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Look for multibaggers in Indian Financial Sector

Posted by fairval on September 9, 2007

China’s broking firms are having a party on the primary markets. This shows the value creating potential India’s financial sector may have

Most Indian broking firms are currently looking to raise money and in some cases, are looking to find strategic investors. Are these companies attractive for either the strategic investor, or the retail investor? For answers, perhaps look at some recent cues come from China. India’s financial companies, which are about all in the market for raising money, would be heartened by the amount of capital raising Chinese companies are doing in recent months.
Citic Securities raised $3.3bn recently, in the biggest IPO by a Chinese financial security firm. Haitong Securities, China’s sixth largest broking firm, plans to raise $3.4bn soon. Goldstate Securities reportedly aims to raise $4-5 billion in a domestic IPO by March 2008. Everbright Securities, part of a large state-owned conglomerate, also plans to do a multibillion dollar IPO next year.
China’s banks have done even bigger IPOs. China Construction Bank, among the big four Chinese banks, plans to raise $7.4 bn, in what would be mainland China’s largest IPO. This bank had earlier raised $9.2bn in 2005, but from overseas markets. The big daddy of Chinese banks, Industrial and Commercial Bank of China, raised $19bn in what would be the biggest global IPO ever. Bank of China, another member of the Chinese big 4 banks, had raised $9.7bn in 2005. China appears to have a few national level banks and around 115 or so city commercial banks. Some recent IPOs have seen even these raise around half a billion dollars or more.
For someone sitting in India, these numbers are clearly eye popping. No security firm in India has even raised $500 mn from the market, while the sixth largest Chinese firm plans to raise 3 times that amount. Motilal Oswal, perhaps among the top 5 domestic broking firms, raised around Rs 246 crore ($60mn or so) from its IPO. Other than ICICI Bank, which managed to raise upward of $4bn in June/July, Indian banks (barring SBI or maybe HDFC bank) don’t have the scale to raise even more than $1bn. China’s domestic market it appears can support capital raising of over $7 bn from one outfit. That was a kind of amount the entire Indian market can support in a year, all IPOs combined.
The difference in GDP does not explain this massive difference in financial sector numbers. China’s GDP is around twice the size of India’s. The size of the stocks markets does not explain this either. China’s stock market capitalization is around $1500bn, about two times India’s size. In fact, till 2-3 years ago, China’s market cap was less than India’s.
China’s financial market thus appears to be disproportionately bigger compared to India, and much better capitalized. That may be the reason why global banks and security firms are keen to get a presence in India when local assets are still cheap. The largest domestic broking firm is perhaps not worth more than 2 billion dollars. All others are perhaps less than one billion dollars in market value. Most banks are small too. While ICICI Bank is around $20bn in market cap, and SBI is around $15bn, a few others like HDFC Bank have some size, most others are less than $1bn in market cap.
India’s financial sector can thus potentially create a lot of wealth going ahead. The transformation of Chinese brokerages gives a clue. According to a media article, 7 of top 10 Chinese broking firms for which financials where available, registered a combined loss of almost a billion dollars in 2005. These same firms reported a net profit of over $2bn in the first six months of this year. Assuming they make a net profit of $4bn this year, and given that Chinese firms quote at a P/E of around 40-50x normally, these 7 firms are perhaps worth a market cap of around $100bn. Now contrast with this the billion dollar loss these firms made in 2005, and the fact that the Chinese stock market was smaller the India’s till recently.
What is amazing is, the till-recently-Communist China, appears to have an equity cult bigger than India’s now. Haitong, for example, has two million clients, served from 124 outlets around China. The largest Indian retail broking firm has a little over half this number as its client base. In April and May of this year, retail investors were opening around 300,000 demat accounts a day! Having started much later on the capitalist path, China current has around 3 times the retail investors India has. And they appear to trade a lot more than ours do.
Look at this another way, you may well say that India’ financial sector has a lot more wealth creation yet to do. From broking firms to banks, there may be a lot of stock picks there for the long term investor.


4 Responses to “Look for multibaggers in Indian Financial Sector”

  1. Anonymous said

    Any opinion on MQC which plans to buy a stake in SMC Group which is a broker in India? Seems like an attractive deal but I’m hesitant to invest being that MQC is a blank check company.

  2. Shant said

    Guys check out Reliance capital. This company is bound to make waves!!! huge value can be unlocked from this!!!

  3. Devarsh said

    Mr. Ajay,I found your article very informative and intresting. I work for a brokerage firm. I always believed that this industry has a huge potential and will gorw by leaps and bounds in decades to come.Your post has provided me some starting point which I wil work on to check the market cap of broking compnies in india and china.I also seek your permission to forward this post to friends..thanksDevarsh

  4. Anonymous said

    Someone like me who worked in the Indian Financial sector few years back knows the hard fact that a very huge percentage of the Indian Financial Services Firms(even the Big guns) have grown over the past decades essentially through highly coterie based , non transparent and also taking advantage of highly corrupt environments. It is easy to be impressed by the the statistics on paper, but do we really believe that the essentialy corruption based mindset in Indian Financial sector can be changed so easily, just by showing good growth numbers or new technology based systems etc..

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