Ismail Iqbal Securities (Pvt.) Limited

CREDIT RATING REPORT | Nov-24

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
28-Nov-24 A- A2 Stable Maintain -
28-Nov-23 A- A2 Stable Initial -
About the Entity

Ismail Iqbal Securities (Pvt.) Limited was established in August 06, 2004. The Company operates through two branches, both in Karachi. The Company is owned by three individuals, wherein the majority shareholding (65%) lies with the CEO - Mr. Ahfaz Mustafa. The Company’s board of directors comprises two experienced individuals including the CEO. The other director, Mr. Muhammad Taufique is a non-executive director and provides governance oversight. The Company has appointed M/s Baker Tilly Mehmood Idrees Qamar – Chartered Accountants as the external auditors.

Rating Rationale

Ismail Iqbal Securities (Pvt.) Limited (IISPL or “the Company”) is an established player in the equity brokerage sector, complemented by its services in underwriting, corporate finance, advisory, and research. The Company has established a commendable market share, supported by a diversified clientele that includes institutional and corporate entities, and high-net-worth individuals (HNWIs). This customer base not only strengthens IISPL’s market position but also mitigates dependency on a single client segment. FY24 marked a significant recovery for the equity brokerage industry, with improving investor sentiment driving a substantial increase in trading volumes on the Pakistan Stock Exchange. This resurgence was fueled by stabilizing macroeconomic conditions and renewed confidence in the equity markets, providing brokerage firms like IISPL with a favorable environment to perform in line with the broader market trends. The Company capitalized on this recovery, delivering robust financial results, including a sharp increase in revenue and profitability. Performing better than the market, the Company earned a revenue of ~ PKR 126mln during FY24, increasing the topline by ~96% when compared with FY23. IISPL reported a net profit of ~ PKR 136mln during FY24 (SPLY: a net loss of ~PKR 56mln). The profit was driven by the sharp increase in the topline and a significant realized capital gain during the year. IISPL has an adequate equity base of ~PKR 324mln at end-Jun’24. Effective management of proprietary investment book has mitigated market risk. The business acumen of the primary sponsor is well-noted. The governance framework could be improved by appointing independent directors to enhance oversight. IISPL has a lean organizational structure, with most department heads reporting directly to the CEO. The management is experienced, and the control framework is satisfactory. Adequate risk management and compliance procedures provide support to the ratings. The Company provides prudent services to its clients in the form of complaint management, access to technical and fundamental reports, and a dynamic reporting mechanism which is a strengthening factor. As part of its long-term strategic plans, IISPL has diversified its revenue streams through underwriting and follows a rigid underwriting discipline to manage associated risks.

Key Rating Drivers

Going forward, pivotal factors for the rating perspective include improvement in core income, management’s ability to retain its market share, and enhancing the volumes and diversity of revenue to improve its competitive position in the brokerage industry. Meanwhile, upholding sound internal controls, retention of key management personnel and diligent monitoring of risks is important.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

Ismail Iqbal Securities (Pvt.) Limited

rating analysis

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Profile
Background

Ismail Iqbal Securities (Pvt.) Limited (‘IISPL’ or the Company), with its inception in the year 2004, became a Corporate Member of the Karachi Stock Exchange. IISPL is presently a TREC holder of the Pakistan Stock Exchange, an SECP registered Underwriter and Book Runner, as well as holding a Consultant to the Issue license.

Operations

Ismail Iqbal Securities (Pvt.) Limited operates through two branches, both in Karachi. The Company deals in equity trading which is the primary source of revenue, while also engaging in the underwriting and corporate advisory of new IPOs and rights issues along with services of MTS/MFS.

