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Many new listings, yet brokerages steer clear of covering peers

Many new listings, yet brokerages steer clear of covering peers
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First Published: Tue, Jan 01 2008. 12 05 AM IST

Updated: Tue, Jan 01 2008. 12 05 AM IST
Looking for a research report on an Indian stockbrokerage firm that got listed on the stock market in 2007? Don’t expect to find too many out there.
A lack of specialized analysts as well as a limited number of publicly traded brokerage firms are the two reasons being cited for a dearth of research on brokerages. Some firms also blame it on what they say is lukewarm interest on part of retail investors in such stocks as a reason for not tracking them too closely.
That logic will seem surprising as, during the past year, three Indian brokerage firms raised money through initial public offerings, or IPOs, taking the number of listed brokerage stocks to 47. And, those who went public in 2007 offered at least 75% return on the listing day itself, and handsome returns since their listing. In fact, some of them have generated returns of as much as 200% in 2007, more than the benchmark 30-stock Sensex index of the Bombay Stock Exchange, which gave a 47.1% return during the year. Little wonder that, in the past year, foreign investors and private equity firms picked up stakes even in unlisted Indian brokerage firms.
Data from Bloomberg show that only four brokerage stocks are being actively covered or analysed by brokerage houses. However, it’s possible that Bloomberg data isn’t reflective of other brokerage firms that are being recently tracked. Still, the coverage compares poorly with other sectors.
India Infoline Ltd, the Mumbai-based broking firm that made its debut in 2005 and gave 503.79% return to investors in 2007, is covered by four other brokerages—Prabhudas Lilladhar Pvt. Ltd, Kotak Securities, Anand Rathi Securities Pvt. Ltd and Alchemy Capital Management. Five firms are tracking Indiabulls Financial Services Ltd.
Prabhudas Lilladhar Pvt. Ltd started covering India Infoline Ltd in October 2006 when the stock was around Rs170. These days, the stock is selling for Rs1,944 a share.
In the latest research report on India Infoline, Kiranjot Kahlon, an analyst at Prabhudas Lilladhar, points out that the stock is richly valued, trading at 36.5 times its next financial year’s projected earnings and it may end up giving returns in line with the Sensex.
So, what is stopping more brokerage firms from tracking more of their peers?
“There is a strong reason to be bullish on financial services sector as its expected to witness at least 25% annual growth over the next few years,” says Manish Sonthalia, vice-president, equity strategy at Motilal Oswal Securities Ltd. “This means that the sector will grow at 2.5-3 times the growth in (India’s) annual gross domestic product. So, whether the market goes up or down, the flow of revenue for the brokerage firms will continue. However, before we recommend any broking stocks, we need to be convinced about the adequate margin of safety for investors.”
His firm tracks only two brokerage stocks: Kotak Bank Ltd and Indiabulls.
Another analyst, who didn’t want to be quoted, claims there is no demand for such reports from retail investors.
“They (retail investors) seem to be reluctant about the idea of investing in broking stocks, as they are not too sure about their income stream, which is largely linked to the performance of stock market,” says the analyst who is with an unlisted brokerage firm.
A shortage of analysts in the industry is also cited as one of the reasons for lack of coverage of brokerages.
“It’s an exciting sector to watch out for. A new player with a slightly different and unique pricing model can change the rules of the game,” says head of research at another unlisted brokerage. But, he says, his firm is not tracking stocks of any of the listed brokerage firms as his own firm has lost some analysts to a foreign brokerage house and hasn’t replaced them.
Indeed, even as many new players have started stock brokerage business in India, the number of stock market professionals, especially analysts, has not kept pace with demand. Some brokerages say that the sector still doesn’t have enough of a critical mass of listed firms and, as a result, it makes limited business sense to devote an analyst for the sector.
“It may follow the pattern of the real estate sector. Two years ago, no one had a real estate analyst in their research team. But, the listing of so many real estate firms has created opportunities that are worth tracking,” says one analyst who didn’t want his named used. Many analysts also point out that some of the stock coverage may be driven by the relationship with the merchant banker who oversaw the public issue. It may so happen that the brokerage arm of the merchant banker, who handed the IPO, may initiate coverage of the company, to ensure that the stock gets widely noticed.
In the US these days, big brokerages were competing to downgrade each other on the basis of the losses in the subprime crisis. For example, in November, Goldman Sachs & Co. Inc. downgraded rival Citigroup Inc., which did the same for Goldman’s shares.
As more and more brokerage houses get listed, it is likely there will be more coverage of competitors by brokerage houses.
Edelweiss Capital Ltd, for instance, had just been tracking Kotak Bank so far but plans to expand its coverage of thesector.
“A lot of our institutional clients are requesting us to provide a detailed analysis and comparison of the broking stocks that have a market-cap of more than $1 billion,” says Shriram Iyer, head of research at Edelweiss, which itself was listed this year. Edelweiss has put out a short note recommending a “buy” on the entire sector.
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First Published: Tue, Jan 01 2008. 12 05 AM IST
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