Around 25 years ago, two young men founded a small brokerage firm in Mumbai with very little money and a big heap of dreams. Today that brokerage firm has become one of India's largest homegrown, fully diversified financial services company. The company is Motilal Oswal Financial services.
Motilal Oswal, Chairman and Managing Director and Raamdeo Agrawal, Joint MD of the company share their story in an interview with CNBC-TV18.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying videos.
Q: 25 years has been quite a journey. For 25 years you have seen various business cycles. You must have seen lot of hope, lot of despair, where would you put where we are today on a scale of either hope or despair?
Agrawal: One of the things I have seen in the stock market and particularly for the economy underlying is that every seven years, you have one cycle. This seven year cycle at least for Indian markets, is again going to happen. The next appointed date for the boom is 2014-15.
Q: Do you think we are overdoing the pessimism?
Agrawal: Yes, for sure. But it's a cycle. When there is pessimism, people talk about pessimism. When there is a bull run, for example if you look two years back, you see the headlines and we were talking about double digit growth then.
Q: But, here we are talking about double deficit, policy paralysis.
Agrawal: It's all there. I am not saying that there is no policy paralysis or there are no problems. There are problems. But it's a process. Once the problem comes, you start highlighting them. The guys who are responsible start taking steps, they are also cornered. They cannot say that we don't want to do anything.
Q: Are you as optimistic?
Oswal: I am a born optimistic.
Q: The last fall hasn't ground that optimism down?
Oswal: As Raamdeo said, we have seen those kind of cycles and we have to accept the fact that financial services and even in Indian economic cycles, it will happen over a period of time and we are geared for good and bad times.
Q: Raamdeo you are an eternal optimist. You don't see the twin deficits, the policy paralysis. Does the India story still hold good for you?
Agrawal: India is doing much bigger than these twin deficits and all. We have problems of one quarter, two quarters, four quarters and very manageable problems. The people who are raising the objection about the problems themselves are saying that it is something that cannot be sorted out.
Q: Is it something that can be sorted out?
Agrawal: Yes it can be sorted out. So long as you have USD 300 billion sitting in your kitty, you can think a lot. Everything is possible. But if you are out, like in 1992 you had only seven days import cover, nobody will give you import cover, nobody will give you forex. That's not the situation this time.
Q: We have had a 5.3% number recently. A monsoon that’s looking like it may not be the best amongst what we have had in many years. So, we are looking at perhaps sub 6% growth for the full year?
Agrawal: It could be 2%, it could be 3% for a year. How does it matter? It doesn't come to an end.
Q: What's the worry that we could go back to the 90s where you had inflation growing faster than growth and that puts a completely different spin on the mood, on savings, on everything?
Agrawal: We are unnecessarily trying to visualize lot of draconian days. Nothing is a zero probability event. I don't think things are completely broken down. You look at May, cement dispatches are up by 13%. You can’t dump cement somewhere, it’s a perishable commodity. Obviously, some construction is happening somewhere and 13% is a large number.
India is the second largest cement consumption country in the world. So when you see an upside of 13%, 13% more construction is happening and it is a very healthy sign. You look at your car sales, it is up by 3% on YoY basis despite the fuel problem, diesel engine problem and petrol engine problem.
If you could get enough diesel engines probably, your sales would have been growing at 8-10%. Motorcycle is up 12%, corporate profits are up 28% QoQ, still we have a declared IIP of 1%. Government revenue is up by 17%. So, which one is to be believed? We need to do certain things and which authorities will do.
They are taking proactive actions, some of them are political, some of them are clear sloppy implementation or whatever, but it’s not broken down to a level where we must lose hope.
Q: What are the retail investors telling you because you have got your pulse on a huge number of retail investors, what are they telling you? What is the message you are getting from them?
Oswal: I think there is lot of pessimism among the retail investors because market on four or four-and-a-half-year basis has not really moved up at all. In fact, it is down by 15-18%. Retail is nothing but, if I have made money yesterday then definitely I am going to come back tomorrow. Hence, very less delivery kind of volumes are happening there.
Q: Is there an increasing shift to bonds and debt over equity or at least thinking that way?
Oswal: In volumes, some volume keep on shuffling between equity, commodities and may be currencies. But I would still say currency and commodities are very small markets compared to equities. The moment you see some kind of stability and may be some hope, people are going to come back.
Q: Oswal you started off as a retail broking business, you have largely stayed retail focused. Take us through the thinking behind that strategy?
Oswal: We started as a retail business so we understood that business and we built the business as a small sub broker, then as a broker. The whole focus was on adding value to the customers and since Raamdeo had a very good background of research, the whole value proportion at that time was built around the fact that how do we add value through research and advice.
