Wealth Dis­cov­ery

Rahul Agar­wal, direc­tor at Wealth Dis­cov­ery, an­a­lyzes the sig­nif­i­cant move­ments for the bro­ker­age firms, AMCs and MFs in 2017-18:

Banking Frontiers - - Contents - Me­hul@bank­ingfron­tiers.com

There have been strong in­flows in eq­ui­ties and by way of sys­tem­atic in­vest­ment plans (SIPs). Will the trend con­tinue in months to come?

At the end of FY17, SIP in­flows stood at `439 bil­lion and the to­tal num­ber of SIP ac­counts stood at 20 mil­lion. If the trend con­tin­ues, FY2018 is likely to end with to­tal SIP in­flow of nearly `663 bil­lion. Data shows that the BFSI sec­tor has the high­est as­set al­lo­ca­tion among MF in­vest­ments - this fig­ure stands around 27% as of now. Rahul Agar­wal, direc­tor at Wealth Dis­cov­ery, says re­tail in­vestor par­tic­i­pa­tion in the eq­uity mar­kets via the SIP route has wit­nessed ro­bust growth in the last cou­ple of years, for which the main rea­son is spec­tac­u­lar re­turns in the eq­uity mar­kets over last 3 years. “Also, an av­er­age in­vestor is more ed­u­cated to­day about the ben­e­fits of SIP and the pos­i­tives of early in­vest­ments and com­pound­ing. SIP in­flows have been ro­bust so far, how­ever if the mar­ket en­vi­ron­ment de­te­ri­o­rates the ro­bust in­flows might take a hit,” he adds.


The re­cap­i­tal­iza­tion plan in the union bud­get has given a clear di­rec­tion to the bank­ing in­dus­try. The NPA is­sues have been largely ad­dressed and Agar­wal says the re­vival of In­dian econ­omy would have to be well sup­ported by the fi­nan­cial sys­tem, there­fore the per­for­mance of the bank­ing stocks in the long term would be good. How­ever, the spate of re­cent scams has turned the sen­ti­ments against PSU banks. “I am, how­ever, pos­i­tive on the en­tire sec­tor in the longer term and ex­pect a lot of con­sol­i­da­tion which would be a pos­i­tive for the in­vestors of all hues in this do­main,” says he.


Eq­uity-ori­ented schemes de­rive 85% of their as­sets from in­di­vid­ual in­vestors in­clud­ing HNIs as per re­cent data. In­vest­ments from small towns be­yond top 15 (T15) cities grew from `2.81 tril­lion in Novem­ber-end 2016 to `4.1 tril­lion at the end of Novem­ber 2017. Says Agar­wal: “This shows ro­bust growth in re­tail par­tic­i­pa­tion. How­ever, ac­quir­ing in­vest­ments from smaller towns still re­mains a chal­lenge for a va­ri­ety of rea­sons: lack of fi­nan­cial aware­ness, low sur­plus sav­ings and lack of di­rect in­ter­ac­tion with the small-town in­vestors are few no­table chal­lenges.”


In­dian house­holds in­vest in a com­bi­na­tion of phys­i­cal as­sets such as real es­tate, gold, di­a­monds, pre­cious met­als, and fi­nan­cial as­sets such as fixed deposits, deben­tures, eq­uity, and mu­tual funds. Un­til 2014, the av­er­age In­dian house­hold held 77% of its to­tal as­sets in real es­tate, 11% in gold, 7% in durable goods such as a ve­hi­cle or in­ven­tory for a shop, and just 5% in fi­nan­cial as­sets. Re­turns in the real es­tate seg­ment have been neg­a­tive for the most part. Also, the re­turns in bul­lions have stag­nated thereby pro­vid­ing a solid rea­son for the in­vestor to en­ter the eq­uity mar­kets ei­ther di­rectly or through the mu­tual fund route. In­vestors have moved away from one as­set class to an­other in re­cent years.

Ex­plains Agar­wal: “Fall­ing real es­tate prices led to a de­cline in phys­i­cal sav­ings from 12.4% of the Gross Na­tional Dis­pos­able In­come in 2014-15 to 10.7% in the re­cent past. Last year’s mu­tual fund data in­di­cated that re­tail in­vestors or in­di­vid­ual in­vestors have taken a dom­i­nant po­si­tion in mu­tual fund in­vest­ing. MF share has risen from 44.5% at the end of Jan­uary 2017 to 50.6% at the end of De­cem­ber 2017. In­di­vid­ual in­vestors pri­mar­ily hold eq­uity-ori­ented schemes, while in­sti­tu­tions hold liq­uid and debt-ori­ented schemes. This shift to in­vest­ing in fi­nan­cial prod­ucts is per­haps a con­se­quence of low re­turns on phys­i­cal as­sets, it rep­re­sents a be­hav­ioral shift and it’s a wel­come change and over­all pos­i­tive for the In­dian eq­uity mar­kets.”


Wealth Dis­cov­ery has wit­nessed sig­nif­i­cant vol­ume in­crease in the ac­tiv­i­ties of its IPO desk this year. In­vest­ments in the pri­mary mar­kets through the com­pany would be in the or­der of sev­eral hun­dred crores, says Agar­wal, adding IPO com­mis­sions form a very small part (<5%) of its over­all rev­enues. “How­ever, good qual­ity IPOs help us in get­ting new clients and of­fer op­por­tu­ni­ties to serve our clients with our other fi­nan­cial prod­uct of­fer­ings. Some 38 IPO of­fer­ings hit the pri­mary mar­kets in 2017, out of which 27 of­fered pos­i­tive re­turns on list­ing,” he elab­o­rates.

