You have a Sensex target of 19,500 for 2010-11...
We are assuming a 15% growth in profits for the Sensex companies in 2010-11 and the advance tax numbers were promising. So, even if we carry forward the same price-to-earnings multiple that we had at the start of the year, we are looking at Sensex crossing 19,500 by March end. Unless something exceptional happens globally, this is almost a given.
What kind of sustained multiple do you expect the Indian markets to trade at
A forward multiple of 16 times seems reasonable. In some ways a little bit of volatility is good because if there is a little bit of a dip then people who have a longer term perspective are able to come in.
But the market is way above 16 times
It is way above 16 times since we are still looking at last years earnings. But by the time we hit March we will be looking at 2011-12, for which we have an EPS target of Rs 1,235. Therefore, directionally we are confident as are investors. Its just that they are looking at some dips to come in and buy.
What kind of FII inflows are you expecting in the next 12 months
Last year, we had total inflows of about $20 billion, of which about 70% went into the primary market. Flows should be similar this year, though the mix may change to 60-40, depending on the disinvestments. Qualitatively, the ETF money in the last six months has been significant. Hedge funds do have money but how much of it has come into India again is hard to say, though the potential for the proportion to increase has certainly gone up. Of course, the share of domestic money has gone up quite significantly and the insurance sector has been active.
So you think the flood of paper that is going to hit the market will be absorbed
Definitely. Funds are there, liquidity is there, it has never been better. India is a preferred destination no matter which way you look at it. There is just one very important caveat, that valuations have to be reasonable.
Is institutional broking a profitable business
It is for us though for other firms that are primarily in investment mode, because they want to build a franchise, the results will show later. The industry is getting more fragmented but players like us, who have built the franchise over many years, we are able to leverage it.
How lucrative are brokerages
Institutional brokerages are broadly in the range of 10-20 basis points. FIIs pay about 15-20 basis points, while domestic players pay a little less at 10-15 basis points.
How do you approach government mandates
There is a certain amount of work that goes into each issue, irrespective of the size, which is why it is the larger deals where the pricing pressure is the most. In 2008, which was a boom year, the investment banking brokerage pool was roughly about 2.25% of the funds raised but last it was down to about 1.15%, excluding the PSU issuances, where it was negative. The marketplace is certainly tightening on commissions. It is a question of what is the mix of the products that you do. Strategies are different, some will cross subsidise the business with ADR/GDRs, others with the retail business.
How do you see investment banking commissions moving
I expect them to stabilise at this level. And on the disinvestment side, clearly the government has given a very clear indication that it does not wish the pricing to be the prime determinant and that it is happy to pay investment bankers a certain fee. If the bidding continues to be aggressive and near-zero, then the industry only has itself to blame.