We have been practicing that simple philosophy of having solid research, solid advice over a period of time. Although, customers had become investors to traders over a period of time, the need for honest advice is there to get correct advice and good recommendations on the stock side.
We really built around our own strengths and then we kept on expanding through our own distribution. Since we started as a sub-broker, we had insight that if we can build the business, why not create huge amount of sub-brokers across the country through a franchise model and India as a country has got huge entrepreneurial talent.
We built on that and we kept on expanding from big cities to smaller ones and I think we have been able to create a very good distribution network through which we are not only pushing the equity products, but may be mutual funds and other wealth products.
Q: The company is called Motilal Oswal but both of you founded the company together. Why is it not Motilal Oswal Agrawal? How did the name stick in and how is Raamdeo okay with this?
Agrawal: Till about 1995, you couldn't officially become partners in broking business unless you had a blood relation. We did not have blood relations, but we were good friends and we knew that we cannot do it without each other. Moreover, we didn't have anybody helping us.
So we said, I will be a consultant and it will be carried in his name because experience was counted on the name of the guy who was going into the ring, who was carrying the badge. He was the one who was carrying the badge and the experience was officially counted in his name. Obviously, you had to start the firm in his name.
Later on, when we became a corporate entity, we had an opportunity to say, forget about Motilal Oswal and create something like an India Broking House or something independent. At that time we said that everything is in the name of Motilal Oswal. Restarting that process and again going through the entire thing will be a tough call. So we took a call and decided to continue.
How does it matter? Starting Raamdeo Agrawal doesn't make sense, so let it be. I don't have any problem in seeing the Motilal Oswal banner out there so long as it works for the business and that's how it continued. Then we realized that world over only the names have become popular. Morgan Stanley, Merrill Lynch are names and it just goes on.
Q: Raamdeo, we were talking of how you differentiated yourself in the beginning. As a broker you offered research. Basically your research differentiated you from your competition. Today the competition is very different and you are also now a diversified financial services company. What is it that prevents it from again becoming just another diversified financial services company? All you are doing is competing on margin, competing on fees?
Agrawal: We started off in 1987. We asked ourselves, what do we stand for? We said, we are in the stock market and we will help clients create wealth in the stock market. That was a promise and if I help successfully, the client will take care of me, he will come back and take care of my needs and he will remunerate me.
Even today, the promise is the same. We want to do something, which has to do with the stock market because that is one machine which we understand and that's where I think the differentiation lies. This is the biggest game in town, involving about Rs 1.5 lakh crore per day.
We think there is enough scope for various services related to IB, institutional equities, retail equities, private equity or public equity. We are involved with everything and it is either starting or ending in the stock market. One leg is definitely there in the stock market. The wealth of the nation is increasing. So you need not one Motilal Oswal, but 25-30-40 of them to cater to the entire nation.
As the demand for services are growing from foreign nationals who are coming into the country, you need more sophisticated services and more investor-related services. Of course the delivery channels will change, the requirement, sophistication will change, the skills required within the company to cater to them will change. Technology delivery channels are changing and therefore, online competence has to come. A lot of those things will change but, basically making money in the stock market would remain broadly same.
Q: You are not tempted to get into the larger financial services market, I am talking about banking because a lot of people feel that whenever there is a downturn in the stock market, when regulation goes against you they forget about 30% savings that India does and want to go into another related business?
Oswal: I think for the next couple of years, we are very clear about building our existing franchise. Whatever the size of the business maybe, now we have 6 verticals within financial services. We want to make them much bigger and much better. We see a huge amount of opportunity and I think a lot of focus is required on those businesses.
Right now, we just want to build these 6 businesses which Raamdeo has mentioned and build it up on a certain scale. Then we will see where exactly we can leverage upon over existing strengths. Each business is linked with another. So wherever we have existing strength in terms of research, market understanding, in terms of corporate relationships or maybe distribution or brand, we have just tried to leverage upon the existing strengths and then build a new franchises around that.
Q: But what are the temptations, because a lot of people look at the Indian companies and say why are you a conglomerate because you want to go grab businesses in various diversified areas and the answer is because we are still a small country and the opportunities are so large. So aren't you tempted at times to get quickly into insurance or something else?
Oswal: I think whatever we want to do, we want to give our best. We don't want to begin in a hurry. I think the focus is very clear and we are trying to at least create a niche kind of positioning in whatever segment we are. Then only, slowly and gradually we can build it up, rather than only looking left and right trying to create more businesses. That's not in our DNA.
Agrawal: Another thing is that we are not doing fun based business. You got to have DNA also to do things like NBFC, banks, insurance and there are large business opportunities. It is not that it’s not open to us, we can try hard and get into one of them.