In March 2018, ICICI Se­cu­ri­ties has suc­cess­fully closed its pro­posed Of­fer for Sale (OFS) and raised ap­prox­i­mately

around `35 bil­lion, after the is­sue size was trimmed by the com­pany by roughly 12%. The QIB (qual­i­fied in­sti­tu­tional bid­ders) por­tion was fully sub­scribed. Pub­lic is­sues of Bharat Dy­nam­ics, Hin­dus­tan Aero­nau­tics and Mishra Dhatu Nigam have also sailed through. All 3 of­fer­ings from the gov­ern­ment re­ceived sup­port from LIC. Lemon Tree Ho­tels’ IPO to raise `10.39 bil­lion too was fully sub­scribed on the last day.

Among the new list­ings, most suc­cess­ful were Salasar Techno En­gi­neer­ing with a list­ing gain of 143.1%, Astron Pa­per & Board with 141.5% gains and Av­enue Su­per­marts with 114.6%. Says Agar­wal: “The strength in the stock mar­kets has en­thused pro­mot­ers for fresh round of fund rais­ing. A strong pipe­line of draft prospec­tus filed with mar­ket reg­u­la­tor SEBI indi­cates that cal­en­dar year 2018 would be busy year in terms of IPOs. In 2018, we have al­ready seen 6 IPO list­ing till date, Apollo Mi­cro Sys­tems had the high­est list­ing re­turns of 68%. It is ex­pected that if the mar­ket sen­ti­ment re­mains pos­i­tive we can ex­pect atleast 55 new IPO list­ings in 2018.


Agar­wal says the union bud­get 2018-19 was geared to­wards ad­dress­ing two key as­pects of the econ­omy - the agrar­ian cri­sis and ru­ral distress. “As such there were no spe­cific sops for the MFs or the fi­nan­cial in­dus­try in gen­eral. In fact, some of the pro­vi­sions in the bud­get re­gard­ing Long Term Cap­i­tal Gains (LTCG) are detri­men­tal to the growth of fi­nan­cial ser­vices in gen­eral. How­ever, the fi­nan­cial ser­vices, par­tic­u­larly the bro­ker­age in­dus­try, MFs would ben­e­fit in­di­rectly through a ro­bust econ­omy, all key in­di­ca­tors point to­wards the re­vival of the eco­nomic cy­cle, ma­jor struc­tural re­forms in GST, de­mon­e­ti­za­tion, open­ing up of For­eign Di­rect In­vest­ment in key ar­eas and an over­all push on man­u­fac­tur­ing would help the econ­omy in gen­eral which will be re­flected in cor­po­rate earn­ings and in­creased re­tail par­tic­i­pa­tion in the pri­mary and sec­ondary fi­nan­cial mar­kets,” says he.


The fi­nan­cial ser­vices in­dus­try in gen­eral and stock broking in par­tic­u­lar has a very high com­pli­ance bur­den, the re­port­ing and au­dit­ing re­quire­ments as such are cum­ber­some and pro­hib­i­tive from busi­ness per­spec­tive. Nu­mer­ous reg­u­la­tory en­hance­ments and changes have been im­ple­mented in the In­dus­try, which are al­ways geared to­wards pro­tect­ing the in­ter­est of the in­vestors. “From the reg­u­la­tors per­spec­tive, some of the no­table changes are the im­ple­men­ta­tion of the Enhanced Su­per­vi­sion Mech­a­nism un­der which va­ri­ety of func­tion­al­i­ties have come un­der in­tense scru­tiny, strin­gent ad­her­ence to the KYC pro­ce­dure, re­vi­sion and im­ple­men­ta­tion of the PMLA poli­cies and risk-based su­per­vi­sion mech­a­nism. The reg­u­la­tory en­vi­ron­ment is ex­pected to con­tinue to be­come more strin­gent in the wake of some re­cent scams at some lead­ing bro­ker­age houses. From a com­pany’s per­spec­tive we wel­come steps that bring more trans­parency to the busi­ness and safe­guards that pro­tect our client’s in­ter­ests,” says Agar­wal.


He is of the view that the out­look for the AMCs, bro­ker­age firms and MF in­dus­try is pos­i­tive in both near term and long term. How­ever, a lot of struc­tural changes are ex­pected in the in­dus­try. The fee struc­ture of the AMCs is ex­pected to be­come more trans­par­ent and sim­pler and over­all bur­den to the client in terms of fees will come down. The size of the AMCs is ex­pected to grow, as the fore­cast for re­tail par­tic­i­pa­tion in the MF in­dus­try re­main strong and bullish.

He pre­dicts: “The bro­ker­age in­dus­try is go­ing to wit­ness a lot of con­sol­i­da­tion as higher com­pli­ance costs and lower rev­enues would push a lot of smaller play­ers into the lap of big­ger play­ers. The ad­vent of dis­count broking has put ex­ist­ing bro­ker­age rev­enues un­der strain and this opens up a lot of room for in­no­va­tion, niche prod­ucts and tech­nol­ogy driven en­ter­prise. Over­all the out­look is rosy for the in­vestor as well as the play­ers be­cause the size of the in­dus­try is ex­pected to grow mul­ti­fold as more and more re­tail in­vest­ment in the pri­mary and sec­ondary mar­ket comes in. It is im­por­tant to re­mem­ber that all this will come true if the eq­uity mar­kets re­main sup­port­ive, vi­brant and buoy­ant. Deep cor­rec­tions, height­ened volatil­ity, and ex­tended pe­ri­ods of low re­turns are some of the sce­nar­ios in which the in­dus­try could suf­fer.”

rahul Agar­wal pre­dicts the bro­ker­age in­dus­try & MFs would ben­e­fit in­di­rectly be­cause of a ro­bust econ­omy

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