Brokerage margins down; see F&O trading up: Rashesh Shah

Rashesh Shah, Chairman & CEO, Edelweiss Capital tells CNBC-TV18 that brokerage margins have eroded over the quarters with the commission pool size scaling down. However, he is confident of a future for the industry and says that there is tremendous opportunities in the financial services space. Of the trading methods, F&O trading has picked up and there is a stronger move towards F&O, he says.

Below is the verbatim transcript. Also watch the accompanying video. Q: The brokerage industry also has not reported great numbers in the current quarter. Are you feeling the kind of pressures which typically to do with very low cash market volumes, high options volumes? Is that fundamentally eroding the prospects and numbers for Edelweiss as well?
A: Overall, brokerage profit margins have come down significantly in the last couple of years. I think, the fourth quarter of the last year has been in a way the worst ones amongst the last eight quarters. In the last year, cash market came down by 10% the volume, while option was up 81%. So there is a lot of uncertainty and short-term trading orientation amongst both, FIIs as well as Indian investors. We are seeing more and more move towards options and futures, rather than long term investment buying. Usually long term investment buying only happens when there is lot of confidence in the futures and there is a secular trend which is clearly established. So I think, we will see retail investors not being very active or if they are active, they will be active through options in the near-term. The same goes with institutional investors. We have seen the inflows into mutual fund industry had slowed down. Insurance has also slowed down. Given all these factors, if the pretax profit margin for brokerage industry three years ago was about 20-40%, they have now come to about 10%-15%. A lot of investment banks have also become very efficient, but given the cost increases and the scale down in this commissioned pool size we should see another couple of quarters of headwinds continuing.
Also read: Market to remain sluggish unless inflation eases Q: So having said all of that, what kind of growth if at all can you eek out in FY12 sitting on a base of about Rs 1500 crore in revenue and Rs 230 crore in profit?
A: Even in the last year, we grew our topline by almost 53%. From about Rs 1000 crore, we ended up at Rs 1500 crore. So we see a significant growth in topline. However, as the profit margins are falling for the industry, its also reflective of what is happening in India as a whole. Growth is coming in, but profitable growth is harder to get because of input prices and cost increases. We have also embarked on a fairly aggressive investment spree in the retail space, on infrastructure and all that. Hence, we carry an earnings drag on that too of an estimated Rs 40-50 crore. So, we will see topline growth but not commensurate bottomline growth, largely because of the environment, but also because of the investments which are continuing. This is likely to go on for another year. That is what broadly we are communicating to our investors and employees, that the industry as a whole is in investment phase. Unfortunately, it is a phase when the environment has got very hostile in terms of growth opportunities and profit margins. We just have to continue because the long term opportunity in the financial services space in India is still enormous. If you truly believe that and have the faith, you should continue to invest even in this environment.