Woh kehte hai na upar wala deta chappar phadke deta hai. (They say when God gives, it is bountiful.) The quarter gone by has been a bumper quarter for you.
Raamdeo Agrawal: You said it. I think it is all-time high in every aspect of whether it is operating, whether it is mark to market, assets under advisory, assets under AUM, you name it everywhere it is 30%, 40%, 50% kind of growth. So, it is a bumper result, I must say. But the thing is it is just about the beginning of the large trend in the capital market and it has become so acute that even banks are feeling the pinch of flight of deposits from the banks to the capital markets.

I think the experience of the capital market for the larger masses is very good. If you see the return post Covid, particularly from 7,500-8,000, the index has gone almost 3X. The return even in the last 12 months has been about 20-21% at the index level. If you look at midcaps and smallcaps, it is 35-40%. So, returns are very good and that is enticing people to come to the market.

Digital onboarding is there. In five minutes, you can open your account and start trading. That has been a fundamental shift in the capital market outlook and it has happened after 75 years in the sense that till 2020. there were only 30-40 million demat accounts and that too with all kinds of duplication. So, unique accounts must not have been more than 20 million. From there to 144 million in December and unique accounts must be 80-90 million.

I think it is a vertical growth in the capital market and the network effect of good experience is pulling in more money from the existing guys and, of course, new guys are also coming and it is going deeper into the fifth, sixth tier of the markets. This money is not going to go away. Unlike in 1990 when the bull run happened, that time the money came and went in two years’ time as a scam broke. But this time, this money is for good. In fact, the money flow will become bigger as we go forward, and it has so much of a power of wealth effect that it can increase the GDP growth of the country. You might have seen this half year that the RBI estimates itself was wrong by 1%.

On such a large base, 1% is a big miss.
Raamdeo Agrawal: And all the global economies including ours are off by 1.5%. They were at 6.2%, 6.4% and what turned out was 7.6%. Every quarter it is going to be like this. They will not be able to catch up because the wealth effect which is coming, is going to spur the economy by at least a percentage or so and the trickle down will happen. So, conventional logic is already happening. Capex is happening. That is giving some kind of new energy to the economy but the wealth effect coming from the stock market has yet another engine. It is a twin engine situation. One is a conventional engine and second is the wealth effect of the stock market. We are in a very sweet spot.Since we are talking about quarterly numbers, there is a big bump up in all your verticals and I am looking at quarter-on-quarter. The quarter gone by, which is October to December, was also an unusually strong quarter for capital markets. Index itself gave a double-digit return. That may not repeat itself going forward.
Raamdeo Agrawal: It would not. Generally, it would not, because doing 10-12% kind of return in a quarter is very unlikely because then you are talking about 45-50% kind of return in a year, that is very unlikely. But the market is horizontally expanding. So, the capital market itself, say, like December, was extremely strong over October and November. September was very good. October was somewhat weaker. November picked up, but December was out of the charts and January is even better than December.

So, what is happening is that momentum is picking up, as we come closer to budget time and then election time and then after that, again, budget time, so I think we have an exciting calendar for the markets.

So, you do not expect any slowdown per se to happen in terms of your capital market business?
Raamdeo Agrawal: Yes. Capital market business will horizontally expand. Now, whether it grows at 10%, quarter-on-quarter or 5% quarter-on-quarter, depending on whether the markets are down, then people get stuck. See what people are doing in this momentum market, that if they buy something today, it makes 20%, they will sell and buy something else, so that rotation is on. The moment the market is down by 15-20%, then that machine stops, because whatever they have bought, that is all in loss. So, the momentum of churning slows down.

So, right now, the momentum is positive and if there is no break in the market, like even if it is 2-3% higher, say whatever the December closing and March closing, it is a 4-5%, 3% higher, just about higher or the same, I think momentum will continue.

If you have added about 40 lakh new accounts for the quarter gone, the net number now stands at about 4 million
Raamdeo Agrawal: No, you are talking about industry or us?

No, Motilal Oswal acquired half a million clients, total active client base is now at 4 million, that is the number I have….
Raamdeo Agrawal: Yes, so I am also not on top of that number, but yes. See, because what is happening is every month this industry is getting four million customers. Last month was a record high, 4.2 million. Let us look at January, my sense is it will be matching. If this level of influx is happening, it is bigger than the crowd in Ayodhya temple, this is bigger than that. And there the crowd passes through. They take darshan and go away. Here, the crowd comes to stay. So, the cumulative crowd, participants, are too many.

But some would also argue and say that the pie is expanding. But for an intermediary or for a broking firm, brokerage rates are getting comparative. SIPs are getting comparative. AIs are now dominating, what could be called as the earlier wealth distribution business. So, while everybody is with you when you say that the large opportunity, we have just scratched the surface, but you will grow more, but you will make less money if margins come down.
Raamdeo Agrawal: My drop in the yield should be lower than the volume growth. So, volume is growing at 40% to 50%. You see, my ADTO has gone up by some crazy 80-90%, but my revenue has not gone up that much. So, obviously, the yield per rupee of trade is lower because the mix is becoming more option oriented. So, my yield, which was maybe a paisa, would be 0.09 paisa types, as there is a drop in the yield.

