We don't need lottery ticket sellers as option traders: Prakash Kacholia

Kacholia said that going forward, a sizeable portion of outperformance may come from SMID space, where earnings are rebounding more quickly and there are still pockets of reasonable value

Markets have been struggling to maintain higher levels. PRAKASH KACHOLIA, managing director of Emkay Global Financial Services, tells Puneet Wadhwa in an email interview that going forward, a sizeable portion of outperformance may come from the small and midcap (SMID) space, where earnings are rebounding more quickly and there are still pockets of reasonable value. Edited excerpts:

What’s your outlook for the markets from a one-year perspective?
 

From a one-year perspective, we anticipate muted returns for the markets. While earnings growth is expected to materialise, current valuations appear stretched, making a time correction likely. Investors might consider holding some cash in their portfolios.

We foresee increased sector rotation, similar to the post-election phase when underperformers like staples and information technology took the lead. A major portion of outperformance may come from the SMID space, where earnings are rebounding more quickly and there are still pockets of reasonable value.

Any market correction should be viewed as an opportunity to buy quality stocks, setting the stage for superior returns over the long term.

How are retail investors approaching the markets now compared to a year ago?
 

Retail investors have become increasingly savvy with their allocations, leveraging a range of investment strategies to build wealth. Many are now seeking the guidance of advisors for asset allocation, reflecting a more mature and informed approach to investing.

While the appeal of equities, futures and options, and trading remains strong, it’s important to exercise caution. I would advise investors to approach these high-risk areas with careful consideration.

When do you expect incremental foreign institutional investor (FII) money to chase Indian stocks without worrying too much about valuations?
 

Many FIIs have missed out on the recent rally in India, concerned by what appear to be high valuations. They have sold nearly $17 billion worth of equities in the calendar year 2024.

We expect foreign investors to begin investing more aggressively in India once the US Federal Reserve starts cutting rates and the global risk-on trade gains momentum.

Is the Securities and Exchange Board of India (Sebi) overregulating?
 

To ensure the development and growth of our market, especially considering its size, it’s crucial for Sebi to periodically revisit and refine its regulations. A historical example can be drawn from South Korea, where changes in derivatives contract specifications in 2011-12 led to a drop in volumes by 40-50 per cent.

While speculators play an important role, we do not need sellers of lottery tickets in the form of options sellers in the markets. Hence, intervention is necessary. That said, any regulatory changes should be implemented gradually to allow the market to absorb their effects smoothly.

If Sebi’s recent proposals are implemented in full, we could potentially see a 20 per cent dip in derivatives segment volumes.

Additionally, arbitrage funds might face increased impact costs, which could affect their returns, particularly with the proposed increase in lot sizes.

Do you foresee pressure on margins going forward for broking houses as costs escalate?
 

The structure of the capital market has undergone major changes after the pandemic. Indian investors are now more liquid than ever, which has been a boon for the broking industry.

We anticipate this trend to continue, as evidenced by the rising number of dematerialised account holders. Additionally, the influx of new initial public offerings is expanding investment portfolios, indirectly benefiting the broking sector.

Margins have largely stabilised over the years, though rising costs — driven by a shortage of skilled talent, the need for new technology, and increased working capital requirements — pose challenges.

At Emkay, we’re focused on enhancing our cash market delivery-based business for high-net-worth individuals (HNWIs), family offices, and corporates, alongside our institutional business.

By investing in technology and delivering a robust execution platform, we can differentiate ourselves from traditional broking firms and maintain a competitive edge.

From where will the next big disruption come for the Indian broking industry? Can it be regulatory disruption instead of technology-driven?
 

Disruption in any industry often arrives without warning. In today’s broking environment, we’re already seeing shifts with developments like execution algorithms, direct payouts, and T+0 settlement.

Both regulatory changes and technological advancements will play noteworthy roles in shaping the future of the broking industry. Regulations have made the broking industry increasingly capital-intensive, and this trend is likely to continue.

On the other hand, technological innovations will reduce reliance on human capital, driving efficiency and potentially redefining the industry’s operational model.

Do you have plans to enter the discount broking space?
 

We have no plans to enter the discount broking space. From a long-term perspective, wealth management is a strong growth engine for us. The business has been expanding robustly, with growth exceeding 25 per cent annually.

We’re currently present in 11 locations across the country and are steadily increasing our team size. Our strategy is to grow gradually by building a solid base of trail-bearing assets while providing dedicated service to HNWIs, promoters, family offices, and corporates.