The stock broking industry was badly hit in the 2008 market crash. However, those memories seem to be quickly receding. In an interview with Palak Shah, Edelweiss’ Chairman and CEO Rashesh Shah says he sees the next decade as the golden age of the financial sector in India. Edited excerpts:
Do valuations look expensive, with the markets having risen so fast?
Over the medium to long term, the current valuations are extremely attractive. While the other markets have not grown so fast, the rise in Indian markets has been very rapid and we should expect some correction which should form the basis for further rally. The market upside will now come from growth and not undervaluation.
So, prospects look bright?
It does. We are seeing the rally mainly because just about half the Rs 70,000 crore cash that different market intermediaries held has been invested. Mutual funds were holding Rs 15,000 cr, insurance companies Rs 20,000 cr, foreign institutional investors Rs 30,000 cr and high net worth individuals Rs 10,000 cr. This is excluding the incremental capital flows.
Compared to 1991, brokerage commissions have come down one-hundredth, but financial services firms have been doing very well on the back of a dramatic spurt in volumes of trades. The volumes have come in because of the high growth in the number of investors over the past eight years. Home-grown investment banks and brokerage firms like us are growing. Even while the world was shrinking, we have been getting into newer areas of business - AMC last year and now retail broking.
The number of capital market investors is currently 8-10 million. We see this number doubling in the next five years. Each of the businesses — M&A, private equity, IPO — will see robust activity in the coming decade.
Which areas do you see growth in?
Given the current backdrop, with India largely having withstood global recession, and the reforms introduced over the last 18 years, I see the next decade to be a golden age for the financial sector. The kind of growth and retail penetration the telecom sector has seen over the past decade, with volumes growing multi-fold due to reduction in call rates, I expect similar growth in the financial sector.
Banking, insurance and the capital market are the three pillars of the financial sector and with each of them reporting robust growth, aided by technology, I believe we are strongly poised. Overall, I am extremely bullish.
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Is there any sense in the India de-coupling theory?
Stock prices track economic growth and it can be measured with simple mathematics. India is a trillion dollar economy with a 34 per cent saving rate, which comes to around $340 billion. In 2007-08, it was observed that some $140 billion were spent in buying gold, real estate and other not-so-productive assets. The rest — nearly $200 billion — came into productive assets through capital markets, banks, insurance firms and other such entities. This investment of $200 billion in productive assets gives us a incremental growth of around $50 billion, which translates into nearly 4 1/2 or 5 per cent of GDP growth, which is achieved purely through domestic money.
Add to this nearly $100 billion through foreign direct and portfolio investment which translates into another 1.5 to 2 percent growth and if export markets are good, then the sector adds another 1 or 1 1/2 percent to growth. So, to achieve a 5 percent growth is not a problem but if foreign inflows and exports improve, then we can grow by over 8 percent or even more, if more domestic savings flows into productive assets as per estimates. So we are de-coupled for basic growth and coupled for incremental growth.
Apart from exports, which are the other sectors of concern?
Real estate developers will still have to bring down prices or this sector would be another area of concern. There is demand for residential property in the affordable housing segment, which ranges between Rs 3,000 to 4,000 per sq.ft. in Delhi and Bangalore and Rs 5,000 to 6,000 per sq.ft. in Mumbai. The concept of 100 per cent margin for real estate developers will have to change.
Large foreign research houses and investors have set up shop in India and competition is growing in institutional business. How is Edelweiss placed?
Edelweiss is the leader in the institutional futures trading segment, with over 7 per cent market share. There were a few foreign institutional investors and banks which had set up base, but they have now scaled down significantly. Also, most of the foreign research houses do not track more than 100 companies, while Edelweiss has a comprehensive research on 200 companies.
Our next step is to expand in the retail segment and we are also looking to grow organically and inorganically — including opportunities to acquire brokers who have a good network among retailers. The retail broking segment will kickstart by August this year.