The Hindu Business Line : Broking firm stocks outperform Sensex

Mumbai , Oct. 29 Motilal Oswal Financial Services entered the capital markets with an initial public offer of shares at a price of Rs 825 per share. It is now quoting at Rs 1,189.65 (October 26), thus giving a return of more than 40 per cent in the space of a month and a half. In contrast, the benchmark index, the Sensex generated a return of just 23 per cent and the BSE-Midcap index even lower at 15 per cent during this period.

High returns

Motilal Oswal (BSE closing price on Monday Rs 1,185.65) is not the only one to outperform the Sensex. Other shares of other broking firms such as IL&FS Investments (BSE closing price on Monday Rs 308.30), JM Financial (BSE closing price on Monday Rs 1,730.75), Emkay Shares & Stock Brokers (BSE closing price on Monday Rs 219.45), Apollo Sindoori Capital Investments Ltd (BSE closing price on Monday Rs 439.30) and India Infoline (BSE closing price on Monday Rs 1,106.15) have registered returns between 30 and 170 per cent returns over the past three months out performing the market quite comfortably.

A few firms such as IndiaBulls, Geojit Financial Serivices Ltd, and JRG securities have recorded a dip in their value in the last three months. But even they out shone the market when measured over an extended period of six months.

Bullish trend

Analysts see a link between broking firm stock returns and bullish market sentiment. “The substantially high returns might be because the broking houses and markets have a positive correlation with the brokerages doing well in bullish markets and the past month has indeed been highly bullish”, said an analyst who did not wish to be quoted.

But others caution against any undue emphasis on these returns.

“Although this business is cyclical in nature the performance of broking firms is also dependent on corporate finance and growth and with the volumes rising, these companies are being valued at higher levels”, said Mr Mugunthan Siva, Chief Investment Officer, Optimix.

For now, the listed broking firms might be raking in higher commissions and profits on proprietary trades, but the market is of the view that their stock returns are built on a relatively fragile business fundamentals.

“It is more or less the existing client base which is scaling up its volumes rather than an increase in the base”, said Ms Anita Gandhi, Head of Institutional Business, Arihant Capital Markets Ltd.

The increasing investor interest and the resultant up trend in stock price has pushed up the rate at which a rupee of future earnings is capitalised (P/E multiple) of these firms.

PE multiple

IndiaBulls has a PE multiple of 63.75, IL&FS Investments Ltd is trading at a PE of 33.06, Motilal Oswal Financial Services at 297.41, whereas JM Financial is at a whopping PE multiple of 3,269.23 and Emkay Shares & Stock Broking is at 27.88. While some of these firms are quoting at PE levels higher than that of Sensex, which is at 25.49, there are some like JRG Securities is at a mere 10.70 and India Infoline is making losses.

“Whether these high PE’s are sustainable is a fact which is not questioned as currently the going is good”, said an analyst from a Mumbai-based brokerage house.

“When the markets are liquidity driven they depart from fundamentals”, said Mr Mugunthan Siva, Chief Investment Officer, Optimix.

But then the analogy that can be given according to Ms Gandhi is the telecom sector, which initially was quoting at high PE levels, but with subscribers base increasing today it is a highly attractive and fundamentally strong sector.

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