Sri Lanka’s Bartleet Religare ‘BB+’ rating confirmed, outlook cut: RAM

Apr 02, 2013 (LBO) – RAM Ratings Lanka has confirmed a ‘BB+’ rating of Bartleet Religare Securities (Pvt) Ltd, a stock broking joint venture between Sri Lanka’s Bartleet group and India’s Religare Capital Markets Limited, but cut its outlook to stable. RAM said the outlook was raised to positive in 2010 following the Indian tie up, which was expected to bring more business.

“However, the outlook has been revised from positive to stable in view of the fact that the anticipated improvements have not materialised partly due to the relatively subdued stock market conditions,” RAM Ratings said.

Sri Lanka’s stock market activity has declined after a stock market bubble, which was fueld by excess liquidity from money flows into government securities markets, burst in 2011.

The Bartleet Religare Securities and its subsidiaries dealt in debt securities, asset management and investment banking.

The ratings are supported by the Group’s financial profile which had strengthened
significantly following the capital infusion from RCML in November 2010.

BRS was debt-free at both Company and Group level.

Its net exposure (T+3 debtors outstanding) to shareholders’ funds was stable at 17.03 percent as at end-March 2012 before deteriorating to 32.44 percent by end-September 2012 as stock market activity gradually picked up, RAM said.

The full statement is reproduced below:

RAM Ratings Lanka reaffirms Bartleet Religare Securities (Pvt)
Limited’s BB+/NP ratings; outlook revised from positive to stable

RAM Ratings Lanka has reaffirmed Bartleet Religare Securities (Pvt) Limited’s (“BRS” or
“the Company”) respective long- and short-term corporate credit ratings at BB+ and NP.
Concurrently, the outlook of the long-term rating has been revised from positive to stable.

The long-term rating was placed on a positive outlook in 2010 as BRS’s competitive
position was expected to strengthen on the back of Religare Enterprise Limited’s (“REL”)
involvement, leading to better market share and profitability.

Given its access to a vast
Indian and global clientele via REL and its subsidiaries (collectively referred to as Religare),
BRS’s market share was envisaged to increase, thereby improving its performance and
easing customer-concentration risk.

However, the outlook has been revised from positive
to stable in view of the fact that the anticipated improvements have not materialised partly
due to the relatively subdued stock market conditions.

BRS is a 50:50 joint venture (“JV”) between Bartleet Transcapital Limited (“BTCL”) which
is the financial arm of the century old Bartleet Group (“Bartleet”), and Religare Capital
Markets Limited (“RCML”) – a wholly-owned subsidiary of Religare.

With stockbroking as
its forte, BRS also deals in government and corporate debt securities in the secondary
market, research, asset management and investment banking via its subsidiaries,
collectively with the Company referred to as the Group. BRS and its subsidiaries are
collectively referred to as the Group.

The ratings are supported by BRS’s established franchise; this is reflected in its relatively
good market share in the domestic stock-broking industry as at end-September 2012,
underscored by its established reputation derived from the century-old Bartleet as well as
its strong retail clientele. Bartleet is a conglomerate with interests in plantations, finance,
manufacturing, trading and information/communication.

The ratings are further supported by the Group’s financial profile which had strengthened
significantly following the capital infusion from RCML in November 2010. Moreover BRS is
debt-free at both Company and Group level. Meanwhile, its net exposure (T+3 debtors
outstanding) to shareholders’ funds was stable at 17.03% as at end-March 2012 before
deteriorating to 32.44% by end-September 2012 (end- March 2011: 17.48%) as stock
market activity gradually picked up.

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
that include 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, and the industry is fragmented with 28 players at
present.

As per the industry norm, BRS relies heavily on a few senior personnel for most of its
brokerage income generation. Thus, the loss of these key personnel could have a
significant impact on the Group’s revenue-generating ability.