Sentiment has improved, but liquidity is bad: Rashesh Shah
Rashesh Shah, chairman and CEO, Edelweiss Group says we are still another 18-24 months away from a bull market the likes of seen in 2007-2008.
Macro-economic parameters have stopped worsening and there is some improvement on the margins, but we could still be another 18-24 months away from the kind of bull market seen in 2007-08, says Rashesh Shah, chairman and CEO, Edelweiss Group. In a free-wheeling chat with Moneycontrol.com, Shah says that sentiment has slightly improved, but liquidity is bad and fundamentals do not support a sustainable upmove at this point.
What about the anecdotal evidence that a good time to start investing in any market is when foreign investor exuberance has died down?
“That could be a broad indicator, but you cannot use it to time the market. For instance, in 2006, there was rush of foreign investors into the country. And the big rally came much later, starting some time in August 2007 and lasting till January 2008. In 1979, Businessweek (magazine) had done a cover on the end of the equity investing culture in the US. The big rally started three years later. So, while foreign investor sentiment can give you some clues, it is certainly not a timing indicator.”
The Sensex is currently quoting around 13 times one-year forward earnings, which is slightly below its historical average.
“Markets can remain overbought and oversold for a long period even if valuations indicate otherwise,” says Shah who says his foreign clients are waiting signs of some improvement in the policy and macro-environment before turning bullish on India.
He, however, sees a short term rally in emerging markets including India, if there is another round of monetary easing in the US.
But weren’t equities unmoved by the second round of quantitative easing in the US and the phase two of LTRO (long term refinancing operations in Europe?
Equities may have been indifferent to QE2 and LTRO2, but gold and real estate did gain, says Shah. “So it did have some effect on hard assets. And this time, since equity valuations are reasonable, we could see a rally if there is further monetary easing,” says Shah.
In the broking business, there is not much to cheer, says Shah, adding there are both good and bad news.
“Things have stopped getting worse for the broking (industry). The good part is that most of the players have become efficient, having cut costs, improved productivity and invested in technology. Now, a good brokerage can easily break even with three or four good months a year, and make decent profits with five or six good months a year.
The bad news is that there is still overcapacity, yields are falling and the market is not growing,” says Shah.
Edelweiss’s revenues from broking fell around 16% during FY12, and profits by almost 80%. And while higher revenues from the lending business shored up consolidated topline by 17%, net profit declined 45% year-on-year.
Shah says many brokerages would have shut shop by now had it not been for the rally in the first two months of this calendar.
“The rally may not have improved revenues, but it certainly improved optimism and gave many brokerages the confidence to hang in there for another six months,” says Shah.
He does not see many buyouts happening in the industry. Most likely, the fringe players will have to wind up operations.
“Institutional players have managed to cut costs by trimming headcount nearly 30% over the last year. As for retail brokerages, the client base lacks either scale or quality to offer value for the buyer,” says Shah.
There are about 10 million demat accounts in the country, but just about 2 million active users, according to NSE data. Of the active users, 100,000 account for around 50% of the transactions, says Shah.
He sees customer service and technology as being the key differentiators in the business going ahead.
“Instead of just expanding the client base, brokerages will have to find a way to service existing clients better and earn good margins out of them,” says Shah.
Edelweiss’s income from its lending business rose 26% to Rs 1231 crore in FY12 as loan book grew nearly 50%, but profit margins shrunk to 20% from 38% the previous year. Shah expects margin pressure due to a combination of tighter regulation and high cost of funds.
“Currently NBFC credit is approximately 10% of total credit and I think this market share will continue. Some of the recent regulatory changes may adversely affect profitability of this segment–after last 3-4 years of good growth this industry could have some margin compression in the next couple of years,” says Shah.
“This industry needs more freedom to grow and I think the share of credit can go up to 15% also. The NBFCs should be treated on par with banks for all parameters and shoukd also have a liquidity facility with RBI,” he says.