RAM Ratings Lanka assigns BB+/NP with a positive outlook to Bartleet Religare Securities

RAM Ratings Lanka has assigned the respective long- and short-term corporate credit ratings of BB+ and NP to Bartleet Religare Securities Private Limited (formerly known as Bartleet Mallory Stockbrokers); the long-term rating has a positive outlook.

The ratings are upheld by the Group’s established franchise, strong financial profile and liquidity position. On the other hand, the ratings are tempered by the Group’s vulnerability to stock market volatility, keen competition in the industry as well as its high reliance on key personnel in generating brokerage income.

The outlook of the long-term rating is based on RAM Ratings’ view that BRS’s competitive position would strengthen over the medium term on the back of Religare Enterprise Limited’s (“Religare”) involvement, leading to better market share and profitability. Given its access to a vast Indian clientele through Religare, RAM Ratings expects BRS’s market share to increase, thereby improving its performance, and easing its customer-concentration risk.

BRS is involved in stockbroking and is a 50:50 joint venture between Bartleet Transcapital Limited (BTCL) and Religare Capital Markets Limited (RCML). The latter is a wholly owned subsidiary of the Indian-based financial conglomerate, Religare. Meanwhile BRS also falls under the umbrella of the Bartleet Group through its 50%-stake of the latter’s financial arm, BTCL.

The ratings are supported by BRS’s good franchise; this is reflected in its relatively good market share, underscored by its established reputation derived from the century-old Bartleet Group as well as its strong retail clientele. Bartleet is a conglomerate with interests in plantations, finance, manufacturing, trading and information/communication. In addition, the Group’s franchise is expected to be strengthened by the rebranding strategy of incorporating its new JV partner’s brand, Religare, which would help attract foreign clients.

The ratings are further supported by the Group’s financial profile which has strengthened significantly following a capital infusion by RCML in November 2010. BRS’s gearing ratio had improved to 0.03 times as at end-FYE 31 March 2011 (end-FY Mar 2010: 0.26 times), before improving further to 0.01 times as at end-June 2011.

At the same time, its net exposure (T+3 debtors outstanding) to shareholders’ funds had also improved to 14.42% (end-FY Mar 2010: 22.86%). The strong capital buffer is expected to sufficiently support the Group’s branch expansion, information-system upgrade and expanding business.

Furthermore, BRS’s liquidity position is deemed strong. The Group’s liquidity levels have improved substantially after the infusion of capital, resulting in a net-cash position. As at end-June 2011, the Group had Rs. 550.59 million of cash and bank balances, compared to its debt load of Rs. 4.05 million and T+3 creditor balance of Rs. 107.28 million.

Despite the above strengths, the ratings are moderated by BRS’s core business being vulnerable to stock market volatility. All stockbroking companies are susceptible to the inherent volatility of the equity markets, which in turn are affected by a range of factors including domestic economic conditions, political stability and the global economic environment. This is reflected in the volatility of BRS’s revenue and profits, which are directly correlated to the fortunes of the local bourse.

On a separate note, competition is keen in the stockbroking industry because of its low entry barriers and the commoditised nature of its services. RAM Ratings notes that the industry is fragmented, with 28 players at present compared to 15 member firms a few years ago. Going forward, RAM Ratings expects competition to intensify with the entry of new players amid the relatively lenient requirements of obtaining a stockbroking licence.

As per the industry norm, BRS relies heavily on its senior managers when generating its brokerage income, who collectively accounted for the majority share of its brokerage income in FY Mar 2011. Thus, the loss of these key personnel could have a significant impact on the Group’s revenue-generating ability.