At a time when corporate India is trying hard to shed its debt burden, broking companies are witnessing a rise in their debt equity ratio. With markets having picked up and volumes surging, brokerages are going ahead with their expansion plans, hence increasing the debt on their balance-sheets.
The debt/equity ratio for all major broking companies has gone up since March when markets started recovering. The ratio had become almost zero during the year ended March,because of the downturn in markets and poor business arising out of economic recession. However, the tide has and brokers are not hesitating from taking short- term debt to boost their business.
Motilal Oswal, for example, has seen its debt-equity ratio grow from zero per cent in March 2009 to 18 per cent in September 2009. Similarly, Edeweiss Capital’s debt equity ratio has moved up from 36 per cent to 70 per cent.
Motilal Oswal, chairman & managing director of the company named after him, said: “ We have taken debt for working capital requirements. However, most of it is short-term debt. We recently acquired a property and would be funding it through short-term borrowing.”
Although several brokers do not disclose their debt-equity ratio with their quarterly results, analysts say it has increased across the board. The reason being not just increased capital requirements due to expanding business but also because of financing having picked up. The loan book for all major players has grown by more than 12 per cent, quarter on quarter, and is expected to grow strongly in the second half of this financial year.
Pankaj Agarwal, analyst, Noble Equities, said: “IPO financing and margin funding has revived for most players, so it is quite logical that debt will go up. For brokers who are into arbitrage trading, the increase in debt would be much higher. Having said that, most broking firms are less leveraged and it gives them headroom to expand aggressively. Brokers generally go for short-term debt to meet their funding requirements. In our analysis, we have found that 75 per cent of the debt is less than six months. We expect it to rise in the long term, given revival in the lending business.” Average daily volumes in the first half of FY10 have been close to Rs 930 billion ( up 55 per cent year on year) compared to Rs 610 billion in FY09 and Rs 554 billion in the fourth quarter of FY09. The major driver of volumes have been FII inflows, to the tune of $13.7 billion in the year to date, compared to outflows of $10 billion in FY09. According to Noble’s analysis, India Infoline and Edelweiss, two top brokers, draw 23 pr cent of their valuations from their financing subsidiaries.
While Edelweiss’ financing book is mostly loan against shares, where stockbrokers have an advantage over banks and NBFCs, India Infoline’s 80 per cent loan book is retail and mortgage loans, where stockbrokers have no visible competitive advantage over banks and NBFCs. According to Noble, the debt equity ratio for India Infoline is expected to increase to 13.7 per cent by the end of FY10 and 25.4 per cent by FY11.
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It is estimated to be much higher for Edelweiss, increasing from 36 per cent to 43 per cent by FY10 and 57 per cent by FY11. Similar estimates for Motilal Oswal have been pegged much lower, at 8.6 per cent in FY10 and 14.1 per cent in FY11.
Apurva Shah, Head of Research, Prabhudas Lilladher, said in one of its reports: “Interest Income for the sector grew sharply in Q2FY10 (28.3 per cent, quarter on quarter), mainly due to huge IPO funding opportunities captured by them in the quarter. The loan book for the three companies (India Infoline, Motilal Oswal and Edelweiss) has also started growing steadily, though substantial growth is yet to be perceived. Episodic financing opportunities such as IPOs will also continue to offer themselves, given the buoyancy in the primary markets.”