Saturday, May 10, 2008

Squeeze the bastards and wreck'em into submission

Finding brokerage houses going cheap now? Not exactly. They are probably hiding more than what they should. The stock prices of Motilal Oswal, Geojit Securities, Indiabulls Financials, Prime Securities all should be actually quoting at just 5% of their existing prices as is being speculated because they are not making adequate provisions for the huge losses they suffered (during the recent Jan 08 market reversal, when stocks declined by over 70%) on their margin lending exposures to their clients.

"It's surprising to know that provisioning and losses announced by brokerage houses do not form even 1 per cent of the entire margin funding business. And, this is at a time when the market has fallen so drastically and the liquidity crisis is still looming large over the system," says investment advisor S P Tulsian.

Their balance sheets show these losses (unpaid dues by clients because of teminals shutting down due to margin pressures) as “loans” instead of “defaults” as they actually are. A loan could be recovered in future. A default is a quantified loss and is a charge against profit. Since reduced profits mean lower EPS, the stock prices could be influenced. Hence their aversion to make full provisions.

But you don’t get caught. Just stay clear of that sector for a while. The lack of demand could pull down stock prices to realistic levels. Squeeze the bastards and wreck them into submission. Remember the period after Harshad Mehta scam when these firms went down the drain? Give them that sense of Déjà vu now that they are asking for it!

[Update : Just four days later, here’s proof. The market’s got them [brokerages] by the balls. Update 2.0 - Edelweiss Group Company ECL Finance with an exposure of Rs.9.14 billion to its clients lent against securities (that quote at deep discounts now) waiting to be recovered. They call it loans, without disclosing how much is margin funding and how much has been defaulted. Yet they make a provision for only 0.5% of the exposure (Rs.45.50 million). Did you say financial prudence or worse, corporate governance? What is ICAI doing? Is SEBI reading this?


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