The return of retail investors such as Walia is promising to breathe new life into the nation’s struggling brokerages. More than 500 of them shut down last year as the combined value of shares traded on the nation’s two biggest bourses plunged to an eight-year low in February. The revival in interest is driven by optimism the biggest electoral mandate since 1984 will help Modi fix the $1.8 trillion economy.
In a sign better days are ahead, Edelweiss Financial Services Ltd. (EDEL), the nation’s biggest by market value, and No. 3 Motilal Oswal Financial Services Ltd. (MOFS) say they are stepping up hiring, predicting higher broking margins. Billionaire investor Rakesh Jhunjhunwala this month bought 10 million shares, or a 1.3 percent stake in Edelweiss, while Espirito Santo Securities India Pvt. said a rally in brokerage stocks is set to continue.
“The growth is due to renewed optimism about the economy, and a positive and decisive mandate,” Nitin Jain, chief executive officer and head of capital markets at Edelweiss, said in an interview on June 16. “It’s a big change.”
Shares of Edelweiss, Motilal and IIFL Holdings Ltd., the second-biggest broker, have more than doubled this year, versus a 19 percent gain in the benchmark S&P BSE Sensex. The Carlyle Group LP is an investor in Edelweiss and IIFL.
Indian mutual funds attracted net inflows of 25 billion rupees ($417 million) in May, the most in five years, after seeing 255 billion rupees of net outflows in the previous two years, according to the Association of Mutual Funds in India.
“Broking stocks have largely been ignored by investors over the past few years,” analysts led by Santosh Singh at Espirito Santo in Mumbai, wrote in a research note last month. A decisive mandate for Modi “will in our view be a shot in the arm for investor confidence,” they wrote. Espirito Santo recommends buying Edelweiss and Motilal shares.
Broking margins may widen to as much as 35 percent in the year to March 31, from 10 percent now, Edelweiss’ Jain said. He plans to hire as many as 200 people during the period, or 15 percent more from a year earlier and compared with a pace of 4 percent in previous years.
Investors including Walia, 63, cite Modi’s record as the head of India’s Gujarat state, where he oversaw economic growth exceeding the national growth rate in 11 of the past 12 fiscal years for which data are available.
Walia said Modi’s victory last month will give him a freer hand to cool inflation and create manufacturing jobs.
“Sentiments have turned positive after many years with the new government,” Walia said.
The average trading volume on the S&P BSE 500 Index almost tripled to about 250 million shares by mid-June from four months earlier, data compiled by Bloomberg show. Retail investors who stayed away in the last few years may funnel as much as $10 billion annually into stocks, CLSA said in a May 14 note.
The global financial crisis of 2008 and delays in policy implementation amid corruption allegations against former Prime Minister Manmohan Singh’s government eroded investor confidence, leading to a slump in trading volume.
The number of retail investors shrank 60 percent in the local stock market over five years through 2013, according to the Association of National Exchanges Members of India, which represents 900 brokers on the two biggest exchanges.
The 200-day average value of shares traded on the National Stock Exchange of India Ltd. and BSE Ltd. shrank to about $2.16 billion on Feb. 25, the lowest level since February 2006, Bloomberg-compiled data show.
Under Singh, economic growth slowed to 4.5 percent in the year to March 2013, the slowest pace in a decade. Retail inflation averaged almost 10 percent in the last two years, hurting the poor in a country where the World Bank says about 70 percent of the population lives on less than $2 a day.
Reversing that and curbing expenditure may be a tough task for Modi and any failure to keep campaign promises may damp the rally, Dhananjay Sinha, head of research at Mumbai-based Emkay Global Financial Services Ltd. (EMKAY) said by telephone. Emkay’s shares have almost doubled this year.
“It will be difficult for the government to control inflation and revive growth at the same time amid fiscal austerity,” Sinha said. “The reforms optimism will have to carry on longer for markets to hold on to current levels.”
Modi, who was sworn in as prime minister on May 26, said on June 15 that his government is ready to take tough decisions before the federal budget is presented next month.
The number of inquiries received by IIFL’s contact center from interested retail investors has gone up “multi-fold,” Prasanth Prabhakaran, president of broking at IIFL, said in a June 16 interview.
IIFL shares rose 0.4 percent to 129.50 rupees today in Mumbai. Edelweiss climbed 0.6 percent to 61.25 rupees, while Emkay Global climbed 1.3 percent.
Priyesh Waghela, a 28-year-old software programmer in Mumbai, said he’s researching mutual funds to invest in after having shunned them for four years.
“We’ve had a big change on the political front after 10 years,” he said. “I am definitely looking to return to the market after seeing the boom.”