Q: You have got a brand, raising the funds is not going to be a problem, raising a partner is not going to be a problem?
Agrawal: Yes, that's possible. We have the right kind of brand equity also for some of the businesses. But what drives us, what we love to do is something like asset management business. That’s very challenging. It is one of the most difficult businesses to get in and 35th AMC, I think just doesn't make sense. It is better to have a 10th bank private license rather than having an AMC. But that’s what drives us. So, we will build.
We have built 2-3 businesses. Here also we are building up. It's a difficult process but we will definitely build private equity and public equity. Our energy is going into what we love so that there is no stress.
Q: Who do you model yourself on? When you both came to Mumbai as youngsters and rode on motorcycles, who did you think you wanted to be, who were you modeling yourself on or you were just saying we are getting in and there is an opportunity?
Agrawal: At that time, we just wanted to make money. We knew only one trick and that was the stock market. We thought, to make money the best place to go would be the stock markets. Later we realized that you can make a lot of money.
Initially, to justify that you are making a lakh or two. That was the game and then later on you realize that you can make more and earn crores. Then you started knowing that there are such large firms like Morgan Stanley, Goldman Sachs, Bear Sterns and other corporate entities. The future starts unfolding as you meet larger and larger successes.
Our ambition was to become one of the larger financial services firm catering to all the corporates and be one of those large corporates like the big Wall Street firms. They are among the top 50 or top 100 Fortune 500 companies in US. But, Indian financial services firms are nowhere close to that right now. In the next 5-15 years, we aspire to be there.
Q: So you don't need a banking license to do that, you think there are enough opportunities outside of that?
Oswal: I think opportunities are huge and look at the overall size of the market. Less than 2% people have access to the secondary market or primary market. About 3% of the people might be investing in insurance. May be 10% of the people are buying insurance. So, headroom is huge for us to focus on and build size in those businesses where we see enough opportunities and where we have a lot of experience.
Q: Only 2-3% of Indians invest in equity markets. Our savings is huge, 30% of GDP. Of course a large part of that is government savings. It is both an opportunity and a worry, isn't it? There is opportunity because its only 2%, the worry is why only 2%, is there something structurally wrong? What is your take on that?
Agrawal: Equity investing is somewhat intelligent in a sense that it’s not for everybody. People in villages, farmers, uneducated people, people who don’t have bank accounts for example cannot do it and only 30% of people have bank accounts. So, 60-70% of people's savings are not reaching the bank accounts, forget about reaching the stock market.
There are a lot of challenges and my sense is that environment will become much more conducive. Second is that fixed income is getting you 10% without applying your brains. Why should you take so much of volatility and multiple years of non-performance?
In equity markets, performance comes at its own peaceful time. Three years down there may not be any performance. Actually it will go down and then for 4 years it will just go like a bull run. The money comes during those 4 years only after seeing the performance coming in. The same thing keeps happening and at some point of time I hope, we also see low single digit interest rates. It should happen in my lifetime and at that point of time, you will see huge shift from fixed income securities to buying businesses in India.
But how far away is it, when will it happen? We don't know and at that point of time, I am quite sure per capita income will be very high, penetration will rise because 3-5% on fixed deposits would not be an acceptable rate of return. At that level, capital proactivity on the corporate side will be very high, which in any case is high in India. Then the equity markets will have their last laugh.
Q: I remember in 2009, we were both together in the US and this was at the bottom of the cycle when people were asking you about the equity markets and you resoundingly said invest in India and markets shot up after that. Would you say that with the same confidence today or are you a little more worried?
Agrawal: At this 12-13 PE multiple and the kind of pessimism I see, I don't have any doubts. It may take 6-8-12 months. I don't know. We might see some more 10-20% downside. But, I am just short of saying that I don't have any doubts that you will make much better returns than what you have made in recent times because now the valuations are very reasonable.
Q: How do you divide your work? The firm carries your name. The visible face is Raamdeo. He is more often on TV than you are. You keep a slightly low profile. How do you divide the work between the two of you?
Oswal: It's based on the natural liking and strengths. When we started, he used to handle the clients. I used to handle the operations and the trading part. As and when we evolved ourselves, wherever natural talent was there and wherever our strengths were, we kept on building on that.
I manage the brand, I manage the HR, most of the operations I manage. I really take care of one or two large businesses like retail and wealth management and he takes care of his passion, which is research and asset management. I think the businesses are divided based on natural strengths.
Q: Are you as optimistic as Raamdeo because he is always optimistic?
Oswal: At these levels, I would say that the odds are in favour of the bulls rather than the bear. We have seen in the last 4-5 years, earnings growth has happened from 1 trillion to 2 trillion and market is at the same level. It is a much more attractive level and money is made when you invest in the stock markets.