‘There is a left-out feeling among investors'

Retail participation in equities is so low in the Indian context that it has to scale up over the long-term. The brokerage industry has to invest in technology, retail reach and brand building.

“I'm very excited about the retail story” — that may be a surprising statement coming from one of India's most respected names in the stock market — Mr Motilal Oswal, Chairman and Managing Director of Motilal Oswal Financial Services. After all, an unpredictable market and dwindling retail volumes in the past year have prompted many other brokerages to try their hand at businesses such as housing and gold loans.

But Mr Oswal is quite confident that the recent revival in market interest is here to stay.

Excerpts from an interview:

Brokerages have been having a tough time due to a fall in retail volumes and a shift to derivatives which bring in lower brokerage. How is Motilal Oswal coping with these changes?

One big factor that distinguishes us from other brokerages is our focus on investing as opposed to trading. For the retail segment we are not propagating futures and options and instead focus on cash volumes. We find that on speculation most people lose money. We did find cash volumes shrinking over a year but have seen a rebound in the last couple of months.

Another factor is that average daily turnover has come down for the markets but cash market turnover has gone up in this month. Therefore the market mix has changed. That is a good sign.

Is there a sign of reviving retail interest of late?

I think the overall level of market activity has come down over the years. But at these lower levels, I see a lot of stability. Historically cash market turnover used to be 25-30 per cent of the total turnover. That fell to as little as 8 per cent in December. But from these levels it can only improve. My sense is that it can come back to 18-20 per cent.

Usually retail investors take time to come back to the markets. Every rise will bring in retail investors.

What has been the trend in your client additions?

In good times, we were adding about 15,000-20,000 customers a month. Now we add about 5,000-8,000 customers a month.

There is a view that retail volumes have shifted from equity to commodities. Is that correct? Have you capitalised on that?

Yes, usually speculative volumes move wherever there is higher volatility and commodities has offered that. Therefore, we too offer commodity trading. We see more HNIs dabbling in commodities as you cannot really buy Rs 5,000 worth of gold or guar gum. Jewellers and traders also take commodity exposures. If the equity markets pick up substantially, I see a shift happening back to equities. The Securities Transaction Tax (STT) has also led to migration of volumes, as costs of transacting are lower in commodities.

See margins tend to be very low for day traders who provide liquidity to the market. For them the costs of transacting have really gone up in equities. Overall participation has come down post-STT.

You have most leading FIIs trading through your network. What do you observe on the institutional side of your business?

We cater to the world's leading FIIs investing in India. We have touched base with them recently and most of them have a completely left-out feeling. This rally has caught them by surprise. If the market corrects there will be a huge amount of money that will come in.

SEBI data shows that FII inflows of $4.8 billion have already come in the first two months of 2012.

I think the rally has been driven by new institutions such as sovereign wealth funds. Global ETFs have also been participating with a lot of money coming in from this source. The biggest concern for FIIs was the depreciating rupee. Now that the rupee has pulled back to higher levels, that is giving FIIs a lot of comfort. That will help participation.

How has algo trading impacted brokerages like you?

Algo trading is nothing but programs that help you break down trades and execute at the best price. Earlier it was humanly impossible to execute very small trades or take advantage of small arbitrage opportunities, say between cash and futures markets. But with algo trading you can do this. The program finds more trading opportunities within a price or volume band. That multiplies transactions, and helps technologically enabled brokers.

What is your take on the recent market rally. Sectors like power generation and realty have been top gainers. Is there a change in fundamentals that justifies this?

You see, the market always overreacts. I think that is what happened in 2011 with negative news in certain sectors. After stocks have fallen by 60-70 per cent a pullback of 20-30 per cent is bound to happen. On fundamentals, too there have been changes. Interest rates are looking to cool down. Inflation too has come off and that was a big risk to corporate earnings. With both interest rates, inflation and rupee moving from negative to marginally positive territory, fundamentals are looking better than they were a few months ago

Other brokerages seem to be diversifying into activities such as lending against gold and home loans in order to diversify away from this market related volatility. Is Motilal Oswal also considering such lending?

We have always held the view that we won't go overboard on leverage. Business risk really shoots up when you over-leverage. Plus these are new lines of activity where one may not always be successful.

We would not like to move into unrelated businesses like consumer loans where we have no core competence.

We currently have six verticals- retail and institutional broking, mutual fund, investment banking and so on. We are growing in these businesses, not very fast, but steadily. Brokerage still accounts for 60-65 per cent of our business.

See in this business, there is immense potential. Retail participation in equities is so low in the Indian context that it has to scale up over the long-term. The brokerage industry has to invest in technology, retail reach and brand building. That is the story I'm betting on for the long-term.

Retail participation in equities is so low in the Indian context that it has to scale up over the long-term. The brokerage industry has to invest in technology, retail reach and brand building. — Mr Motilal Oswal, CMD of Motilal Oswal Financial Services

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