Private-equity funds’ investments in stock broking firms in India are turning out to be a bitter experience. 2011 has been another year of pain and no gain for the PEs in stockbroking firms as as Indian markets ended with 25 per cent losses.
“It has not been a happy experience,” admits Munish Dayal, partner, Baring Private Equity Partners, which invested about $35million in mid-2007 in Kochi-based JRG Securities at Rs 49/share. At present, the stock is quoting just above Rs 12 apiece.
Other PE biggies such as CVCI, ICICI Venture and Baring PE Asia are lucky in a way that the equity brokerages they own stakes are unlisted, hence the losses cannot be quantified, at least for the wider public.
Most of the major investments by PEs in India stock broking firms came in 2007 and in 2008 (See chart), buoyed by the bull-run in local stocks, which started in 2003. “2006 and 2007 were different worlds. In hindsight the investments came at the peak of valuations,” says Avinash Gupta, leader, financial advisory, Deloitte in India.
According to Dayal of Baring PE Partners, the fact that the small investors, who mostly trade via cash segment, moved out of equity investments, was the main reason for the decline in performance of the stock broking outfits. “There has been a big decline in cash business,” he says. Cash segment constituted 33 per cent of total turnover of Indian market. This has now dropped to a third. Similarly, the commissions have also come down from 35-40 paise by a third over the last 3-4 years, hitting the revenues of stockbrokers.
No wonder, valuations of listed equity broking firms including Edelweiss, India Infoline, Motilal Oswal and Indiabulls Securities, Geojit BNP Paribas have plummeted. Dinesh Thakkar, CMD of IFC-backed Angel Broking, which was looking or more PE funding, informs that the company has dropped the plan as the requirement of capital can now be met from internal accruals. “Stock broking business is a proxy for Indian economy. The economic growth has come down from 9 plus per cent to below 7 per cent. When growth returns, valuations will also return,” he reckons.
At ruling valuations, broking firms may not dilute stake, Thakkar adds.
The cheaper valuations, however, are encouraging big PEs such as buyout funds such Carlyle and KKR to bet on Indian broking outfits. While Carlyle picked up stakes in Edelweiss (4 per cent) and India Infoline (9 per cent) from secondary market purchases.
So what’s the way forward of PE funds?
Dayal of Baring says diversification of other income streams such as commodities broking, gold and property loans may be the way forward for the brokerages. As far as JRG Securities is concerned, Dayal said the PE fund has brought in professional management team and the company will remain a South Indian brokerage. On other income streams, Angel Broking’s Thakkar adds that commodities broking now constitutes 25-26 per cent of the firm’s revenue while 12-15 per cent is accounted by NBFC business. The commodities business has grown 30-35 per cent per annum in the last 3-4 years, he adds. This may be the case with other leading brokers as well.
In contrast, the equity market business is seen zero growth since 2008. Once the market sentiment improves, Deloitte’s Gupta expects more PE transactions and even entry of big foreign discount broking firms such as Charles Schwab and E*trade into the country. “At present, the total demat accounts in India is not more than 15-20 million. The big guys will enter once the numbers reach 40-50 million levels,” he says. “They will come when there is a comprehensive business model.”
Source: My Digital FC