Why IIFL Securities Share Price is Falling

In some ways, the current rally in Indian markets can be compared to the post Covid bull run that started in April 2020.

Benchmarks BSE Sensex and NSE Nifty have staged a good comeback. While the small and midcap indices have rallied more.

Individual stocks from the smallcap and midcap space have logged high double-digit returns in a matter of days.

Performance of Indian markets since 29 March 2023

Index	Change (%)
BSE Midcap	19%
BSE Smallcap	22%
BSE Sensex	22%

Source: Equitymaster

IIFL Securities share price, made the most of the good run and touched a 52-week high yesterday.

The firm, however, received a major blow last night after the Indian market regulator barred it from on-boarding new customers.

Reacting to this news, shares of the company plunged a massive 19% in early trade before recovering some losses.

That made us wonder whether a kneejerk reaction to such extent was justified.

Let's dig a little deeper into the details and understand what lies ahead for the finance company.

Why IIFL Securities share is falling

# Regulator's surprise move

Up until now, IIFL shares were on a good run and even scaled a new 52-week high yesterday. So you could say everything was fine on the fundamentals front.

No one expected the regulator to bar the broker from on-boarding new clients.

But in a surprise move post market hours yesterday, the regulator barred the brokerage firm from taking any new client for two years for alleged regulatory violations that pertain to segregation of clients' funds.

The other reason behind this move was improper marking of clients' bank accounts.

Also, this isn't anything new. SEBI is of the view that the company has been doing this for the past 25 years. The rules were framed in 1993 and IIFL Securities has been on and off about following these rules.

The market regulator's notice comes after years of rigorous investigation so clearly, a lot of time was spent before it took such a big measure.

What IIFL Securities had to say about these allegations

Whenever something big like this happens, companies immediately come out with circulars explaining reasons behind the same.

While we'll get to the crux of the matter over time as more details come out, IIFL Securities had this to say on the recent event...

• The said order pertains to inspections carried out for different periods from April 2011 to January 2017, which was prior to the issuance of Enhanced Supervision Circular dated September 26, 2016, by SEBI, which was made effective from July 1, 2017.
  
  The SEBI order applies the said Circular retrospectively even while confirming that after the Circular becoming effective there has been no non-compliance with the same.

IIFL Securities went on to calm investors' nerves and said that this order does not affect company's existing business with the existing clients.

It will also challenge SEBI's decision and is in the process of preferring an appeal before the Securities Appellate Tribunal.

What next?

Not much is known about these allegations at the moment. While SEBI has barred it from onboarding clients, IIFL is ready to present their side of the story and have appealed to the SAT.

We'll find more details in a matter of days. Until then, the stock of IIFL Securities could see some pressure.

Keeping aside the current matter, IIFL Securities has been a consistent performer. The company recently posted good fourth-quarter results with revenue jumping 15.9% year-on-year while net profit surged 10% to Rs 863 million.

This was on the back of a strong growth in its broking business.

The company's board has also approved fund raising up to Rs 5 billion (bn) via non-convertible debentures on a private placement basis.

As the company said in response, the regulator's move will not affect its existing business, that has been doing pretty well over the past three years, especially since the lockdowns.

Rising markets and increased retail participation are pretty much the key factors that drove the growth of IIFL Securities.

There's also the pending merger between IIFL's certain segment with 5Paisa Capital. In December last year, 5paisa Capital had decided to merge IIFL Securities' online retail trading business with itself.

Industry experts say that while this merger will moderate IIFL's market share, it will still maintain a dominant market share.

A word of caution...

In the broking segment, there's intense competition and even established players like Angel Broking are seeing an impact on their business.

You might be tempted to consider investing in stock broking companies given that they are direct beneficiaries of bullish sentiments and increased investor participation.

Sure, the stock broking business may have received a boost in the current market scenario. But if that is the only reason you think makes a good case for investing in brokerage businesses, let us caution you.

In our view, if companies are forced to diversify into unrelated businesses simply to be able to survive tough times, then the long term durability of such businesses may be highly uncertain and unreliable.

How IIFL Securities share price has moved recently

In the past one year, IIFL Securities share price has fallen 6%. On a year to date (YTD) basis, the stock is down 5%.

While in the past five days, the stock has fallen 11%, after taking into consideration today's freefall.

IIFL Securities has a 52-week high of Rs 79.40 touched yesterday and a 52-week low of Rs 48.2 touched in March 2023.

Have a look at the table below to compare IIFL with its peers.

Comparative Analysis

Company	Capri Global	Centrum	IIFL
ROE (%)	5.7	-30.8	18.5
ROCE (%)	22.4	77.2	30.8
Latest EPS (Rs)	9.9	-3.6	8.2
TTM PE (x)	75.5	-	8.7
TTM Price to book (x)	4.3	1.2	1.6
Dividend yield (%)	0.1	0.0	4.2
Industry PE	11.7
Industry PB	2.3

Data Source: Ace Equity

About IIFL Securities

IIFL Securities provides retail and institutional equities, financial products distribution, commodity broking, currency broking, investment banking, financial planning and wealth management services to retail and institutional customers across India.

The company was incorporated in 1996 as a broking arm of the IIFL Group.

To know more, check out its financial factsheet and its latest quarterly results.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...