Ownership
Ownership Structure

IISPL is a family-owned business and the stakes are being divided among family members where the majority of shareholding lies with Mr. Ahfaz Mustafa (65%). The remaining stake is held by his sister Ms. Ayesha Naseem and brother Mr. Azhar Iqbal (17.4% each) while Mr. Muhammad Taufique also holds one share

Stability

Mr. Ahfaz Mustafa and his family have been running this business for approximately 20 years and there has been no significant change in the ownership structure. Moreover, the Company's sponsor has been involved in the Brokerage industry for over 16 years.

Business Acumen

The Company's sponsors possess relevant educational backgrounds and extensive industry-specific working knowledge. The overall assessment of the strategic thinking capability of sponsors is comfortable.

Financial Strength

The main sponsor, Mr. Ahfaz Mustafa has a sizeable personal net worth along with a well-established and well-known family group.

Governance
Board Structure

The Company’s board of directors comprises two experienced individuals including the CEO - Mr. Ahfaz Mustafa and a non-executive director - Mr. Muhammad Taufique. The presence of an independent director would strengthen the governance framework.

Members’ Profile

Both the directors are seasoned professionals and possess manifold experiences in the relevant fields. The board members are skilled and experienced to manage the business operations efficiently.

Board Effectiveness

To ensure an effective control environment and compliance with reporting standards, the Company has constituted an Audit Committee at the board level. The Committee is chaired by the non-executive director. There has been 2 Management Committee Meetings held in FY24.

Transparency

Baker Tilly Mehmood Idrees Qamar is the external auditor and is ranked in the 'A' category in the State Bank's list of approved auditors. The auditor has expressed an unqualified opinion on IISPL’s financial statements for FY24.

Management
Organizational Structure

The Company has a lean organizational structure with the following departments, i) Finance, ii) Compliance, iii) IT, iv) Research, v) Business Development, and vi) Equity Sales. All HODs report directly to the CEO and the Company has created all requisite positions to ensure smooth operations. Separation of functions such as compliance and risk management may bode well for IISPL moving forward.

Management Team

Mr. Ahfaz Mustafa is the CEO of the Company since 2008. He has nearly 16 years of experience in the equity market. The management team of the Company comprises seasoned professionals with considerable financial services sector experience. Mr. Fazal-Ur-Rehman is the 'Head of Finance and Compliance'. He is a member of ICMAP and holds two Masters degrees. Mr. Fazal has been in the Brokerage industry for over 18 years and for 15 years with the group. Mr. Muhammad Saad 'Head of Research' is a CFA level one and is an MBA with over 6 years of extensive experience in the areas of Equity Research, Economic Research, Financial Modeling & Valuations.

Management Effectiveness

The front and back office software are integrated, resulting in the ability to generate real-time MIS reports for the management to make swift decisions in the dynamic environment.

Control Environment

The control environment is considered weak as the same person heads the Compliance and Finance functions. Adding an internal audit department and an independent Risk Management function is encouraged. The depth and scope of the Company's policies need improvement.

Business Risk
Industry Dynamics

FY24 has been a transformative year for the brokerage industry in Pakistan. Despite ongoing political uncertainty and high inflation, the economic conditions have significantly improved. The Karachi Stock Exchange (KSE-100) index has surged near to 100,000 mark, reflecting renewed confidence among investors. The resumption of the IMF program and the government's proactive measures to address longstanding economic issues, such as reducing circular debt, have played a crucial role in this recovery. These steps have boosted market volumes and attracted foreign investment, making the Pakistan Stock Exchange one of the best-performing markets globally. However, political turmoil continues to cast a shadow over the market. Despite these challenges, the brokerage industry has benefited from the increased market activity and the overall positive sentiment in the economy.

Relative Position

The Company primarily caters to HNWIs and has a sustained position in the market. IISPL was able to capitalize on the market surge and enhanced its market share notably during FY24.

Revenues

IISPL earned operating revenue of ~PKR 126mln during FY24 (SPLY: ~PKR 63mln). The increase in the revenue has been the result of market uptick.

Cost Structure

IISPL's administrative expenses increased from ~PKR 84mln in FY23, to ~PKR 92mln in FY24. The surge in the administrative cost is due to increase in salaries.

