Won't cut retail exposure till interest low: Motilal Oswal

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Motilal Oswal Financial Services ' consolidated net profit fell 52% to Rs 24.3 crore for the fourth quarter (January to March). The company's total revenues for the fourth quarter were down 24% at Rs 126 crore compared with the same quarter previous year.

Raamdeo Agrawal the Director and Co-Founder of Motilal Oswal Financial Services, in an interview on CNBC-TV18 said the company's disappointing numbers can be attributed to a shift in volumes towards options which has been leaving a dent in brokerage businesses like theirs. On retail investors not being too keen on investing in this space, he says, "While retail investor interest has been low, we will not cut down on our retail exposure."

Raamdeo sees FY12 Sensex EPS at Rs 1250

Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. For complete details watch the accompanying videos.

Q: Do you think Osama's death has any rub-off on the market?

A: For the global equity markets, there will definitely be an impact. Terrorism based risk will definitely come down.

Q: What have you taken away from the earnings of other companies so far? Has the season so far got you feeling confident or is it marginally disappointing?

A: The season so far is alright except for the tech pack. The aggregate earnings are good except that the quality of earnings is shifting more towards commodity though aggregate earnings is coming at 22-23% up. The mix of the earnings is more commodities oriented as expected. That is what is a little disappointing so it may hurt the valuations of the aggregate pack.

Q: Traditionally our market has been mature about handling any geopolitical crises - it doesn't react as much as many of its Asian peers do. How much of a limited or strong impact do you think Osama's death will have on our market in specific?

A: Maybe our markets will follow what happens worldwide because it's just 15-20 minutes back the news has broken out so it's too early. People are trying to grasp the news itself. The impact of Europe, particularly, America at night will set the trend and whatever are the reactions.

My sense is if 9/11 had such a dramatic downside impact, clearly, the fall of Osama will definitely have a positive impact because this is good news which sinks slowly in the market. So maybe over a period of time it might bring down the terrorism base risk perception a little lower. That's my sense, however, markets are very difficult to predict as to how fast they absorb this news.

Q: What global market watchers have been watching with some surprise is the way the dollar index has been depreciating. Do you think there is any likely impact on the currency because that will have a more direct impact on us and liquidity?

A: If weighted dollar index is going down, it means that the rupee is also going because it is dollar backed. So the rupee is also going down with dollar index going down vis-à-vis the rest of the currencies of the world. Some kind of J-curve effect in export should come for the US. In India, we are seeing that our exports are booming.

I find America also wants the same affect on their side so that they can get out of their own problems. But how far it goes down and when they get the export boom out of the US is a matter of time. The policy is clearly a reversal of what they did at the turn of the century when they followed a strong dollar policy. Now they are following a weak dollar policy so we have this effect.

Q: For banks it is looking like a rough spot for them where anyway asset quality has begun to fall a bit and now there maybe some margin pressure as well if indeed the Reserve Bank moves with much more aggression?

A: Very short-term movements are impacted by tomorrow's expected 50 bps move by the RBI. We have a short-term headwind. I met few of the public sector banks recently and I don't see much of concern in their minds about demand for loans and even reasonable margins. If somebody is earning very high margins, there could be some concerns but business conditions are good so far and the growth is also intact.

In fact, now the cost of deposits is coming down and there is a new issue which has come up which is savings deregulation. There the bargaining power of the bank is total compared to the saver. Saver has Rs 25,000-50,000 or Rs 100,000 in his account, he cannot do much. He would not flip his account because he can get a percentage more here and there. My sense is I don't think this issue is going to be that big but let's see what comes out.

Q: Your own results have seen quite a bit of compression in the currency quarter. Is it to do with the fact that it is just F&O volumes which are picking up and not cash market volumes? Why have you seen that pressure on the broking side?

A: Sequential result has been disappointing more because of our IB revenue getting shifted that is all the big deals getting shifted to Q4. The broking revenues have been particularly hurt because of the shift in the mix from cash to F&O. For the year it was about 14%, total cash volume to total turnover.

Now in Q4, it came down to as low as 10%. Our bread and butter are cash, cash future and deliveries which has come down significantly. Our markets shares are pretty stable but the mix is horrible.

Q: What kind of recovery do you expect to see in the IB side and what kind of pipeline does Motilal Oswal have at this point?

A: We have a very strong pipeline but closure of the deals is actually getting delayed, from buyer side much more. At some point of time it was looking as if we will do very well in 2010-11 and that was the thinking at Q1 level even as late as September-October but then later on the deal closure became very slow.

