Hi Pandi, I haven't done much research on AB Capital as yet, hence I am not sure if it is rightly priced right now or not. I would wait for some more time to understand that stock in a better way. However, my initial impression has been that, AB capital derives significant portion of its revenues from non capital market activities like Insurance, lending etc. On that sense, this company may be compared more with Edelweiss or IIFL, than companies like Arihant Capital Markets or Emkay.
Though I am currently invested in Edelweiss, my particular interest right now is on companies which derive their maximum portion of income from capital market activities. That's where the cyclical play has really kicked in. I feel, these companies are likely to give you maximum returns over the next few quarters/years.
Also, let me explain in detail, why I believe the companies which derive their maximum portion of income from stock broking activities (Arihant Capital Markets or Emkay) specifically are likely to grow at higher rates of profits over the next many quarters or years, as compared to other companies in the capital markets sector or other NBFCs or Housing Finance Companies.
Stock broking business by its nature is such that, as the volumes increase, the topline (sales revenue) increases, but the bottomline (profit) increases in a disproportionately higher way. As per my judgement, this is due to the reason that, the business (due to its very nature) is able to handle more volume with less increase in the resources (employees, computer software etc.) and thereby lesser increase in cost. Hence, we have a non-linear relationship between volume and the cost.
As we get into more and more deeper into the ongoing bull market (I assume a multi-year bull market here), more and more money pour into equity market, hence volumes for these companies will increase proportionately. However, their profits will increase in a disproportionate way, as explained above.
Let me substantiate the above hypothesis with one more fact. As you know, ROCE is the primary measure of how efficiently a company utilizes its all available capital to generate additional profits. Arihant Capital Market`s ROCE as of Mar-17 was around 28 (it was just around 9 in 2004, when market condition was not favorable). However, during the earlier capital market boom time in 2008, Arihant's ROCE had even gone above 50. I think, companies like Arihant will keep on improving their ROCE significantly from now onwards due to the reason explained above.