Motilal Oswal - op leverage market recovery theme

I would not say that the good times are back again but I stronglybelievethat markets are past their trough

also considering that the Govt is coming out with multiple FPOs of PSUs at a discount it is very likely to kickstart the interest of retail investors again - Maruti IPOdeja vu

I was looking for the names which would benefit from this trend and brokingcompaniescome at top of that list

Broking is a very cyclical business and has a very high operating leverage

of the listed names I find Motilal Oswal as the best placed

it has the best brand awareness amongst the retail investors and is a pure play broking business (as opposed to say Edelweiss or India infoline who also have a lending and/or insuranceportfolio)

As they have higher fixed cost the operating leverage would come into play when volumes rise in the market with most of the revenues directly flowing to EBITDA

this entails a 2X current profits if things do really turn around

I would salute the management for sticking to their core business and not diversifying into lending orinsurancebusiness

they have a healthy 40% div payout and I think the owners know what ticks the markets

it might look optically expensive at15 times FY2013E earnings

but if you are bullish on retail investorscomingback to the market it isprobablyquoting at very low P/E on its FY2014 earnings

In this post I am posting only my reasoning for acquiring brokers stocks without specifically going into too much detail on Motial Oswal. Will post a short comment later, specifically on Motial Oswal.

Itas true that various investors acquire same stocks for totally different reason. I had invested in couple of broker stocks like Geojit BNP Paribas, and Motilal Oswal, Emkay Global (Emkay is totally a different story now after they got hit badly in flash crash and would not recommend any fresh position for now) couple of months back. I acquired these stocks based on what Martin Whitman of Third avenue Fund (You can download his newsletter from here ( has mentioned while acquiring stocks of companies directly impacted by housing crisis. Lets see how his reasoning can be applied to brokers:

Let’s see what these principle are and how can we apply the same to Indian brokerage companies._(Mentioned it italics principles laid down by Martin _and my comments below I normal font)

First the bad side of these investments:

1)The stock market pricing for these equity issues is chaotic. There is no way Fund management is able to pick a bottom for securities prices, or a near bottom. - this is quite evident from the stock prices wherein stock prices of most of these companies are down more than 80%.

)- This is indeed the case for most of the brokers stocks wherein their share prices have fallen by more than half or more. Going forward its quite likely that share prices can test new low in case of any uncertainty (decline of more than 25-30% would not surprise me)

2_) Fund management has no good idea of how deep the crisis will become, or how long it will last. Our best guess is two to four years._

)- Its difficult to say when the sustainable rally will begin. Currently there are lot of high impact low probable events hanging around both domestic and international.

Second, the good side of these investments:

1)_In each instance, Third Avenue Value Fund (TAVF) is acquiring common stocks at meaningful discounts from readily ascertainable NAVs.__For each of these companies, a normalized Return on Equity (equity equals book value) (aROEa) ranges from 8% to 14%. Assuming a 10% ROE sometime in the future, and no further dramatic deterioration in book value during the interim, probably a realistic assumption; and current pricing at 40% of book value, Third Avenue would be paying only four times future normalized earning_power.

  • At one point on time stocks of Geojit BNP Pribas and Motilal Oswal were trading at or very near to their book value and Emkay Global steep discount to book value (more than 50%). Brokerage rates have definitely have hit bottom or close to bottom. Assuming that going forward brokers can earn ROE of 10-12%. Going by high asset turnover ratio or in other words low capex requirement, which these businesses enjoy, conservatively they should be able to earn atleast 15% ROE (Motial Oswal asset turnover declined after they invested in buying their corporate office) So if you acquire these stocks at or near book value, you can acquire these stocks at a normalised PE multiple of 6-7x.

2)Each common stock acquired, is acquired in a company which enjoys a strong financial position.

)- Both Geojit BNP and Motilal Oswal have zero net debt as on Mar 2012. Their business is not at all capital intensive and having burned their fingers in rapid expansion during 2006-08, I do not think any of the brokers will expand their branch network aggressively.

