Hip Hip Hip Hurrah ! Winner of the gauravblog hamper announced this Monday morning,April 25,2011 ….we have entered a new week…..thanks Tushar,Kiran,RR, and A B Upadhyay for responding to this TAP GAP Equity Poser 3/11…..Kiran wins the gauravblog hamper for this Equity Poser…Kiran please email me your postal address and telephone nos…well done….my own personal view is that the verdict on the future of Broking firms is yet out…Enam and Sharekhan are wisely,in my view,exiting standalone entity structures before the realisation dawns that the cost of maintaining such a network may outweigh the benefits that are expected to accrue…such risks can best be absorbed and met by Banks…so clearly there will be a strong phase of consolidation in the Broking Industry…however don’t be surprised if a few also opt for a banking licence !…so clearly ,as Kiran says, a contra play,available at 52 week lows…any takers !
TAP GAP…Equity Poser 3/11….…Winning Response gets a gauravblog hamper
Do you think Listed Broking Companies like Motilal Oswal,Emkay,Geojit etc are worth Investing In right now and will become Wealth Creators in your Equity Portfolio over the next Three Years ?
Some guidance to respond to increase the probability of your’s being the winning response
Briefly support your views to explain why you think what you think…if you feel the brevity sought in the response box will not do justice to your views,you could simply mention your Views in brief as a response to this blog and also detail out why you think so in a seperate email to [email protected] …Both will be considered
…so get your mind gums working….responses inside ten days will be appreciated to help me select the winner from them by next weekend Sunday,April 24,2011
Cheers !…and all the Best
5 thoughts on “TAP GAP…Equity Poser 3/11…Do you think Listed Broking Companies are worth Investing In right now and will become Wealth Creators in your Portfolio over the next Three Years ?…Winning Response gets a gauravblog hamper”
Hi Gaurav,
sent a seperate email.
Reproducing Email below
Hello Gaurav,
I tried to do a quick analysis of this sector on the basis of 3 companies you had mentioned.I think carefully chosen co. from this sector could be a good contra bet in current time.
Here is what I feel about this sector.
1) Cos are quoting at almost close to their 52 weeks lows and not very high from recession times lows.So could be a good contra bet, if selection is proper.
2) Based on quick review of financials of the 3 companies you mentioned in the blog, general facts occurred to me are:
1) Very little debt on the books.
2) High margin business.
3) EPS degrowth in last 2-3 years.but future outlook is good as cos are expected to post good results in general.
3) This sector is closely related to economy. As Indian economy grows in the next few years, financial industries including brokerage firms will do well.Also the names you suggested are leaders in the brokerage and wealth management industry so they will do well.
4) As the average income level grows, investment in direct equities will grow which will help these companies. Apart from brokerage,these companies are also in the business of investment banking and wealth management which could see tremendous growth in the years to come as HNW individuals are growing in India.
5) Many private and public banks are also trying to diversify in this field. so some of these well managed companies can be acquisition targets which in my opinion should benefit their stock prices. But its very hard to predict this as of now (at least to retail investor like me).
According to me , a good company from this space(Geogit may be?) could be a good contra bet and will be a wealth creator in next 3 years.
Please let me know if I’m correct in this analysis to some extent.
Warm Regards,
Tushar.
P.S : I’m a small retail investor and started on investment journey 1 year back.I regularly follow your blog and learnt a lot from it.I Appreciate your efforts.
Dear Gaurav,
Huge fan of your blog. Please find attached my analysis and response to your Equity Poser 3/11.
I do think listed broking companies are worth investing at current valuations too, but I would qualify saying that not all broking companies will generate wealth for investors if invested at current levels. Some stocks will and some stocks won’t (and I have listed which ones might and which ones might not below)
Economy (Big Picture) Perspective:
If we look at the Indian economy as a whole, with favorable demographics and rising income levels (and the resultant improved economy), financial services indusry is likely to do well. Broking companies along with Banks as part of this are bound to do well too.
Business of Broking Perspective:
Before getting to specific stocks, let me detail out in brief the dynamics of a broking business. The broking business is essentially a agency business where business comes through extensive distribution network, expanded customer/client base and innovative product/services that a broking firm can provide to the client. There are a lot of brokers (and sub-brokers) in the country, but the major brokerage firms (like Motilal, Geojit, Emkay etc.) provide services for retail, institutional, wealth management (PMS – which has been a recent trend for these firms) and third party distribution. From an economy perspective (and as we observed in the last 5 years), lot of customers will actively trade/invest if it is a bull market (stock market, sensex is rising) and the same lot will shun and close their broking accounts if the Sensex is falling. Therefore, the true fortunes of these broking companies (although they make revenue irrespective of whether the customers buy or sell securities) will be a factor of how Sensex moves (because the volume of trading goes down dramatically in case of a downturn like 2008, thereby loss in a lot of revenue).
The key to a successful brokerage business, and a critical factor in retaining existing customers are the distribution network and more importantly a terrific technology infrastructure which can support both online and back-end processes. Any customer complaint/dissatisfaction in his online experience/back-end processes (say, for example, delivery of shares into demat) will result in serious lashback (due to increased online connectivity and social media) and result in drain of customers, both prospective and existing.