So, it has become very inexpensive. On a 90% growth of the ADTO, I have only 30% growth in the revenue. So, what you are saying is right. The yield is dropping, but my expenditure is not growing at 30%. My expenditure might be growing at 20-25%. So, there is actually a margin expansion at our level and I do not see that changing. And we have a good control over the cost.

And given that this year could be dominated by new listings, new IPOs, a lot of PE exits, I would imagine that the capital market business or the so-called merchant banking business will also be strong.
Raamdeo Agrawal: The guys who have good teams are going to be kings. We have put a brand-new team and we are doing alright right now. But my sense is when there is so much demand for paper, the supply has to come and at elevated levels of valuation clearly all the corporates, I mean, they will either do a foreign offering, the ones who are listed, the ones who are not listed, they will get listed.

We will have a very warm capital market throughout the year. Earlier it used to be a window – two months on, then two months off, four months off and mostly all the i-banking companies are not doing well because instead of a very short window of issuance, it is continuous now.

Three-four issues every week is now common practice.
Raamdeo Agrawal: Every week, yes. In one day I think it was five issues. I think a day will come when we will have 10 issues in a day. So, it is a terrific time to be an entrepreneur. For hardworking, profitable entrepreneurs, there is no dearth of equity. The first decade of this century was dominated by no equity, only debt. Now, the second and third will be dominated by too much equity and less debt at a corporate level.

Every company is taking pride in saying that we have de-levered to the level of net cash.

Real estate companies have net cash now.
Raamdeo Agrawal: Net cash. Real estate, steel, cement companies are going net cash, which is crazy. If you have ROC is about 10-12%, you will never reach an ROE of 15-17% unless you levered up.

Now you have followed a rule of 20% in 10 years is 10X, 20% for 20 years is 100X. But given that we have seen such exciting times in the capital market, can I say that the threshold at least for the next five years for your firm is not 20%, it is between 25% and 30% CAGR?
Raamdeo Agrawal: See, it should be better than the last 10 years, that much only I can say because capital markets can be parabolic.

We are talking about percentage growth here, not the profit growth.
Raamdeo Agrawal: I know. Basically, I can only say that whatever pace we have grown in the past 10 years, logically because the market is horizontally expanding, number of customers are increasing, products are increasing, the activity levels are very different, there is no reason why it will be not at least 4-5% higher.

So, we can do our numbers, in the last 10 years what we have done, we have done upwards of about 25%. This is a company which has done right from inception at about 25% top line, 25% bottom line. So, I would think it should be a little better.

Let us look at banks. They are always considered to be the proxy of what the economy is. For banks, now, if I look at all banks, they are facing what could be called a liability war. They are not getting deposits. Money is coming to the capital market. So, while we may feel happy when we see the numbers of a brokerage firm, savings are not moving into banks.
Raamdeo Agrawal: But itna farak nahi hai (not so much difference). It is only marginal. I mean, if they are getting about Rs 20-25 lakh, of that Rs 2-3 lakh would have moved at best. They will get accretion, but they are used to free accretion, like at 2%, 3%, people will dump the money in the savings bank account, that is not the situation now.

Now you have to pay a little higher price. So, they should be able to pass on. The loan demand is very good from retail, particularly, side. The real issue is that the corporate side is not very strong. So, basically, what they are saying is that pricing power is limited. If your liability cost goes up, there is a NIM compression and that will finally have an impact on the ROTA.

Despite volume growth and operating leverage, they will have a tough time expanding the ROTA. So, the market is apprehensive. The market has its own apprehension that might be, ROTA might fall and if ROTA across the industry falls, then the whole valuation is based on some level of growth in profits and price to book given is a lot more premium, so that they can raise money at three, three-and-a-half book, that may be difficult.

So, there was a time five years ago where PSU banks were rescued by the government. They were recapitalised. Bank of India a quarter ago raised money via the QIP route. So, from a government rescue to a QIP, things have changed for the banking sector per se. Five years from now, if you look at the banking sector, do you see the top pecking order, the one, two, three, four, five changing in a meaningful manner?
Raamdeo Agrawal: I do not think it will change. In terms of size, we have to talk about the AUM. Let us not talk about profits because profits have different meanings. You can write back a lot of things which you are recovering and things like that. But I think the pecking order would not change meaningfully. PSU banks like Canara Bank or PNB were erstwhile very large. They might come back to slightly higher reckoning, but the dynamism of the private sector, the flexibility they have in terms of talent attraction and the technology deployment they have, gives them an edge over the PSU banks.