Need to patiently wait out 2 quarters: IIFL's Venkatraman

Moneycontrol Bureau

The mood among investors has become so pessimistic that the market could be the fag end of the bear phase, says R Venkatraman, managing director, India Infoline Ltd. (IIFL).

"In India, every time we reach a gridlock is when some bold decisions are taken. We could see something similar like what happened in 1991 when the situation was as bad or even worse than what it is now," Venkatraman told moneycontrol.com in the course of a freewheeling chat.

According to Venkatraman, the three big problems right now are governance, rising current account deficit and a falling rupee.

"India was never a governance story to begin with; there have been pockets of excellence, but that's about it. Demand for gold is coming down and crude prices too easing, so a lower import bill will ease pressure on current account deficit. The rupee, I think will fall to 60 (to the dollar), and the sooner it goes there and stabilizes, the much better," says Venkatraman.

IIFL reported a 37% decline in net profit to Rs 132 crore for 2011-12, even as revenues grew 28% to Rs 1880 crore. Also, for a brokerage firm, 58% of the revenues came from loans and investments, compared to 42% the previous year.

And while IIFL has doubled its loan book to Rs 6750 crore as on March 31, margin in this business has shrunk to 14% from 23% last year, as costs of funds surged because of high interest rates.

"We have been cautious in growing our loan book over the last quarter. As we see it, lending will continue to be the major revenue earner for a few more quarters, but the growth will be a gradual one. Ultimately, it is the broking business that will bring in the big money. Once the market revives, the broking business will make money hand over fist because it has a high operating leverage," Venkatraman says.

Venkatraman thinks concerns over asset quality in the non-banking finance space may have been overdone.

"The prospects are good, only that there are too many regulatory restrictions at the moment. The best thing is to patiently wait it out for the next couple of quarters," says Venkatraman, who is betting on interest rates to start softening shortly.

The share of broking revenues fell to 29% from 45% year-on-year, as income from this segment declined 19%. In addition to declining turnover because of depressed market conditions, margins have shrunk most of the volumes are in the options segment, where the brokerage is a fraction of that of the cash segment.

In addition, domestic brokerages like IIFL are up against the large foreign brokerages, which are aggressive in poaching both talent and institutional clients.

"It's a myth that foreign brokerages have deep pockets and can sustain losses for any duration," says Venkatraman.

"They may have skewed the job market by paying exorbitant salaries, but most of the recent entrants are not making money. At some point, one of them may lose patience and shut shop. And that will be a trigger for other loss-making (foreign broking) firms as well to wind up. That is probably when the market will make a bottom," says Venkatraman.