From pontificating on reservations in higher education, I am back to my more mundane day-job world to announce another India investment. Along with New Vernon Private Equity, Bessemer has invested in Motilal Oswal Financial Services, one of India's leading stockbroking firms serving both institutional and retail investors. Mr Motilal Oswal and Mr Raamdeo Agrawal founded the company in 1987. Multiple bull-and-bear markets later, Motilal Oswal is arguably the best 'Indian' stock broking house, competing effectively against India-operations/JVs of various global firms (including the bulge bracket ones). On the retail side, they have an extensive reach of over 500 branches/franchisees across India. On the institutional side, Motilal Oswal serves a wide range of global asset managers who invest in the Indian markets. As a regular reader of their equity research, I can personally vouch for its high quality! For a more unbiased opinion, in March 2006, AQ Research (a UK-based firm that analyses the accuracy of a broker’s research call) declared Motilal Oswal the best research house for Indian stocks. Beyond stock broking, Motilal Oswal offers commodity trading and wealth management services, and is setting up its investment banking operations.
In terms of the market, our thesis is that rising consumer incomes will translate into disproportionately higher allocation of these funds into equities. Right now, under 3% of India's retail assets are invested in stock markets. Cash, bank deposits, real estate and gold dominate the pie-chart on how Indians invest their wealth. As economies develop, this % rises to as high as 30-35% in the US. Further, the stock broking industry is highly fragmented and seeing a gradual consolidation. Motilal Oswal's growth has outpaced that of the industry and the company should continue to gain from this consolidation.
The main concern with the brokerage business is cyclicality. Trading volumes drop sharply during a downturn. When (notice that I havent said 'if') the Indian stockmarket enters the next bear phase, Motilal Oswal and its competitors will clearly be affected.
Then what? We wait! Ups-and-downs are a part of this game, and one of values of patient capital is to be able to support a company through a potential downmarket. The secular shift towards greater equity investment will continue and we expect growth across a cycle to be robust. Further, leading firms are better placed to weather a downturn and may even be able to accelerate industry consolidation by rolling up smaller firms that have been affected to a much larger extent.
For those who havent been to their website yet, check out the two rules on the top-left of the page!