What a fantastic quarter. Take us through some of the highlights of the quarter gone by and what really some of the driving factors were.
It was one of the most exciting quarters as well as the year — 2020-21. If you look at the detailed declaration, it is about Rs 1,600 crore profit against literally no profit last year or even loss. So this is a bumper year and it is aided by the mark to market in the portfolios and, of course, the operating performance has also been stepping up.
Actually this company is made up of four businesses. First is broking; second is asset management; third is housing finance and fourth is portfolio management or treasury. Treasury is a very important part of the business. Broking has had a stellar year and literally the profits doubled in the whole year and we added many customers. The momentum in the broking side is fully on. Other competitors’ results also were fabulous. The broking business is firing on all cylinders.
In the case of the asset management business, the first two-three quarters were a little challenging because the markets were down. AUM, on which we get our commission, was also low and now in Q4, it has come back fully. The asset management business did very well in the second half.
The housing finance business has been suffering for the last three years. You could not have had a more challenging year than 20-21 and this year the company has done well. It has earned about Rs 60-65 crore profit. If it was not for the second wave of Covid, I would have declared that we are out of the woods and we will grow and build on this business.
The fourth business is treasury which is all equity and that has done exceedingly well. There has been about Rs 700-800 crore of treasury gains and about Rs 600 crore of operating profit. That adds to about Rs 1,500 crore of net profit.
You mentioned the impact of the Covid second wave. What is the outlook going forward?
Again we go business by business. Since the second lockdown is not a complete lockdown, businesses will not be in such a bad shape. Broking is still very steady and doing well and it is also helped by global markets, especially the US markets.
They are recovering and hence what they do has an impact on the money market because they source a lot of stuff from here. Clearly India will also be on a revival path as thanks to other developed markets it is doing well. I do not think the markets will see a debacle like last year. In 2021-22, I would expect the asset management business to do much better than last year because the average AUM will be much higher.
Thirdly, in case of HFCs, subject books are clean and we have paid our tuition fee fully. So we think that we will do well there but for the second Covid Wave.
Coming to portfolio management, we are not going to have such a blowout year like 2020-21, but 2021-22 should be more about consolidation. In fact, the portfolio gains may not be as big as this year but my operating profit should be much better. Last year, two businesses did well – broking and asset management. This year housing finance, asset management and private equity all three are likely to do well. So my operating performance will be better.
How do you expect the rest of the year to pan out? What are you advising?
It is a very challenging year because there is the Covid second wave, then probably even a third wave. A lot of things are happening on the ground which are keeping the consumers inside houses or mobility is restricted. It is extremely difficult to predict what is going to be the business outcome in specific businesses.
We think the US, the UK and China have declared that they have broadly come out of Covid and since they have a massive pool of savings, in terms of consumption, pent-up demand is coming up. They are import dependent economies and the imports will come from China, India and the rest of the world. I would think that there will be business momentum led by America and China.The aggregate demand in the global economy will be high and that will determine what a lot of businesses do. It will be very tough to figure out who has benefited and who is getting hurt.
It is a really unusual kind of situation. Some pockets are unbelievably good and some pockets are so bad that it is never anticipated that this is going to happen. So it is a mixed scene.
Do you believe that the financials will remain vulnerable? Should one stick to some of the large cap top tier names within this space — the ICICI Banks and HDFC Banks of the world?
I can tell you only what I will do. The financials which have been able to weather the last 12 months well are the ones, you should go for now. This is not the time to speculate on what is going to be the outcome of the Covid second wave or third wave or fourth wave because this base is completely unpredictable. The risk is whatever one is pricing. People do not know what the risks are. So, we are in a slightly uncharted environment. This problem is not contained. I would be sticking to safer counters rather than being speculative because though speculative gains are possible in the small or not so good stocks if the economy settles down, it will be premature to believe that the economy will settle down in the next 12 to 24 months.
Going forward, what do you feel is going to be the mix or the pace of growth in terms of participation from different categories?
So there are certain businesses which are resilient and have actually done well in the last 12 months. They will continue to do well; select financial services like broking have done well in the last 12 months and the momentum is on.
A record volume of almost Rs 100 trillion got traded yesterday on expiry. We are still hitting new highs. New opportunities are coming up in pharmaceuticals like the vaccine suppliers and all kinds of commodities are on fire because the consumption boom is there. The underlying commodities have to be in short supply and they are doing well.
Led by global recovery, even tech spend is booming in the US. I spoke to somebody who said even in April and June, they are going to see very strong deal pipelines. The software segment is building up well. So, pharma, software, selective financials are doing well. I would say it is a portfolio which has been corrected for credit cost. I think credit cost will spike –though not as badly as it did last year and hence the earnings recovery even in the financials will be pretty strong.
Any risks that you see not necessarily from a brokerage business point of view but from the financial section point of view in terms of lockdowns leading to vulnerability for the sector in terms of payments and NPAs going forward?
In lending ,business you are leveraged 8 to 10 times of the equity. That kind of risk must be giving nightmares to the CEOs because nobody knows which way it will turn and how deep it can come because it is a very large country of 1.35-1.37 billion people and still only about 1.2% of the population will be tested altogether. The healthcare facilities are limited. There is a lot of fear but generally with so much alertness, things do not go out of hand. I would still be cautious on Covid but you never know from where trouble will come. There is so much liquidity, such low interest, booming commodity prices. Something might break down. I do not know what that would be.
