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Indian financial players have BIG dreams

By Shobhana Subramanian
May 08, 2007 09:28 IST
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Last May, when the entire investment banking team of Rabo Bank flew the coop to set up shop at domestic brokerage Motilal Oswal Financial Services, it caused quite a flutter in financial circles.

Then, a few months ago, Enam Securities - which until now has cultivated expertise and clients for initial public offerings - kicked off a retail broking business. And not content with advising corporates at home alone, Enam also registered itself as an investment banker in the UK market.

Meanwhile, brokerage and investment bank Edelweiss Capital, known for its focus on equities and derivatives, has decided it wants to be a non-banking financial company, too. Not to be left out, investment bank ICICI Securities (I-Sec) is toying with the idea of building a brick-and-mortar broking business.

They want to do it all. A booming economy has created wealth for more people and companies and India's homegrown money managers are exploring every niche possible in search of profitable business, whether it is portfolio management or advising companies on mergers and acquisitions.

Here is why they think they are in business: A Morgan Stanley study, done in January 2006, estimated that given India's growing capital needs, companies would issue capital amounting to 2 per cent of GDP in the coming decade, compared with an average of 0.8 per cent in the past 10 years. With GDP growing faster than ever - 8.5 to 9 per cent at last count - capital issued will be an ever-growing figure.

Moreover, the total investment banking fees, the study noted, at just 1 per cent of issuances, could be as high as $400 million in 2015.

Little wonder that investment banking teams are being poached. According to Manish Chokhani, director, Enam Securities, the addressable opportunity in the wealth management space in the next five years is estimated at $10 billion. Even at just 2 per cent and no profit sharing, that means fees of nearly $200 million, or nearly Rs 850 crore (Rs 8.5 billion).

Says Vivek Prasad, partner, PricewaterhouseCoopers, "Urban India is cash rich and there is a greater awareness today of the importance of planning for the future than there was even five years ago. So an intermediary needs to offer more than just one service."

Adds Sandeep Sharma, head, private banking, Societe Generale, "The penetration into households with surpluses of $1 million is low at present. The total number of such households covered by the top 10 broking firms and private banks will not be more   than 15,000. So, undoubtedly, there is a huge opportunity."

A finger in every pie

To be sure, there is still money to be made from plain vanilla broking, even if commissions are down to 0.2-0.3 per cent. But today's youngsters prefer to trade on their own, a trend that is spawning more online trading portals like ICICI Direct or

Says Subrata Mukherji, MD and CEO, I-Sec, "Youngsters are willing to take risks to earn high returns. Besides, you can't put all your money in fixed deposits. So broking is a big story and perhaps we will look at a brick-and-mortar model in addition to our online channel."

Many of the older lot, however, are more risk-averse and prefer to hand over their savings to experts. That is what has prompted Enam Securities, which is getting ready to move to a new 100,000 sq ft office, to set up a both a retail brokerage as also put together a wealth management service. It is looking at clients with a net worth of at least Rs 5 crore (Rs 50 million).

Edelweiss, meanwhile, is already there: its wealth management team advises around 200 customers on real estate, mutual funds, fixed income securities and equities. And portfolio sizes have to be worth at least Rs 1 crore (Rs 10 million). At present, the firm does not cater to smaller investors, but that may soon change.

To earn more fees, Motilal Oswal, CMD, Motilal Oswal Financial Services, says his firm has raised $40 million for a private equity fund that it will manage for investors in return for a 2 per cent fee and a 20 per cent share of the profits. And Edelweiss has armed itself with an NBFC licence and plans to venture into the asset management segment at some stage.

Observes Edelweiss Capital CEO Rashesh Shah, "We are already into both cash and derivatives broking and these would be adjacent businesses for us. We could get into funding for employee stock options or even margin funding where the risks are relatively low."

To be able to service more companies, Enam has armed itself with a registration to operate in London as an investment banker. Even before this the firm had helped the Raheja group mop up funds on the Alternate Investment Market.

