Record valuations for financial services

Record valuations for financial services

Edelweiss Capital, a financial services company, debuted on the stock exchanges on Wednesday last with a large market capitalisation of over Rs 11,000 crore. On the same day Reliance Capital divested about 5% stake in its 100%-owned asset management venture Reliance Capital Asset Management to a foreign investor for Rs 501 crore, valuing the mutual fund company at Rs 10,000 crore.

These are not isolated cases of over-the-top valuations. Instead, these are the latest instances of what has merely become the norm across the financial services spectrum. Brokerages, corporate finance/advisory, securities or portfolio management firms are all enjoying enormous investor response on the bourses.

The re-ratings are largely driven by the enormous growth potential in both corporate and retail segments. The retail participation in equities, directly or through mutual funds, is abysmally low — only 5% of household financial savings are in stocks and debentures. The strong bull market in equities is, however, driving more household savings to stock markets.

The brokerages and the asset management companies stand to gain the most from this rising retail interest. On the corporate side, the vibrancy has thrown up many corporate finance and transactions advisory opportunities in the universe of small and medium companies. Since the big foreign investment banks usually do not enter this segment, this business is going to the local investment banking firms.

This re-rating of financial services would give another boost to the valuations of financial services conglomerates such as HDFC, ICICI Bank and Reliance Capital. All the large players have asset management, securities and insurance business. Some public sector banks, such as SBI, also have a full-fledged investment banking and corporate advisory subsidiaries. Even a minor dilution in these businesses could yield good returns for the shareholders.

UTI Asset Management, which is likely to come out with a public issue, would be another significant beneficiary of the better valuations. Of course, one can still question the valuations, but high valuations are good for the spread of financial services. These valuations would enable securities firms to raise funds easily and invest in spreading their reach.