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Monday, September 21, 2009

Motilal Oswal Financial Services, Edelweiss Capital, Religare Enterprises and Geojit BNP Paribas Financial Services:Outlook and prospects of them

When the stock market reached its peak in January 2008, the stocks of brokerage houses were buzzing the most. For the trading activity too was at its peak and initial public offerings (IPO) came as a deluge. Making money for these brokerages was very easy. As the market started tumbling, the performance of these companies too nose-dived. Few of them incurred losses too. The stock price took even severe beating, as these counters were trading only at a fraction of their peak values. When the markets hit the bottom on March ''09 this year, the stocks of Motilal Oswal Financial Services, Edelweiss Capital and Geojit BNP Paribas Financial Services had lost anywhere between 80% to 90% of their peak prices. Just when the gloom had become all too pervasive, the stock market started moving up. And, in a matter of less than 3 months, Sensex had almost doubled. In a market rally, how the brokerage stocks can be left behind? The stock prices of Motilal Oswal Financial Services, Edelweiss Capital, Religare Enterprises and Geojit BNP Paribas Financial Services have risen by 175.3%, 61.3%, 24.2% and 127.4% respectively since the rally started. So, what should the investors do at current prices?

To answer this question, we will have to look at the business model of these companies. The brokerage industry in India started with companies, which were purely into broking. However, in last few years, many big brokerage houses have tried to become a financial services company. Let us look at the business segments of Religare Enterprises ? one of the biggest companies in this sector. The company is into retail & institutional brokerage, wealth management, insurance brokerage, investment banking and asset management. Its subsidiary Religare Finvest is a non-banking finance company (NBFC) registered with Reserve Bank of India (RBI). For all practical reasons, brokerage houses are present in all spheres of financial services industry but for banking. This shows that their business model is far more diversified now than earlier.

The business model may be diversified but a major chunk of revenue still comes from brokerage related activities. For instance, broking accounted for three quarters of Motilal Oswal''s revenue in FY 2009. Even for Religare Enterprises, which is the most diversified company in this sector, broking accounted for more than half its revenue in March''09 quarter. So, the diversification is yet to reflect in the financials of these companies, And, for this reason FY 2009 was really a tough year for the sector. The net profit of Motilal Oswal and Edelweiss Capital fell by 41.4% and 31.8% respectively in FY 2009. In fact, the net profit of Geojit stood at nil in FY 2009. There is no denying that brokerage is one of the most cyclical businesses in the world. And as the market recovered in June''09 quarter, Motilal Oswal has more than doubled its net profit and Geojit BNP has posted a profit of Rs 13 crore compared to loss in corresponding period last year.

Valuation:Considering price to earning (P/E) multiple does not make sense, as most of these companies are erratic in performance because P/E shoots up when earnings fall. We have considered price to sales ratio to determine the best bets in this industry. Motilal and Geojit are trading at a price to sales of 6.8 and 4.4, respectively. Edelweiss and Religare trade at 3 times their sales. By no stretch of imagination, these stocks are cheap. If the investor had invested for one-year horizon, he should actually sell. However, if you are a truly long term investor then you can invest in the stocks of the top four brokerage houses discussed in this article as the fruits of their diversification will take at least 2-3 years to ripe.

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