2. Profit Growth (5 Year CAGR) – 87%

Rising faster than sales indicating improving profitability.

3. Return on Equity (ROE) – 45%

Shows efficient use of shareholder capital to generate returns.

4. Low Debt to Equity – 0.47x

Comfortable leverage position. Scope for growth without straining the balance sheet.

5. High ROCE – 52%

Efficient capital allocation towards assets that can boost returns.

6. Reasonable Valuation (P/E Ratio) – 15.6x

Stock price aligned with fundamentals. Not overvalued.

7. High Cash Balance: ₹1,488 crores

Provides investment flexibility and balance sheet strength.

Key Data Points for Share India Securities

Promoter and Institutional Holdings

Promoter Holding: Came down from 55.87% in Dec’20 to 52.81% in Sep’23.
FII Holding: Increased from 0% in Dec’20 to 0.97% in Sep’23.
DII Holding: Remains low, increased from 0% in Dec’20 to 0.02% in Sep’23.

Financial Performance Trends

Sales Trend: Strong growth – ₹74 cr in FY16 to ₹1,260 cr in TTM Sep’23. 5-year CAGR of 51%.
Profit Trend: Rising faster than sales – ₹6 cr in FY16 to ₹394 cr in TTM Sep’23. 5-year CAGR of 87%.
Debt Trend: Increased but remains low – ₹21 cr in FY16 to ₹569 cr in Sep’23.
Margin Trend: Improving – OPM 19% in FY16 to 47% TTM Sep’23.

Valuation and Intrinsic Value

Company P/E: 15.6x. Lower than median industry PE of 21.2x.
Industry P/S: 3.3x.
Intrinsic Value vs CMP: ₹2,591 (intrinsic) vs ₹1,857 (market).

Market Capitalization and Industry Trend

Market Cap: ₹6,101 cr. Higher than industry median of ₹824.63 cr.
Industry Trend: Favorable backdrop for financial services firms.

Financial Strength and Dividends

Cash Balance: Strong at ₹1,488 cr as of Sep’23.
Dividend Payout: 0.46% in FY23. Scope to increase payouts.

Comparison with Competing Companies

Competing companies include Bajaj Finance, Bajaj Finserv, Shriram Finance, etc. Share India Securities has faster growth in sales & profits compared to these peers. It also has higher margins (OPM of 47% vs. median OPM of 8.64%), better return ratios (ROCE of 52% vs. median of 8.64%), and reasonable valuations (P/E of 15.6x vs. median 21.48x). The company’s financial position and past track record of performance make it well-positioned among leading industry players.

Is This Stock Overvalued or Undervalued?

At the current market price of ₹1,857, Share India Securities appears to be reasonably valued and not overvalued. Several factors support this assessment:

P/E Ratio Comparison: The company’s P/E ratio of 15.6x is notably lower than the industry average of 21.2x. This suggests that investors are paying less for each unit of earnings compared to the industry norm.
Intrinsic Value vs. Market Price: The gap between the intrinsic value (₹2,591) and the market price is not significant. This indicates that the stock is trading relatively close to its estimated intrinsic value, which is a positive sign for investors.
Strong Fundamentals: Share India Securities boasts impressive fundamentals, including a 51% sales Compound Annual Growth Rate (CAGR), an 87% profit CAGR, and a robust 45% Return on Equity (ROE). These metrics demonstrate the company’s ability to generate strong financial performance.
Peer Comparison: When compared to its peers, Share India Securities stands out with higher earnings growth, margins, and return ratios. These superior metrics justify the potential for higher valuations.

Considering its historical performance and growth prospects, the current valuation suggests that the stock may have room for re-rating in the coming years. In summary, Share India Securities appears to be fairly valued at present, and the stock may have further potential for appreciation over a 2-3 year horizon.

Should We Buy This Stock and Why?

