Low inflation, rate cuts to drive earnings, FII flows: Motilal Oswal

Interview with Chairman and managing director, Motilal Oswal Financial Services

Amid the high volatility that follows a significant correction from peaks, Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services, speaks to Ujjval Jauhari on the outlook for the markets and the growth strategy of his organisation, among the leading companies in the capital markets space. Edited excerpts:

In challenging times for the broking business, what has driven your company's growth in December 2015 quarter?

Our business is divided into traditional capital markets (retail, institutional broking, investment banking and distribution), asset management (AMC, real estate, etc) and home finance which is new.

Traditional capital markets have seen minor growth but we continue to increase our market share in a big way. While market activity and volumes cannot be controlled, our focus continues on improving distribution and market share at all times. So, in good times, the traditional business will do better but the distribution business, which is growing fast, keeps driving growth even in a subdued environment.

Asset management business growth has been very fast, with year-on-year growth of 100 per cent in terms of both assets under management and revenues, and is more than Rs 60 crore now. PMS (portfolio management services) has seen top notch performance. In housing finance, the book size has grown very fast, we have funded around 13,000 houses and business is gathering pace.

What are the other measures to drive growth?

While we are de-risked now from broking to distribution, and asset management and housing finance drives growth, we have also increased our manpower and that has paid off. We have confidence in our business and the results will come. Even in bad times, we will continue doing better.

For Indian markets currently mauled by volatility, what is the road ahead?

As far as the China market is concerned, we are already delinked from there. Yes, when there is too much volatility in the Chinese market, our markets become volatile but unlike earlier, there is no correlation. As corporate earnings show better traction, which might be two or three quarters away, we will see foreign money coming back. The market's near-term prospects could be a difficult call, as it depends upon crude oil (prices) and US interest rates but we're otherwise well placed. It is a tough time for economies but during tough times, too, we will perform better.

What will drive fund flows in the Indian markets?

Inflows will depend upon not only emerging markets but on, for instance, whatever is happening in crude (oil). The good thing is domestic mutual funds have been the biggest buyers when foreign institutional investors (FIIs) were selling, and that's a good trend. Domestic mutual funds are getting stronger. And, hence, compared to China's huge dependence upon foreign money, we have high net worth investors, mutual funds and many other investors.

Having said that, the selling has moderated and FIIs are also coming and buying. While the short term might be a difficult call, we will on a full year basis see better foreign flows in the country. India's positioning in the minds of global investors and the world has definitely gone up drastically, helped by Prime Minister Modi's marketing.

How have corporate earnings been in the current results season? Do you see any upgrades or downgrades?

They have been up to expectations. Some have been better, like cement and private banks. Many automobile companies have also done well. But, there might not be upgrades immediately. Everybody right now has factored FY17 growth at 15-17 per cent, so there might be a one to two per cent downside but the numbers for the year ending March 2017 will be much better than for 2015-16.

Due to low inflation and interest rate cuts, somewhere we will see corporate profitability improve, driving FII flows.

Currency and crude oil are big concerns. What is your view?

We as an economy are very strong, so we are not going to see sharp decline in the rupee. Also, as we always factor in a four to five per cent currency depreciation yearly, I do not think it will go beyond that. The forex reserves are not falling, another positive. So, net to net, we are well placed.

We are not experts on crude but if the corrections on either side are sharp, the rebound is also sharp. I see some stability coming. Around $40-45 a barrel should bring stability to a lot of foreign funds.

How should one play the current markets? Any sectors and stocks you recommend?

We are in the buying zone. Good quality stocks with quality growth in large-caps and mid-caps should be looked at. Oil marketing companies, automobiles, pharmaceuticals, banks and cement. So, 10-15 stocks in five to seven sectors, can be looked at. For investors, mutual funds should be used, as professionals would be managing their funds 24x7.