We have one of the strongest pipelines in our history but how many of them get closed and closed quickly that's an issue. There is a lot of uncertainty in terms of deal closure. The IB environment is somewhat uncertain but we are still hopeful that next year will be significantly a better year than last year.

Q: There has been a huge shift in the market even in terms of where the large volumes are happening. It seems largely to be focused on the Options segment right now. What ramifications is it having on your business per se as well? Is your brokerage fee income going down because of this shift in trend?

A: Yes, because all our F&O volumes, particularly Options have a very thin brokerage bearing. Almost 1 to 1.5 bps compared to 5-10-20-30 bps kind of a cash related volumes. So Re 1 of cash volume would be equivalent to Rs 10 to Rs 15 of Option volume. That is the kind of impact it has.

I think 8-10% cash volume is very dangerous for the F&O volume also because if your cash market becomes very thin then you will have a very disproportionate impact. The individual impact on a very small inflow or outflow would be high and it will be felt across the F&O kind of a segment. The market is becoming a little unhealthy in terms of what should be the optimum cash volume to F&O volume.

Q: Do you see that changing anytime soon and what do you attribute that too because the market has now come back quite a bit. We are trading at 19,000-19,500. Yet, there is no investor interest as such from retail or HNI which seems to be picking up?

A: Yes, it is still going from bad to worse. We have seen the worst in Q4 at 10%. For the whole year it was about 14% but Q4 was very bad. Even if we don't see any respite in Q1 this year, April has been a continuation of the trend. We might be at some kind of a bottom. You can't predict this kind of thing.

It also has something to do with the STT (Securities Transaction Tax) kind of charges. The levies are much more favourable for this F&O kind of trading rather than cash volume which could be one of the reasons where instead of people doing cash volumes they would rather do F&O and Futures to achieve the same objective in the stock market.

Q: Some of your peers have chosen to do a complete hack on their retail operations, hive it off from the listed entity and shutdown retail operations to the barest minimum. Is that an option for Motilal Oswal to just work in a different vertical and cut down retail exposure completely?

A: No. That is not there on the drawing board nor are we thinking that way because this is what is going to be the natural way of consolidation in the market. What has happened is technology has expanded the client handling capacity and exhibition capacity. So it has become literally unlimited. When we started the business 15-20 years back, capacity was limited. Today capacity is unlimited. There is going to be a natural consolidation.

You don't need 500 brokers to handle the client business in India. Maybe you need 10-15-20 brokerage houses with very good technology set up, branch distribution, research, logistics etc but you don't need many retail people. It is going to be painful for a lot of people.

Q: While sales growth has been okay are you taken aback by the quantum of margin erosion there has been and how much do you want to tweak FY12 now?

A: Its early days because individually it's very difficult to say. Just 20 days back when we did the preview there was a little moderation in March 2012 expectation from more like 1,260-1,265 to 1,253. So maybe a little more moderation, but still we are not seeing a complete breakdown in the expectation for 2011-12.

Q: Any slowdown in the volume growth trajectory because we have seen the monthly numbers for Tata Motors and TVS Motors and they don't look very encouraging. Do you think it's only a March to April seasonal kind of a blip or is there any threat given the interest rate environment that maybe demand conditions are also beginning to slacken off just that little bit?

A: On the ground, I don't see that there is much of impact per se as we have been speaking to a lot of automobile people. April is definitely going to be slower than March because companies try to push volumes in March. I have not seen the numbers for the month this year but I believe April over last April is not bad.

Generally things are okay but rising interest rates, high inflation will definitely moderate it but I don't think it's a major breakdown into the cyclical dip of a very larger magnitude.

Q: Fundamentally speaking, you don't think the market should correct very significantly from here?

A: I don't know how the market will behave because the market is function of what the FIIs do or local equity and whether retail participates or not. As far as corporate earnings are concerned we still don't see any major breakdown. Analysts still stand by 1,250 kind of a number for next year.

Q: Which cluster will take the market to that level? Will it be the banks or commodities or do you think it will have to be spaces like IT which has performed through last year?

A: There will be some shift more towards commodity profits like Cairn India, ONGC barring subsidies etc or the metal pack. There will be a little shift in the composition of earnings which is not very healthy because they generally get lower PE multiple and the commodity using companies will have little pressure in terms of margins.

On aggregate profits, banks are likely to continue to do well, oil and gas, banks, IT pack, automotive are still looking good and global turnaround stories like Hindalco, Tata Motors, Bharti hopefully should come back. Telecom had a bad two-three years. Hopefully, now a turnaround maybe in the second half of the year should be visible.