Edelweiss’s Rashesh Shah hears no death knell to broking business from tech sphere

Edelweiss entered broking in 2000. The next three years were very bad. From 2001 to 2003, our broking revenues fell from Rs 10 crore to Rs 1 crore. By 2008, it had grown to Rs 180 crore. The foundation for that growth was laid down in 2000-2003 when we hired analysts, built a sales team, and invested in technology.  When things started looking up from 2004-05, we were well-positioned to reap the returns.

The pecking order

Broking is getting split into two parts—one part will be discount broking, automated order execution (Direct Market Access), where the broker is just providing the platform.

The other part will be the full-service offering for institutional clients and wealth management for individual clients. And there will be a market for both offerings. There will be customers who will say I just want an execution platform, and I will figure the research for myself. And there will be those who want advice on how to allocate their capital across various products. We are seeing what I would call a "barbelisation" of the industry. There will be room in the middle but that space will be a shrinking one.

In the US, you have Robinhood, Charles Schwab, there is Merrill Lynch and Morgan Stanley one rung above that, then there is JP Morgan Private Bank and Citi Private Bank for the ultra-rich. At the very top end, you will have the clients being indulged with  wine-tasting sessions and art shows and at the other of the spectrum, you will have pure execution.

In the US, Charles Schwab has $8 trillion of assets in what is known as the mass affluent segment. The arrival of Robinhood has not led to the collapse of Schwab’s business model.

In India, there is still enough room for domestic broking firms to grow over the next eight-10 years. They need not be worried about foreign competition, all they should be doing is investing in their business. Today it is easy for a global player to set up an NBFC or broking firm in India. But they are not rushing in because the market is still not big enough from their perspective to make huge investments.

On the financial services industry

The financial services industry is poised for massive growth over the next few years. But for that, companies will have to invest and be patient. If you want to start an MF today, our estimate is that it will take seven-eight years just to break even, and it will require anywhere between Rs 100-200 crore of investment.

For insurance, it will take you 15-16 years to break even and at least Rs 5,000 crore of equity. The days of starting a financial services firm with three people in a room are gone. You will have a counter-cyclical approach. You must invest when things are looking bad, rules are changing fast.

Second, regulations will only get stricter, and compliance costs will rise. That has been the case from 2008 onwards all over the world. Look at any industry — broking, NBFC, mutual fund — it is a given, and you have to adapt to it through investments in technology, culture, and training.

The 5% threshold

At $3.5 trillion, India is close to 4 percent of the global GDP. But if you look at the financial services industry, be it any segment — mortgages, credit, mutual funds assets and insurance premiums — we are between 1-2 percent of the global market.

Even in global trade, our share is under 2 percent. All this has to increase, and I am hopeful it will.

By 2026, India should be 5 percent of the global GDP. And that will be an inflexion point. When any industry — be it online, digital, shoes (or) car -becomes 5 percent of the global GDP, it becomes worthwhile for international players to start investing. That’s when they say "now, I want to fix my flag here”.

In 2000, private equity used to be 2 percent of the public investment from global players. That has now risen to 50 percent. We are seeing a similar trend in private credit. Private credit is right now less than 2 percent of the total credit market in India. It will go to 5 percent with all these AIFs and private credit funds.

As new market segments open up, India is becoming an interesting space for global investors. We are soon going to be 5 percent of the global GDP but financial services will become 5 percent of the global industry only by 2030.

The problem in India is not so much about demand but that of unit economics. Unit economics is still at a point where it is hard to service a client and make good profits. The paradox of India is that we are the fifth largest economy by size but way behind when it comes to per capita income.

On rate hikes

I think we are done with interest rate hikes (by the RBI). The majority view is that there could be one more hike in the offing and that’s it. I think the world is slowing down a lot faster than most people realise.

Inflation is also coming down. The key variable here is the oil price. That is hard to predict. All other things being equal, I think inflation is trending lower.

My view is that the RBI is unlikely to hike rates further. I don’t think even the Fed is likely to hike rates a lot more from here. Maybe a hike or two at best. And the RBI won’t have to raise rates just to keep pace with the Fed.

FII flows have resumed. So I don’t see the rupee getting pressured much. But will the RBI cut rates anytime soon? I think we will see the cuts only after some time.

On private sector capex

There has not been fresh capex, or greenfield capex but there has been lots of M&A capex. That also is an investment ultimately.

In general, because of the bankruptcy court rulings, a lot of investment capex has happened. You won’t see anybody putting up a five million-tonne steel plant but Arcelor Mittal, which acquired Essar Steel, is expanding.

You are also seeing a lot of brownfield expansion, which is not as capital-intensive as greenfield. That is why you see capacity utilisation steady at 75 percent. Every cement company has done brownfield expansion.

Companies are hesitant to invest capital at current interest rates. Greenfield with environmental clearances and all that is an eight-10-year call.

There is investment happening but not in high-capital industries. There is investment happening in electronics assembly, and renewable energy, even in the power and energy sectors we are seeing a lot of brownfield expansion.

Banks are mostly looking at retail lending. They are also doing corporate but that is largely for working capital and brownfield. Banks, too, would be hesitant to invest in projects with an eight-10 year gestation period. That is why banks are holding more government bonds than they are required to under regulations.

On NBFCs

NBFCs will be focusing on segments where they have a competitive advantage over banks or can compete on an equal footing with banks. These (segments) are commercial vehicles, gold loans, microfinance, SME and affordable housing.

An NBFC may not be able to build a Rs 30,000 crore book in a segment like microfinance or affordable housing. But it can build a nice and profitable Rs 8,000-10,000 crore book. Education loan is also a space that is growing where NBFCs are stepping up their presence.

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The Edelweiss structure

The 2017 ruling by RBI that banks cannot be holding companies anymore was an inflexion point for all non-banking financial conglomerates, us included.

Increasingly, the market is not rewarding a conglomerate structure. We started unbundling our businesses in 2017. Today we have eight standalone businesses—wealth management, mutual fund, alternate asset management, NBFC, housing finance, asset reconstruction, life insurance and  general insurance.

We are of the view that standalone pure plays will become a better way of growing the business. We use Edelweiss as the investment company and have allocated our equity capital across our businesses.

Over the last five-six years we have been making the various businesses more and more independent. There have been different versions of unbundling over the years. We are right now in version 4.0, where we are allowing the businesses to change their brand names, and office.

There are a lot of advantages to this model. If the businesses go public someday, then they get their own currency, they can do M&A and taken their own decisions to grow further.

So Edelweiss makes the initial investment, with a horizon of 10-15 years. At the end of five years, the companies have to become operationally independent and at the end of 10 years, they have to become financially independent.

At some point, you give up control and allow them to scale up on their own. Investors are now warming to the idea of pure-play standalone businesses. That is what the regulators also want because regulating pure-play businesses is easier.

Our NBFC business has degrown but all other businesses have grown at 18-20-30 percent a year over the last five years.