 "Non-broking businesses to contribute 40-60% in five years: Motilal Oswal")
What are your expectations from the Budget?
As far as budget is concerned since many of the policy initiatives are already taken there should not be much to talk about. Still I would say no negative news will be positive news for the markets. We do not expect good news but we also do not want to hear any bad news. At this time the market is concerned about the inheritance tax, hike in custom duty, service tax etc.
Do you think the hopes of earnings recovery and thus market for real?
We are expecting the Sensex earnings in FY14 and FY15 in the region of about 15%. This is significantly higher considering that in the last five years starting 2008 to 2013, Sensex earnings have grown at just 8%. Today, the biggest worry is inflation rate which is hammering growth of the companies. But once the inflation cools down, it will boost earnings due to lower interest rates and higher demand. Companies will be able to save not only on the interest front but also on the input cost front. Corporate profit growth has underperformed nominal GDP growth. In the next two years, corporate profit can hit about 15% annual growth. Keeping these things in mind we have projected year-end target of 23,000 for the Sensex. The bigger trigger for markets would be the RBI action in the coming months. We are expecting 100 basis points cut in rates in 2013. This could bring huge amount of positive impact on the industries. Many companies in the infrastructure, construction and real estate space have been hurt big time because of high interest cost.
Do you think the optimism for the real estate sector can sustain in the coming months?
In real estate, the problem is most companies are over leveraged. My sense is that we have seen the worst in the real estate sector and the growth in the next couple of years could be in the region of 20-25%. Now, the market is improving, companies are de-leveraging. I think there are still good companies to own in this space, which are having sound balance sheet and business prospects.
You are also bullish about the public sector banks. Can you through some light on the reasons for the same?
In the last two years, the private sector banks have done very well even in the bad times. On the contrary, public sector banks have suffered due to asset quality issues and distressed portfolio of clients to whom they have lent. Public sector banks could be the biggest beneficiary of lower interest rates. Presently, the margin of safety in the public sector banks is very high. In terms of share prices, there are possibilities that the public sector banks could do well in the coming months compared to private sector banks. We like banks such as SBI, Canara Bank and OBC in the public sector space.
What about the capex led sectors?
Right now the confidence is still low for the capital intensive sectors. Government has shown the intention and if things continue as projected, like a good budget, there is hope of revival and people will start thinking of making long term investments. But, it will only be clear after the budget whether the government is in election mood or wants to continue doing the right things.
During the election period though there is usually fear about policies. Most of the big investments will happen post the elections. Till that time, capex will keep on happening but in smaller amounts where it is needed. As of now, in engineering and infrastructure, investment is not happening because of the policy issues and higher interest rates. I would rather bet for cement companies at this point in time. In fact, we are quite bullish on mid-cap cement companies from a two years perspective.
How would you advise to position portfolio at this time?
I think one should own a portfolio of 12-15 companies coming from different sectors. Sectors which I have mentioned above namely, cement, PSU banks and real estate are the beaten down sectors, but that does not mean one should own all of these companies in the portfolio. Probably, a portfolio consisting of companies in the auto, pharma, IT, private sector banks should do well.
Is your broking business witnessing revival in volumes?
Right now there is not much happening because as of now the volumes are largely happening in the derivate segments, where realisations are low. Our main business comes from the retail investors where the volumes are yet to pick up. We have the highest delivery based volumes among brokerages given the strong research focus.
How are you coping with the situation? When do you think retail participation to increase?
We are now present in the 600 cities. Right now the growth is not happening in the small cities and towns, but we have laid down the infrastructure and are ready for the bigger participation in the markets. There is money in the hands of retail investors, but then people should make money. Profits bring more and more money in the equity markets. As the markets move up they will attract more money.
It is part of life out of seven years, three years will be very good, two will be bad and another two will be average. We are investing in technology, people and infrastructure. We know that in bad times you try to become better and in good times you become bigger. One cannot expect to become bigger in bad market conditions. So what we are trying is to become better by hiring the right talent selectively , training employees, innovating products, investing in technologies, etc. At least, we are ready for the next leg of growth as and when it comes.
Your balance sheet shows that you have invested lot of capital in infrastructure and curving out several verticals like asset management, PMS, private equity and investment banking, etc. But, in this period revenues and profits have fallen and return ratios have impacted because of the large capital base. When do you expect the new businesses and investments to contribute?
We have made big investment into our own tower in the heart of the city. Today, new businesses contribute 25% of revenue but negligible to profits. In the next 4-5 years, this ratio should change to 40-50%. One thing is that if the markets conditions allow, these businesses could grow faster than the broking business. And since the infrastructure is already in place they can straight away contribute to the overall profitability of the company.
Recently your organization has celebrated 25 years of existence. If we look back, you have focused in and around the broking business. Are you looking for more verticals when your peers are making headlines in other activities like gold loans, etc.?
We do not want to leverage our balance sheet. We are focused: we do not need money for the gold financing or other unrelated activities which require high leveraging. We have zero leveraging in our balance sheet. Our objective is to get highest return on equity (RoE) for our investors. We do not want to get into the riskier businesses. We will keep the money in bank and raise the dividends rather investing in unrelated areas.