Business Outlook did a great thing by inviting leading stock wizards to identify their best stock picks. While Basant Maheshwari picked Repco Home Finance, Ajay Relan picked MPS and Gajendra Nagpal chose Kaveri Seeds.
These stock picks did not come as a surprise because they are all of companies that are doing well.
However, Saurabh Mukherjea’s stock pick in the form of brokerage Motilal Oswal Securities Ltd (MOSL) came as a big surprise because at that time, brokerages were not at all doing well. In fact, MOSL itself was a victim of this, with its stock price having given a negative return of 31% in CY13.
At that time, the stock broking industry was totally out of favour with investors due to intense competition, investor apathy towards equities, sluggish volumes and falling revenues. The cash equities volumes in the Indian market had slumped to about Rs 250,000 crore per month as compared to around Rs 450,000 crore three years ago. The share prices of broking firms were down by 80% from their peaks in early 2008. At least a dozen substantive brokers had shut shop in Mumbai in CY13.
MOSL, in particular, was totally in the dog-house because it was also facing the prospect of a huge loss (around 40% of FY14 operating profits) on account of the NSEL scam.
So, who would want to touch any brokerage stock with a barge pole, and in particular MOSL?
Only a die-hard contrarian investor with a vision for the future!
In a brilliant analysis, Saurabh admitted that he is a contrarian investor looking for situations where the market has fallen out of love with a sector that is essential for the functioning of our economy. “I prefer to be greedy when others are fearful” Saurabh added.
Saurabh explained that though stock broking was at that time “an unfashionable backwater of financial services”, it was highly unlikely that the sector will cease to exist. He argued that the business of broking stocks is almost as old as capitalism (1602) and was “not going to shrivel up and die”. The trick, he said, is to invest in the sector at a point in the cycle when the intensity of competition has inflicted the maximum damage on the sector.
That nadir, for brokerage stocks, was reached in H1FY14, he estimated.
Saurabh also pointed out that the peculiarity of a brokerage business is that while brokerage revenues rise linearly with volumes, profits rise non-linearly, due to the fixed costs in the form of IT costs, real estate and research analysts’ salaries.
Saurabh also gave convincing reasons why Motilal Oswal is/ was the best stock to buy amongst the lot of listed brokerages. He called it “the best listed stockbroker” in India due to: (a) its top flight research team, which also happens to show strong loyalty to the Motilal franchise; (b) its extensive and well-established distribution channel of nearly 1,500 branches across 500 cities; (c) its strong institutional broking business, which helps the firm maintain its robust revenue market share of around 5% even in the teeth of the economic downturn.
Well, on the day that Saurabh made his analysis, you could have bought a truck-load of MOSL stock at Rs. 82. Today, less than 6 months later, the stock is at Rs. 226, giving a 150% gain.
You can also see how fast the mood amongst the investing public has changed. From being a pariah sector, brokerages are now a much coveted sector, thanks to the boom in the stock market. Even the great Rakesh Jhunjhunwala bought a chunk of Edelweiss recently to increase his holding. You can read about the merits of that acquisition here.
If you want to know more about Saurabh Mukherjea’s contrarian stock picks, you have to read his report on “5 Great TurnAround Stocks That Can Make You Huge Profits”. Several stocks listed there, such as Ashok Leyland and Bajaj Electricals, have surged but still have great potential. You must also check out his “10-Bagger Stocks Model Portfolio” which has great stock ideas.