Burman's date with equities

It’s a tradition the Burman family loves to keep. On every Friday, they meet for lunch at the family office in New Delhi’s ITO area. During the meal they discuss everything from life to work. “Friday has become the day when we get together and spend time,” says Mohit Burman, a fourth-generation entrepreneur from the Burman family, promoters of Dabur. “We started this tradition in 1997 and it continues till date.” The lunch, while informal, gives the family a chance to discuss business plans and brainstorm. It was at one such lunch that Burman proposed his idea of entering the equity broking business. The idea found approval. In November 2011, Mohit and his younger brother, Gaurav Burman, bought a 25% stake in Espírito Santo Securities, the Indian unit of Portuguese bank Banco Espírito Santo, to offer 

investment banking and institutional brokerage services. While Espírito will make an initial investment of around $10 million, the Burmans plan to invest $2 million (₹10 crore) in the joint venture. While that is hardly worth talking about any more, Burman says it is only seed capital and they will ramp up their investments as they go on.

More important is the fact that the joint venture with Espírito  marks Burmans’ entry into the highly competitive equity broking business at the most inopportune time, that too with an unknown partner. Mohit Burman’s desire to scale up his finance business is understandable—he holds an MBA in finance from Babson Graduate School of Business, Massachusetts, and his first date was with Dabur Finance. After the unremarkable stint, in the 1990s with Dabur Finance, which no longer exists, the group ventured into the insurance sector with its first joint venture with ABN Amro bank in 2001 to market the bank’s life insurance products. It then partnered Fidelity International and Aviva Life Insurance and brought them to India. Fidelity eventually bought out Mohit Burman’s 25% stake but the family still holds a 74% stake in Aviva Life and a 10% stake in Universal Sompo General Insurance. So far, the Burmans have invested close to ₹2,000 crore into the insurance business. So the equity broking may sound like a natural progression. But can the group really make its presence felt in this business?

Burman says the partnership happened, in part, because of the personal equation his family shares with Espírito  board members. “We knew Espírito’s board members well, through some of our overseas deals,” says Burman. “We wanted to get into the broking business and Espírito  was looking for an Indian partner, so it clicked between us.” He claims that financial services is Dabur’s second largest focus area after consumer goods. In the past, the promoters have exited some of their financial services businesses, but he insists that there will be no exit from Espírito. On their part, Espírito  officials declare that this was the reason for choosing Dabur, though it has no experience in investment banking. “Like Espírito  Santo, as a family business the Burmans invest for the long-term, which was an important consideration for us,” says Nick Paulson-Ellis, Country Head, India, Espírito  Santo Securities. 

Espírito  has been in India since 2008, through its subsidiary Execution Noble, which has an institutional equity research team of 20, covering 75 Indian listed companies. Post the joint venture, Espírito  has applied for equity broking licences, which it hopes to get in January-March 2012. It will also leverage Dabur’s presence in Africa. “Dabur has a strong interest in emerging opportunities in Africa, where Espírito  Santo has a longstanding position and network, so we can help identify investment opportunities for Indian firms in Africa,” says Paulson-Ellis. 

Poor Timing?

Analysts are, however, sceptical about Espírito’s success in India, given the timing. “This is the wrong time to enter the broking business,” says Kajal Gandhi, Analyst, ICICI Securities. “Brokerage yields are shrinking because of an increase in futures and options trading where yields are the lowest and a decline in higher yielding cash and delivery segment,” she adds.

Gandhi says even existing investment banking players are looking at other sources of revenue such as the lending business, i.e., loan against pledged shares. “Any new player will find it tough to operate in such an environment and they will need to cut operational costs to be profitable,” she says. Brokerage yields in the derivative options turnover is 1-4 basis points (bps) compared to 10-12 bps for trading in the cash segment. In FY11, options constituted about 58% of overall equity turnover against 37% in the previous year, according to Icra.

Gajendra Nagpal, CEO, Unicon Financial Intermediaries, a financial services company, agrees that these are difficult times for broking houses. “Retail investors are missing and people are playing on the Nifty futures and options, algorithmic trading—all good for the liquidity of the market…but investors are disillusioned,” he says.  

Low trading volumes and an increase in costs is forcing broking houses to shut operations or downsize. In June this year, Alchemy Shares & Stock Brokers closed its institutional broking business to focus on its asset management and wealth management businesses. Mata Securities has shut down its research division and there is speculation that at least three or four broking houses are looking for buyers. “Quite a few broking houses are already on the block,” says Nagpal. “Only players with very deep pockets and patience will do well.” 

The Icra report says “the weak operating environment could speed up consolidation, as small brokers may find it difficult to sustain profitability.” Consolidation has started, with Anagram Capital acquired by Edelweiss Capital and Quant Capital by Reliance Capital. Banks are also acquiring broking houses. For instance, HSBC Bank bought IL&FS Investsmart, StanChart acquired UTI Securities and Axis Bank acquired Enam Securities.

Paulson-Ellis expects further consolidation in the broking sector. In fact, Ellis says his intention is to take advantage of this turmoil. “We would like to build market share before the industry consolidates,” he says. “The market may worsen in a year or two and we will see broking consolidation, given the issue of lower business levels and overcapacity in broking.”  

Filling The Void

It’s not just Espírito . Other foreign broking houses such as Jefferies, Barclays, Goldman Sachs and RBS are also trying to pick up market share left by brokerages that have shut shop. CJ George, Founder, Geojit BNP Paribas Financial Services, says foreign brokerages have an edge over domestic brokerages in the institutional broking business. “Foreign brokerages have global clients, so it is easy for them to link India globally,” says George. Espírito , which will be offering institutional equity broking along with investment banking, is perhaps banking on its global clients to make its India business profitable.

Paulson-Ellis agrees that since market volumes are very thin, it will be challenging for the bank. Espírito hopes to differentiate itself by offering equity research, a trading platform that allows clients to trade in 16 markets, and the expertise to help corporations in their ambitions across Africa and Brazil. 

With so many brokers competing for the same clients, Indian brokerages are likely to be stressed. Consequently, the weaker players will be squeezed out and the stronger ones will rise. More than a brand recall, Espírito needs to convince its foreign clients to put their money in India. Given the abysmal performance of the India market that is a tall order in these times. Additionally, if the European crisis blows ups, and clients turn risk averse, the flows may slow down to a trickle. Burman’s equity dreams will have to wait. But will Espírito wait that long in an alien land? Historically, foreign brokerages in India have chosen to leave during times of turmoil. Burman can hope that Espírito bucks this trend.