 "Analysis: JM Financial stock jumps the gun")
After rising by 16% before the announcement was made on Thursday evening, JM Financial closed 13.4% higher at Rs 26.70 after touching a 52-week high of Rs 27.70. Between Wednesday and Friday this week, the stock has gone up a whopping 44%.
As per the details of the deal, Vikram Pandit and Hari Aiyar will be picking up a 3% stake in JM Financial by pumping in about Rs 45 crore. The duo will receive 23 million warrants at a price of Rs 19.05 each on a preferential basis. Apart from this infusion, Pandit will help raise global funds for the NBFC to expand its lending and financing business.
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The other reason that the market seem to be bullish about, apart from Vikram Pandit’s name being attached to the company, is that the company will apply for a banking license.
Though there are some big positives in the deal, the market seem to have over-reacted to the developments.
Consider the following facts -- Pandit and Aiyar have picked up stake at a price of Rs 19.05 per share, which is a little higher than the average price of Rs 17.50 at which the JM Financial stock was languishing over the past three months, not participating in the recent rally.
The two financial wizards are not paying a large premium to the market price for picking up a stake, which is expected, given the less-than-mediocre financial performance of the company. Lesser known and a late entrant Capital First (erstwhile Future Capital) has a much faster growth over the last three years.
JM Financial's profit fell from Rs 154 crore in FY2010 to Rs 123 crore in FY2012, while Capital First witnessed its profit rising from Rs 59 crore to Rs 105 crore in the same period. The small amount of money pumped in by Vikram Pandit is unlikely to improve the financials of the company immediately.
Second, the money-making business of distressed asset fund is being set up as a joint venture between JM Financial and Vikram Pandit’s firm with an initial target capitalisation of $100 million, which will be raised from global funds.
However, the ownership structure of this JV, which is not known yet, will determine the returns to JM Financial shareholders. The expansion of JM’s lending and financing operations is good but it cannot generate super-normal returns.
As far as the banking license is concerned, even if the company is able to get the clearance from RBI, setting up a bank in a competitive environment is no longer easy. Vikram Pandit, with all his experience has been running an established and well-managed bank, while a start-up bank in India will be a completely different ball game.
For the JM Financial stock, the Rs 45-crore investment by the duo and their presence has resulted in the market capitalisation going up from around Rs 1,400 crore to over Rs 2,000 crore.