Have a stock-specific investment approach: Bonanza

Mr Shivkumar Goel, Founder Director of Bonanza Portfolio Ltd, has been in the financial sector for the last 30 years. He shared his thoughts on current issues affecting share-broking industry with Business Line in this e-mail interview

How do you read the current market situation?

The equity market is trading between Nifty 5,177 and 6,338 since the last seven months. High inflation rate and accordingly increase in interest rate on regular intervals by the RBI are likely to affect the profitability and growth.

At the lower range of the market, valuations become attractive. It is not a trending market and it is advised to have a stock-specific investment approach rather than a sector- or market-specific one. Overseas markets are also correcting from their 52 weeks' highs.

Global central banks have begun tightening the strings and with the ECB raising rates, we believe the developed markets have started gradually exiting from the quantitative easing mood. Domestically, the market is expected to take cues from the global fund flows, the way inflation numbers turn out, the monsoon numbers, and the slope at which RBI tackles inflation through rate hikes especially in the light of descending growth numbers as reflected by the core sector numbers, PMI and IIP.

The earnings are more or less in line with expectations. In all, the markets are likely to continue to be range bound for one more quarter.

Do you welcome SME exchange? How is the new platform likely to impact brokerage firms' revenues?

We welcome the new initiative being taken by BSE and NSE to launch the SME Exchange and are also actively working with the exchanges to create awareness about this new segment. However, its being a new development, we do not see any major addition or impact on the brokerage revenues as the market capitalisation of the companies getting listed in SME segment is expected to be relatively lower.

Further, the volumes on these listed securities may also take some time to pick up. Few guidelines requirements will result in slow growth of this segment.

The requirement of underwriting of 25 per cent of issue size will restrict number of merchant bankers in SME public issues. It will need more capitalised merchant bankers to take such exposures. Further, requirement of compulsory market making for such issues will make it a more difficult in the initial phase.

We have come to know that lot of brokerage firms are finding it difficult to retain their partners and PE investors. Are you also facing any threat of investors quitting or pulling out from your company?

There is a pressure on the profitability of the broking industry, particularly due to lower operating margin due to lower brokerage rate and increasing cost. Also, retail participation, particularly the delivery volumes, is low. Hence, it could be possible that few brokerages may be facing difficulty in retention of their partners or PE investors.

But this problem has been addressed by most of the big brokerage houses by diversifying product baskets. They are now earning substantial revenue from non-equity products like commodity broking, currency derivatives, distribution of third party products like life insurance, general insurance, mutual funds, corporate fixed deposit and investment banking.

Our PE investor – Gaja Capital Partners – is with us for the medium- to long-term and appreciates the current situation as well as the cyclical nature of the market.

Are there any retrenchments or job losses at your brokerage firm? How are you managing your staff strength, given the tough conditions brokerage firms are facing now?

There has not been retrenchment in our company. Over the last few years, we have been anticipating such kind of developments in the market owing to which we have trained our staff for cross-selling, primarily third party products.

The revenue, thus generated, not only ensures the justification towards the cost of manpower but also give us a leverage on our clients as the association is not only focused for one product.

We nurture and constantly arrange for various employee development plans that ensure their retention.

We are also venturing into new products and verticals so as to balance the overall profitability of the company.

Are you considering any takeover at this point of time?

We are open to takeover or merger with like-minded people. Such decisions, though, depend on a lot of factors, such as market scenario, valuations of the companies, synergies among the companies getting merged.

Overseas markets fail to attract retail investors, despite a flood of opportunities. Are brokerage firms doing enough to enlighten retail investors?

We are working towards providing overseas investment opportunities to retail investors. It requires lot of research on overseas markets and identification of right opportunity by the retail investors, besides the infrastructure, for execution of such transactions. We have a dedicated in-house research team that specifically focuses on the developments that are taking place in the global market. Our team constantly take updates from the global touch points that provide important and relevant information about the opportunities that emerge in all geographies.

With the developed markets not showing significant signs of improvement, our team focuses on the opportunities in the emerging markets and keep our investors abreast with such developments.

Where do you see the Sensex finishing the current quarter?

The market is expected to factor in a few more rate hikes over the next quarter and the possibility of average monsoon helping the inflation numbers.

The borrowing costs, wages and other input costs, are putting pressures on the earnings of India Inc. The performance would be very stock-specific. It may be advisable to invest in the best companies out of the sectors that are not dependent on borrowings and are less affected by the interest rate hikes.

Pharmaceuticals, FMCG and IT sectors are recommended sectors to hold on to. It may be better to invest in large-cap stocks as they are the ones that bounce back first at the time of recovery of the market and may give better returns.

Keeping in view the market situation and the technical view, the market is likely to trade between 17,500 and 19,400 till June 2011.

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