Sustainability

During FY24, the Company earned a net profit after tax of ~PKR 136mln (SPLY: Loss of ~PKR 55mln). This is attributed to the increasing operating revenue generated during the period under review. The brokerage income is expected to improve with the recent upward tick and better performance of the stock market. The Company also has plans to tap into foreign clientele once market conditions improve, which bodes well for IISPL's future. The management's ability to strengthen its supplementary income and maintain its niche will be important.

Financial Risk
Credit Risk

The main credit risk for a brokerage company results from providing clients with margin facilities to trade through leverage. IISPL does not allow clients the facility of leveraged trading apart from a selected few clients with whom they have long-term relationships, thus limiting their credit risk exposure.

Market Risk

As at Jun’24, the Company had a short-term investment portfolio of ~PKR 30mln (SPLY: ~PKR 15mln), which comprised quoted securities. Proprietary listed securities as compared to the company's equity comprised ~9.5% at end Jun’24 (SPLY: ~8.1%). Trading in proprietary book creates conflict of interest, risk of front running and inherently bears the market risk. The Company has formulated an investment policy to address key issues like scrip level and sector level limits.

Liquidity Risk

At end-Jun’24, the current assets of ~PKR 572mln adequately covers the current liabilities of ~PKR 268mln.

Capital Structure

The Company has an adequate equity base of ~PKR 324mln at end-Jun’24, increasing from ~PKR 187mln at end-Jun’23.

 
 

Nov-24

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Ismail Iqbal Securities (Pvt.) Limited

financial summary

(PKR mln)

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Jun-24
12M		 Jun-23
12M		 Jun-22
12M
Audited Audited Audited
A. BALANCE SHEET
1. Finances
2. Investments 38 22 152
3. Other Earning Assets 168 76 58
4. Non-Earning Assets 390 224 348
5. Non-Performing Finances - Net
6. Total Assets 596 322 558
7. Funding 77
8. Other Liabilities (Non-Interest Bearing) 272 134 237
9. Total Liabilities 272 134 314
10. Shareholders' Equity 324 188 244
B. INCOME STATEMENT
1. Fee-Based Income 137 64 93
2. Operating Expenses (92) (84) (99)
3. Non Fee-Based Income 121 (9) (50)
4. Total Operating Income / (Loss) 166 (29) (56)
5. Financial Charges (14) (19) (13)
6. Pre-Tax Profit 152 (48) (69)
7. Taxes (15) (9) (9)
8. Net Income Or (Loss) 136 (57) (78)
C. RATIO ANALYSIS
1. Cost Structure
a. Financial Charges / Total Opearting Income/(Loss) 8.7% -66.7% -24.2%
b. Return on Equity (ROE) 309.6% -40.6% -39.5%
2. Capital Adequacy
a. Equity / Total Assets 54.4% 62.7% 58.9%
b. Free Cash Flows from Operations (FCFO) / (Financial Charges + Current Maturity of Long Term Debt + Uncovered Short Term Borrowings) 326.4% 236.4% -772.1%
3. Liquidity
a. Liquid Assets / Total Assets 56% 55% 57%
b. Liquid Assets / Trade Related Liabilities 150% 161% 117%
4. Credit & Market Risk
a. Accounts Receivable / Short-term Borrowings + Advances from Customers + Payables to Customers 26.0% 21.2% 17.1%
b. Equity Instruments / Investments 100.0% 100.0% 100.0%

Nov-24

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Ismail Iqbal Securities (Pvt.) Limited

rating scale

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Nov-24

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Ismail Iqbal Securities (Pvt.) Limited

