Stocks in the broking space, which have been off market radar over the last couple of years, might come back in the reckoning as valuations have hit rock bottom and equity markets are showing early signs of revival.
Broking stocks, including Motilal Oswal, Edelweiss and India Infoline, have underperformed the broader market in the last two years as their financial performance had come under pressure amid shrinking trading volumes and falling yields. These firms have been particularly hit due to change in market mix from the high-yielding cash segment to a low-yielding options segment.
However, things are starting to look up for brokerage firms, say analysts and industry executives. “We see signs of the market stabilising and if confidence returns, then a continuation of this rally and a re-opening of primary equity markets could lead to a substantial re-rating of these stocks,” said Santosh Singh and Nidhesh Jain, analysts at Espírito Santo Securities, in a report.
| POOR PERFORMANCE Broking stocks have underperformed the broader market since December 2010 | |||
| Sept 24, 2012 (Rs) | Dec 30, 2010 (Rs) | Change (%) | |
| Motilal Oswal | 112 | 168 | -33 |
| Edelweiss | 32 | 47 | -32 |
| Geojit BNP | 22 | 33 | -34 |
| India Infoline | 59 | 82 | -28 |
| BSE 200 (in pts) | 2,283 | 2,534 | 9.89 |
| Compiled by BS Research Bureau | |||
The analysts duo highlight the stocks in the Indian broking industry are trading at one of the lowest multiples globally, despite very little balance sheet risk.
Promoters of leading brokerages are also confident about the improvement in prospects for their companies.
“The worst is behind us, things are looking better with the markets showing improvement. However, it's too early to say whether the activity will sustain,” said Motilal Oswal, chairman and managing director at Motilal Oswal Financial Services.
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Added C J George, managing director, Geojit BNP Paribas Financial Services, “Broking is a volume-driven business. If the market is bad and volumes are subdued, that naturally affects our business. If the market sustains, it will instill confidence among investors. There could be a change in fortunes.”
The stocks in the broking space have been particularly hit by falling cash market volumes and lacklustre primary market activity.
According to the report by Espirito Santo Securities, the share of cash volumes has declined from 30 per cent in 2007-08 to less than 10 per cent in the first quarter of 2012-13 (Q1FY13). Meanwhile, the share of options has increased from 10 per cent in 2007-08 to 70 per cent in Q1FY13, which has taken a toll on blended yields of broking firms. Investment banking business, too, has taken a hit due to very few deals in the primary market space. “The fee pool peaked at nearly $1 billion in 2007 and has been $350-650 million since and could be sub-$250 million this year,” adds the report.
However, analysts believe market volumes will bottom and investment banking fees could see an uptick in 2012, which could see these stocks doing well. Analysts at Espirito Santo are not expecting any dramatic recovery but say most of the risks have been played out and the current valuations are too bearish. The firm is advising its clients to buy Motilal Oswal and Edelweiss with a medium-term outlook.
The change in sentiment towards broking stocks is already evident. Following the market rally since September 6, these stocks have rallied sharply. Motilal Oswal and Geojit each have gained 17 per cent, while India Infoline moved up 12 per cent in the past two weeks.