Now, even if it takes upto 5 years for broking stocks to recover its profitability, they should atleast double from these levels. This imply minimum CAGR of 15%, with likely possibility of much higher return.

Disc: My opinion can be biased, I have positions in the stock discussed above.

As per moneycontrol data, Dolly Khanna has entered Emkay Global. She holds 1.1% of its shares.

In case you haven’t heard of her, she is an investor with a good/great track record. There is a thread about her over at TED.

Excel, Anil,

Do you still track brokerage stocks? While they have run up this year, if the so called mother of all bull markets is ahead of us, these stocks should continue to benefit. Jhunjhunwala added to his geojit position and also bought into edelweiss recently. Do share your views.

If you believe in Modi / India story which would bring the retail investor back to equity markets

[ Comment too short ]

Hi HG,

I am invested and positive on brokerage stocks. I am pasting my basic reasoning from one of my posts in Donald’s thread ‘Positive Phase of Market: New Strategies Required?’

"If one believes that this is going to be a secular long term bull run then Capital Mkt intermediaries should definitely benefit from this.

I have created a basket of Motilal Oswal, IIFL and Edelweiss in my portfolio, based on simple reasons which lead me to believe that these companies should do well.

  1. Avg. Cash Mkt. volumes have risen from 9k Crs. in Oct 2013 to 24k Crs. in May 2014. And which I believe would rise further as well.
  2. Net Folio additions are at its highest after April 2008.
  3. AUMs of AMCs are at record highs at 10 lac odd Crs.
  4. Retail investors would come back to markets.
  5. These intermediaries have Insurance JVs which will benefit from relaxation ofFDInormsin Insurance sector.
  6. Capital Market reforms being introduced.

Such factors mentioned above lead me to believe that these companies as a cluster should do well in next 3-4 years and these are also trading much lower then their all time highs.

**Discl:**Invested instocks mentioned above."

Great insight and follow through, HR!

Do you see much higher levels in these stocks or have they priced in 1-2 years growth already? I have not experienced a bull market as an investor but I guess full fledged retail participation is still to come…?

If we are talking about Harshad Mehta kind of bull market the volumes could go 10x from here

Disclosure: I have insignificant historical exposure to Geojit

Hi HG,

Personally I am of the view that there’s a long way to go for these stocks and retail participation is yet to come into the markets in a big way.

I have speaking to people in the industry and they tell me that:

They have been recruiting as they are short of manpower.

IB activity is at an high as more and more companies are lining up to raise funds.

Retail investors are inquiring more and more to open new demat accounts or to activate their inactive accounts.

Volumes are rising on the retail front and cash market volumes are rising.

Broking margins would improve considerably going ahead.

The 2008 crisis till now has shut many small broking firms which in turn augurs well for the big ones that are left.

Other businesses that they own are also doing well (lending etc.,.)

On top of all the above policy reforms like impending capital market reforms, Insurance FDI, etc., will also definitely augur well for the industry.

Investors like R Jhunjhunwala entering these counters also adds to the confidence.

Pasting few recent news links below:

Therefore I intend to ride these stocks for next 2-3 years and would keep reviewing them depending upon my view on the bull market and depending upon x times returns that I make on them as these are opportunistic bets for next few years.

Thanks for the inputs, HR and Excel.

Looking at the activity on this thread

Brokers ke acche din aane wale gain

IIFL and Edelweiss are in T2T segment. I bought some yesterday but they don’t show up in on my stocks screen as other bought stocks do. Do they show up after the t+2 date?

Not sure on this. It showed in my portfolio immediately (obviously settlement pending). I am not sure if it (T2T stocks)reflecting in the portfolio differs from broker to broker. Even if that is the case still it should reflect post settlement.


The theme seems to be playing out - Kotak Securities, brokerage arm of the bank, doubles its net profit in the June Quarter YoY. Source -

Link: …/…/…/investing-basics-q-a/374263620