Yes you can consider this share, Share India Securities is an attractive investment option from a long-term perspective for several reasons:

Strong Growth Momentum: The company has demonstrated robust growth with a 5-year Sales CAGR of 51% and a Profit CAGR of 87%. This indicates its ability to capitalize on market opportunities.
Technological Leadership: Share India Securities has established itself as a leader in technology-based offerings, providing a competitive advantage in a rapidly evolving industry.
Consistent Margins and Returns: The company’s consistent margins and return ratios reflect efficient operations and sustainable profitability.
Healthy Financial Position: With low debt and a high cash balance, Share India Securities maintains a strong and flexible balance sheet.
Promising Industry Dynamics: The financial services industry in India is poised for growth, driven by increasing retail investor participation, rising mutual fund assets under management, improving financial inclusion, digitalization, and government reforms.
Reasonable Valuations: Despite its premium fundamentals, Share India Securities trades at a reasonable P/E ratio of 15.6x, making it an attractive investment proposition.

While monitoring pledge levels and ensuring maintainable ROE are prudent steps, the overall attributes make Share India Securities a compelling stock to consider for long-term gains, especially on corrections.

How Is the Industry of This Company Growing?

The financial services industry in which Share India Securities operates is experiencing robust growth in India, as evidenced by several key trends:

Retail Investor Participation: The industry has witnessed a significant increase in retail investor participation, with over 1 crore new Demat accounts added in the last 18 months. This influx of retail investors has contributed to increased trading activity and revenue for financial services firms.
Mutual Funds AUM: The assets under management (AUM) of mutual funds have surpassed ₹40 lakh crore, indicating a growing interest in investment products and wealth management services.
Financial Inclusion: Efforts to enhance financial inclusion are driving lending growth. Credit penetration in India remains relatively low compared to other major economies, leaving ample room for expansion in lending services.
Digitalization: The expansion of digital channels and fintech innovations is enabling financial services firms to reach underserved and untapped segments of the market. These technological advancements are fostering greater accessibility and convenience for customers.
Government Reforms: Government initiatives such as the unified payments interface (UPI) have improved the payment and transaction infrastructure, creating a conducive environment for financial services growth.

Moreover, India’s growing middle class and rising incomes contribute to the industry’s favorable growth prospects. The potential for expansion in the addressable market size further enhances the attractiveness of the financial services sector. Share India Securities, positioned within this dynamic industry, is well-positioned to sustain its strong growth momentum over the next decade, making it an appealing business case for investors.

Key Risks Associated with Share India Securities and the Industry:

Competition Risk: The financial services industry is highly competitive, with numerous established players and new entrants. Share India Securities faces the risk of losing market share and pricing power in a competitive landscape.
Regulatory Changes: The industry is subject to frequent regulatory changes and reforms. Shifts in regulations can impact the company’s operations, compliance requirements, and profitability.
Market Volatility: Stock market volatility and fluctuations in asset prices can affect the company’s trading volumes and revenue. Economic downturns may also lead to reduced investor activity.
Liquidity Risk: Share India Securities’ business heavily depends on market liquidity. A sudden liquidity crunch or market turmoil can impact its ability to execute trades and manage risk effectively.
Credit Risk: The company may face credit risk when extending margin facilities to clients or engaging in derivative transactions. Defaults by clients could lead to financial losses.
Cybersecurity Threats: In an increasingly digitalized industry, the risk of cyberattacks and data breaches is significant. Such incidents can disrupt operations, harm the company’s reputation, and result in financial losses.
Market Sentiment: Investor sentiment and perception can influence trading volumes and brokerage revenues. Negative market sentiment may lead to reduced investor participation.
Operational Risk: Any disruptions in the company’s trading platforms, infrastructure, or processes can lead to operational failures, financial losses, and damage to its reputation.
Promoter and Management Risks: It’s crucial to assess the management quality and integrity. Any adverse legal or regulatory actions, including criminal cases against the promoters or management, can impact the company’s stability and reputation.