Specific Stocks that investors can look at:
At a very fundamental level, almost all major brokerage firms have decent retail, institutional and wealth management capabilities. However, valuations look attractive for some, while not so attractive for others. They have been resilient to an extent to the vagaries of the stock market (especially 2008 downturn), although I doubt we’d see the valuations of these broking companies reaching 2007 levels (which was ridiculous in my opinion)
Let’s look at some stocks that cannot generate wealth in the future if invested at current levels:
a) Motilal Oswal – Strenghts are tremendous distribution network, a recognisable brand and fantastic research capabilities. However, at current valuations, it is very expensive. Its P/E is 43, quoting at more than 4 times book and has had negative operating cashflows for 3 of the last 4 years. One of the major comforts, cash on balance sheet is extremely poor. Given these basic details, I don’t think investing in Motilal at current valuation will generate wealth for investors.
b) Edelweiss Capital – At 20 times earnings and negative operating cashflows for 3 out of 4 years, we can expect very meager returns if invested in the stock at current levels.
Stocks which can generate wealth are:
c) Geojit – Quoting at 12 times earnings, having positive cashflows for all the past 4 years, increased revenue 3 fold in 4 years (from 75 odd crores to 250 crores) with increase in Operating profit and expanding customer base. All work in favor of Geojit securities. Added advantage: Cash on Geojit’s balance sheet is 30% of its current marketcap which gives great comfort in investing at current levels (if it falls further, I am a buyer at this counter).
d) Emkay – One of the main factors that attracted me to this stock are its cash levels. At stock price of 62, it has cash on balance sheet of close to Rs. 53, which is close to 88% market cap, giving a sense of huge cushion while investing in this stock. It has increased its revenue from 50 odd crore to 150 cr in 4 years. It is not impressive growth, but off a smaller base, I think there is a higher chance of growth (or a buyout, like Axis Bank buyout of Enam Securities) which might re-rate the counter.
Yes, they will become wealth creators as percentage of investors in share market will go up. Also, listing of MOSL at NY exchange indicates that they are also very confident.
hi… I have maild you too….My reply is based on your time horizon of 3 years.
It is undisputed fact that Indians are heavily underinvested in equities. Statistics , numbers, investors etc have been debated enough every year in all the channels, magazines etc, justifying the potential upside in market claimed by “experts”.But how much so ever one pulls out these statistics, the situation is not going to catch up in a big way like mobile phone revolution in next 3 years.
Hence broking as such is not going to pick up in terms of numbers and gets rerated in the market because of the inherent value in next 3 years.
What will actually get valued is the network, systems, processes , client basd , skilled employees, goodwill, expertise, reach and allied bouquet of activites like wealth management, IB, AM, Distribution, DP , Loans etc they offer setup for a potential acquisition. Next 3 years will see banking sector opening up. Most of the private sector banks which are available for grabs ( not talking abt likes of ICICI, HDFC) but the smaller banks do not have skills, systems, processes etc towards broking and allied activity. Randomly look at any broking, DP services offered by private sector banker, it is just hopeless . The effort , time , investment required for these banks to build these skills, systems , network and people etc will take time not worth its value for the organization which is taking over these private sector banks in India. These broking houses will get rerated because of potential merger/takeover opportunity for their expertise, skills, systems, processes, people etc . in the specialized area of broking which they have built over a period of time. In a nutshell Iam looking broking and allied activity as complementary to banking activity and will be valued only on that basis with banking sector opening up.
Rerating is on cards in next 3 years in a big way …but ONLY the quality one’s which have all the aforesaid qualities the network, systems, processes , client basd , skilled employees, goodwill, expertise, reach and allied bouquet of activites like wealth management, IB, AM, Distribution, DP , Loans etc they offer ….
Having said the above, the market for broking etc is going to catch up in next 10-15 years in a big way( but not 3 years) considering demographics, literacy , awareness levels, Media reach, income levels, Indian growth story….and I see most of the transaction happening electronically -online, mobile / banking etc…
My reply is based on your time horizon of 3 years.
It is undisputed fact that Indians are heavily underinvested in equities. Statistics , numbers, investors etc have been debated enough every year in all the channels, magazines etc, justifying the potential upside in market claimed by “experts”.But how much so ever one pulls out these statistics, the situation is not going to catch up in a big way like mobile phone revolution in next 3 years.
Hence broking as such is not going to pick up in terms of numbers and gets rerated in the market because of the inherent value in next 3 years.
What will actually get valued is the network, systems, processes , client basd , skilled employees, goodwill, expertise, reach and allied bouquet of activites like wealth management, IB, AM, Distribution, DP , Loans etc they offer setup for a potential acquisition. Next 3 years will see banking sector opening up. Most of the private sector banks which are available for grabs ( not talking abt likes of ICICI, HDFC) but the smaller banks do not have skills, systems, processes etc towards broking and allied activity. Randomly look at any broking, DP services offered by private sector banker, it is just hopeless . The effort , time , investment required for these banks to build these skills, systems , network and people etc will take time not worth its value for the organization which is taking over these private sector banks in India. These broking houses will get rerated because of potential merger/takeover opportunity for their expertise, skills, systems, processes, people etc . in the specialized area of broking which they have built over a period of time. In a nutshell Iam looking broking and allied activity as complementary to banking activity and will be valued only on that basis with banking sector opening up.
Rerating is on cards in next 3 years in a big way …but ONLY the quality one’s which have all the aforesaid qualities the network, systems, processes , client basd , skilled employees, goodwill, expertise, reach and allied bouquet of activites like wealth management, IB, AM, Distribution, DP , Loans etc they offer ….
Having said the above, the market for broking etc is going to catch up in next 10-15 years in a big way( but not 3 years) considering demographics, literacy , awareness levels, Media reach, income levels, Indian growth story….and I see most of the transaction happening electronically -online, mobile / banking etc…