Edelweiss Capital didn't really have the same kind of qtr like Motilal Oswal or IndiaInfoline. For the other two, PAT and rev jumped almost doubled qoq. For Edelweiss, qoq growth was 50%. YTD, Edelweiss stock has underperformed Motilal and IndiaInfoline - does this qtr have a clue as to why?
It appears that Edelweiss had lower broking rev growth than others, which would imply company lost market share. Part of it might have to do with the nature of clients. Edelweiss had probably more hedge fund clients (it is the largest derivative broker) than the other two, and they got wiped out last year.
The question is - is there something structurally different about Edelweiss that it might not grow as fast as the other two? Edelweiss has a huge prop trading book (40% of its revs are from arbitrage trading), while the other two are pure brokers. Is this book as scalable as broking revs? Besides, Motilal and India Infoline also have a huge retail broking network, while Edelweiss is primarily institutional, so this might reduce the long-term acquisition potential of Edelweiss. Why will any foreign broker acquire an arbitrage trading group?
One thing is sure - valuing Edelweiss on PE is strictly not correct, as its arbitrage business requires capital and is more appropriately valued on PB. The ROE's on this book are in low teens - so that warrants a discount to pure brokers.
I had bought Edelweiss couple of weeks back on the theory that if Edelweiss delivered the same kind of growth as other two, it is the cheapest amongst the lot on PE basis (10x PE vs 15x for Motilal and 20x for IIFL). That has turned out to be incorrect - Edelweiss didn't have the same growth. So I sold Edelweiss today. It is unlikely to outperform the other two from here. Market will need better 2Q results - better relative to competitors - to do that.
Next time - I will pick up one of IIFL or Motilal. Brokers are the best way to play beta. IIFL is a very good company but also very expensive and loved by everyone. Motilal might be a more intriguing play.