Risks to Consider Before Investing in Share India Securities:

Promoter and Management Assessment: Investors should thoroughly investigate the background and track record of the company’s promoters and management to ensure their credibility and transparency. Any past or ongoing criminal cases should be evaluated for potential impact on the business.
Regulatory and Compliance Risks: Given the dynamic regulatory environment, investors should monitor regulatory changes and the company’s compliance efforts. Non-compliance could result in penalties or operational disruptions.
Market Conditions: The company’s performance is closely tied to market conditions. Investors should consider the potential impact of market volatility and economic cycles on the company’s revenue and profitability.
Competitive Positioning: Assess the company’s ability to compete effectively in a crowded market. A loss of market share to competitors could affect its financial performance.
Technology and Cybersecurity: Given the increasing reliance on technology, evaluate the company’s cybersecurity measures and its ability to protect client data and infrastructure from cyber threats.
Financial Health: Monitor the company’s financial health, including its debt levels, liquidity, and ability to manage risks. A weak financial position can make it vulnerable to economic downturns.

Potential Risks of the Financial Services Industry:

Market Risk: Financial services companies are highly sensitive to market conditions and economic cycles. Market downturns can lead to reduced trading activity and investment, affecting revenue.
Regulatory Risk: Frequent regulatory changes can impact business models and compliance costs. Non-compliance with regulations can result in legal issues and penalties.
Credit Risk: Lending and investment activities expose financial services firms to credit risk. Defaults by borrowers or clients can result in financial losses.
Operational Risk: Operational failures, such as system outages or errors, can disrupt services and harm the reputation of financial institutions.
Interest Rate Risk: Fluctuations in interest rates can affect the profitability of financial services firms, particularly those engaged in lending and borrowing activities.
Market Sentiment: Investor sentiment and confidence can impact the flow of funds into financial products and services. Negative sentiment can lead to capital outflows.

Investors considering Share India Securities should conduct thorough due diligence, assess these risks, and stay informed about developments in the company and the financial services industry as a whole.

Long-Term (6-10 Years) Performance Outlook:

Share India Securities appears to be well-positioned for strong growth over the next 6-10 years. Several positive factors support this long-term outlook:

Underpenetrated Financial Services Industry: India’s financial services industry has significant untapped potential in segments such as equity, mutual funds, and credit. This underpenetration provides room for substantial growth in the coming years.
Digital Adoption: The increasing adoption of digital services, particularly among retail customers, offers scalability opportunities for financial service providers. Share India Securities’ tech-focused model aligns with this trend, enabling it to reach a wider audience.
Strong Balance Sheet: The company’s strong balance sheet, characterized by low debt and ample cash reserves, positions it to pursue growth initiatives without significant capital constraints. This financial flexibility is crucial for expansion.
Leadership Position and Product Innovation: Share India Securities holds a leadership position in key offerings and has demonstrated the ability to launch new products that cater to evolving consumer needs. This adaptability enhances its competitive edge.

With operating leverage benefits expected to kick in, Share India Securities could potentially achieve a 25-30% revenue Compound Annual Growth Rate (CAGR) and a 30-35% profit CAGR over the 6-10 year period. This robust growth trajectory has the potential to unlock significant shareholder value.

Short-Term (2-5 Months) Performance Outlook:

In the short term (2-5 months), Share India Securities may experience some impact from global recessionary fears, leading to volatility in equity markets. However, the company’s solid track record and reasonable valuations could help it weather these short-term challenges.

It is anticipated that the stock may consolidate within a narrow range, roughly 10%, over the next 2-5 months, with a trading range of ₹1,650-1,850.

Medium-Term (2-6 Years) Performance Outlook:

Over a 2-6 year horizon, Share India Securities is expected to deliver steady performance, in line with India’s economic growth and the progress of the capital markets. Expanding its client base through digital channels and introducing new products will be key drivers of medium-term growth.

During this period, the company could potentially achieve an annual revenue growth rate of 20-25% and a profit growth rate of 25-30%. These figures make Share India Securities a promising candidate for value creation over a medium-term investment horizon.