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
    1. No director, officer, or employee of PACRA communicates the information acquired by him for use for rating purposes to any other person, except where required under law to do so. (Chapter III; 10-(5))
    2. PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during a business relationship with the customer. (Chapter III; 10-7-(d))
    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
    1. PACRA fulfills its obligations in a fair, efficient, transparent, and ethical manner and renders high standards of services in performing its functions and obligations. (Chapter III; 11-A-(a))
    2. PACRA uses due care in the preparation of this Rating Report. Our information has been obtained from sources we consider to be reliable, but its accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verify or validate information received in the rating process or in preparing this Rating Report. (Clause 11-(A)(p))
    3. PACRA prohibits its employees and analysts from soliciting money, gifts, or favors from anyone with whom PACRA conducts business. (Chapter III; 11-A-(q))
    4. PACRA ensures before the commencement of the rating process that an analyst or employee has not had a recent employment or other significant business or personal relationship with the rated entity that may cause or may be perceived as causing a conflict of interest. (Chapter III; 11-A-(r))
    5. PACRA maintains the principle of integrity in seeking rating business. (Chapter III; 11-A-(u))
    6. PACRA promptly investigates in the event of misconduct or a breach of the policies, procedures, and controls, and takes appropriate steps to rectify any weaknesses to prevent any recurrence, along with suitable punitive action against the responsible employee(s). (Chapter III; 11-B-(m))
  4. Independence & Conflict of Interest
    1. PACRA receives compensation from the entity being rated or any third party for the rating services it offers. The receipt of this compensation has no influence on PACRA’s opinions or other analytical processes. In all instances, PACRA is committed to preserving the objectivity, integrity, and independence of its ratings. Our relationship is governed by two distinct mandates: i) rating mandate - signed with the entity being rated or issuer of the debt instrument, and ii) fee mandate - signed with the payer, which can be different from the entity.
    2. PACRA does not provide consultancy/advisory services or other services to any of its customers or their associated companies and associated undertakings that are being rated or have been rated by it during the preceding three years, unless it has an adequate mechanism in place ensuring that the provision of such services does not lead to a conflict of interest situation with its rating activities. (Chapter III; 12-2-(d))
    3. PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA. (Chapter III; 12-2-(f))
    4. PACRA ensures that the rating assigned to an entity or instrument is not affected by the existence of a business relationship between PACRA and the entity or any other party, or the non-existence of such a relationship. (Chapter III; 12-2-(i))
    5. PACRA ensures that the analysts or any of their family members shall not buy, sell, or engage in any transaction in any security which falls in the analyst’s area of primary analytical responsibility. This clause, however, does not apply to investments in securities through collective investment schemes. (Chapter III; 12-2-(l))
    6. PACRA has established policies and procedures governing investments and trading in securities by its employees and for monitoring the same to prevent insider trading, market manipulation, or any other market abuse. (Chapter III; 11-B-(g))
  5. Monitoring and Review
    1. PACRA monitors all the outstanding ratings continuously, and any potential change therein due to any event associated with the issuer, the security arrangement, the industry, etc., is disseminated to the market immediately and in an effective manner after appropriate consultation with the entity/issuer. (Chapter III; 17-(a))
    2. PACRA reviews all the outstanding ratings periodically on an annual basis. Provided that public dissemination of annual review and in an instance of change in rating will be made. (Chapter III; 17-(b))
    3. PACRA initiates an immediate review of the outstanding rating upon becoming aware of any information that may reasonably be expected to result in downgrading of the rating. (Chapter III; 17-(c))
    4. PACRA engages with the issuer and the debt securities trustee to remain updated on all information pertaining to the rating of the entity/instrument. (Chapter III; 17-(d))
  6. Probability of Default
    1. PACRA’s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e., probability). PACRA’s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA’s Transition Study available at our website. (www.pacra.com) However, the actual transition of rating may not follow the pattern observed in the past. (Chapter III; 14-3(f)(vii))
  7. Proprietary Information
    1. All information contained herein is considered proprietary by PACRA. Hence, none of the information in this document can be copied or otherwise reproduced, stored, or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s prior written consent.

Nov-24

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