Axis shareholders pay for Enam shareholders’ wealth creation  

November 18, 2010

As Enam promoters bow out with one of their greatest trades ever,high-risk financial takeovers by banks a la Wall Street invades India

Axis Bank, which has so far stayed away from the stock-broking business and has had an insignificant presence in the investment banking business, is paying out Rs2,100 crore to buy Enam Financial. The deal will catapult Axis into the highly competitive business of broking and investment banking, but what can Axis get out of Enam, a highly entrepreneurial and secretive boutique firm?

Enam will be a 100% subsidiary of Axis and, according to Axis, the entire talent pool of Enam will move into the Axis fold. The question is, will the talent pool stay? If not what is the value of Enam, especially minus the top Enam team? Enam has worked all these years to develop extraordinary market insights, business relationships with scores of owners and their finance heads, as well as institutional investors. This network has proved invaluable in all aspects of its business—investment banking, portfolio management, proprietary trading and broking. The fact is, none of this will be available for Rs2,100 crores!

The core of Enam, which has been led by some of the finest brains in the Indian stock markets, will no longer be with the company after the Axis takeover. While Vallabh Bhansali will join the Enam board and Manish Chokhani will supposedly head the investment banking business, it is really a token post-retirement presence. It will obviously not be the same like when the entire Enam team of Nimesh Shah, Vallabh Bhansali, Manish Chokhani, Jagdish Master and others were all together and driving the business.

Let’s step back and see what Enam is all about and why Axis will not be able to make much of its purchase. Enam was started as a stock-broking company by Nemish Shah, late Manek Bhansali (hence the name NM, or Enam) and Manek’s brother Vallabh Bhansali, a chartered accountant. The three managed a small and extremely innovative broking business, which took full advantage of the highly imperfect Indian stock markets driven by highly speculative waves, a thriving grey market, the absence of investment institutions and very poor market infrastructure.

In these days of dematerialised trading it is hard to imagine this, but powerful market players could easily make transfer forms of shares of illiquid companies disappear before the book closure and trap the bulls or the bears as the case might be. Enam exploited this imperfect system to the hilt, but this was just one part of the firm. Enam was probably the first broking firm in India that started systematic investment research, applying Western principles of equity valuation.

Most importantly, its owners steered clear of major scams and market meltdowns thanks to their superb market acumen. For instance, Enam owners were close buddies of Harshad Mehta, but they were neither carried away by their investment ideas like Harshad, nor caught up in any scam. Instead, Enam promoters, even as they were close to many Indian businessmen, were among the first to identify the potential of multinational companies like Indian Shaving, Castrol, Hindustan Lever, etc. Among their close friends, who shared a similar investment approach, were Radhakishan Damani and Rakesh Junjhunwala.

In the early ’90s, Enam was a powerful force in broking and portfolio management services. As a natural move, they entered the investment banking business, mainly advising promoters on the timing of fund raising and the right capital structure. They brought many high-quality unlisted Indian companies to the market, most notably Infosys. The Infosys IPO nearly failed, but Enam was so impressed with the company that the promoters personally took up a lot of shares, encouraged clients to buy with the definite advice not to sell in a hurry. This keen understanding of the promoters and their business and fund-raising ability helped them establish a healthy long-term relationship with the owners of many fast-growing companies in the ’80s, like Bharat Forge, Thermax, Videocon, Supreme Industries as well as eventual behemoths like Infosys, Essar and Reliance.

Enam has also been extremely close to Marwari businessmen, especially the Aditya Birla group. In what is a uniquely Indian edge, Enam managed to develop close rapport with both the owner and the head of finance of many companies, sometimes even handling their personal portfolios which meant that both business and information came in freely, which is turn could be used to develop other relationships.

So, Enam’s secret sauce was a sharp understanding of the quality of promoters and their business, long-term relationships, market operations bordering on insider trading (especially when there was no law against it) and finally a fine sense of market direction. All these are intangible skills, which will last for only a few weeks after Enam ceases to exist as an independent company. Enam’s brilliant promoters have made many great trades so far. They end their innings with what will probably be the greatest trade of their lifetime. — Debashis Basu