Hedge the risks

While there's no shortage of customers, it's also true that margins for the broking business have become wafer-thin. "We get barely 0.15-0.20 per cent as commissions while costs are going up. Besides, last year the markets were down so brokerage revenues for the industry grew by just about 20-25 per cent," says Shah.

That's possibly why he feels he should start one new business every year - the firm, Shah notes, is not yet into commodity broking. And as Ravi Trivedy, executive director, KPMG Advisory Services, points out, "It is becoming a cut-throat environment for brokers, whether they are dealing with institutional or retail clients because research is also getting somewhat commoditised. In this kind of environment, it is wise to hedge your bets." Oswal agrees.

"If you are in only one business, you are vulnerable to a downturn because the markets can be very volatile." For his part, Oswal is looking to grow the balance sheet and plans to raise funds through an IPO.

"We believe a mix of fee-based businesses like portfolio management services or commodity broking together with fund-based revenues from margin-funding will sufficiently de-risk the firm," he says.

More bang for the buck

It is simply a question of leveraging a firm's existing strengths. Says Oswal, "We have more than 200,000 customers across 1,160 outlets so instead of simply offering broking services, it makes sense for us to distribute mutual funds and also offer portfolio management services."

As for venturing into investment banking, Oswal says he is simply making use of the knowledge base he has created. "We are researching firms and sectors for our broking business. So, we can also use this perspective to advise companies on how to raise money, how to generate new revenue streams or what acquisition to make."

Oswal believes his firm can compete on the strength of the ideas that it throws up as also the relationships with corporates that it has built up over the years. It is much the same story at Edelweiss.

At Enam Securities, too, Chokhani says he is readying a team to kick off wealth management and financial services. However, the research team for both this segment as also the secondary market broking business, which will include a derivatives segment too, will be pretty much the same.

And I-Sec's Mukherjee says it will use the ICICI Bank branch network to distribute IPOs, especially in smaller towns. "We hope these investors will over time migrate to our online trading system," he observes.

Going it alone

It is not just about reaching out to the retail investor. Brokerages are equally confident of being able to cater for institutions, both foreign and local. I-Sec's Mukherjee believes domestic brokerages today offer research of a high standard and "that is why a JM Financial, a Kotak or an ASK Securities can afford to split from its foreign partner."

Mukherjee also points out that while the foreign players may have had an advantage initially when the market was opened up to foreign institutions, today it is relatively easy to access foreign institutional investors. Shah agrees. "We research more than 200 firms; most foreign brokers don't track more than 100 companies," he says.

In the investment banking space, too, as Chokhani points out, the access that local brokerages have to high net worth and retail clients will ensure that they get a good share of the IPO.

"With companies now preferring to raise institutional resources at home via the Qualified Institutional Placements route rather than through the Global Depository Receipt market because it's far simpler, we can pitch for more of these mandates," he adds. But it is still difficult to be part of big cross-border deals in the M&A space.

That is because, as PricewaterhouseCoopers's Prasad points out, "Companies prefer merchant bankers who have some knowledge of the country in which the target firm is based and so a foreign player does have an edge. Moreover, since many of the deals are large it helps if the investment bank can also help fund the deal."

Indeed, that's the reason for a couple of large foreign banks having found their way into recent cross-border deals. True, says Enam's Chokhani. "The reach of foreign investment banks cannot be matched but we have our ears to the ground and we can also add value."

Adds Oswal, "It doesn't really matter too much if you don't have a large enough balance sheet because the market is big enough to accommodate many players." He adds that his firm has already done seven deals, including the Aban Lloyd takeover of Sinvest in Norway.

Edelweiss' Shah, whose company is working hard to raise resources for Deccan Aviation, sums it up: "The top 100 companies in India are over-banked but the 500 firms below them are under-banked. And it won't be easy for foreign firms to reach them."
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Shobhana Subramanian
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