Can Sharekhan's acquisition by Warburg, General Atlantic revive India's broking industry?

The deal suggests foreign investors' confidence in the buoyancy of Indian markets

The M&A raiders have finally arrived at the doorsteps of broking industry. Reports say that Warburg Pincus and General Atlantic are jointly taking over leading retail broking firm Sharekhan. The deal is expected to be among the biggest such acquisitions in the industry.
 
Sharekhan is being valued at around Rs 2,300-Rs 2,400 crore, which is around 13 times its net profit of Rs 175 crore. The largely-online broker has a net worth of Rs 1,300 crore and operates through 160 branches and numerous franchisees. Sharekhan is the third largest retail broker after ICICI
Direct and HDFC Securities with a client base of around 13 lakh retail investors.
   

Going by valuation of broking companies like Motilal Oswal and Edelweiss Financial Services on the bourses, Warburg and General Atlantic seem to have struck a bargain. Motilal Oswal, with a consolidated net profit of Rs 143.58 crore for FY15, is trading at a price-earnings multiple of 30 times. Edelweiss too is trading at around the same valuation. Sharekhan is being sold at less than half the valuation of either of these two brokerages.
 
But then, this is not a fair comparison. Sharekhan is primarily an online retail broker while the other two companies have other businesses in their fold. They are also established institutional brokers and operate asset management companies.
 
The fact that foreign broking firms are willing to look to acquire Indian retail brokerages is good news for the Indian markets since it suggests that Indian markets will be buoyant going forward. This has been demonstrated in the recent past.
 
Even while FIIs were sellers in the Indian markets, domestic institutional investors have been strong buyers on account of fresh money being pumped in by Indian investors. Since the formation of the new government last year assets under management of mutual funds industry has increased from Rs 9 lakh crore to Rs 11.8 lakh crore. More importantly, 22 lakh new folios have been added.
 
Sundeep Sikka, CEO of Reliance Capital Asset Management has been reported, [LINK 2]as saying that Rs 1.63 lakh crore of retail money was pumped in to the mutual fund industry since the new government took charge; this is three times more than what it was in the previous year.
 
Investors who directly trade in the market have also increased over the year. The National Stock Exchange (NSE), the country’s largest stock exchange by trading volume as of April 30, 2015, had around 52 lakh active clients for all stock brokers of the exchange, a jump of 25% over the previous year. India has around 25 million registered clients across exchanges. Demat account opening has increased by 8% in the second half of FY15 against 4-5% in earlier years.
 
But there remains huge potential to be tapped, which is presumably what has brought Warburg Pincus and General Atlantic to India. The penetration of mutual funds in the country remains very low. There are only 4 crore mutual fund folios, representing 3% of the population, while the number of demat accounts or those who trade directly is even lower at 2.5 crore. If this is compared with 97 crore telecom subscribers and 21 crore bank accounts, the potential for the financial sector is huge.