Share prices of brokerage firms have declined 20-40 percent in the past year amid volatile equity markets, a slowdown in new client additions and tight competition.
In the last year, shares of ICICI Securities have lost 29 percent, 5 Paisa 22 percent, IIFL Securities 37 percent, Geojit Financial Services 37 percent. Emkay Global 28 percent, Motilal Oswal Securities 23 percent and Edelweiss Financial 11 percent.
"The sector growth is directly linked to market performance. Considering the high volatility and expectation of moderate return on the overall index, we remain neutral on the traditional brokerage sector for the medium term," said Prashanth Tapse, Research Analyst and Senior Vice President, Research, Mehta Equities Ltd.
Indian market sentiments have been impacted by the escalation of geopolitical tensions into war, supply-chain disruptions in relation to pent-up demand, weak listing gains and elevated crude oil prices, analysts said. However, some signs of the easing of macroeconomic headwinds were observed in recent months.
Retail woes
Retail participation saturated on increased volatility due to which the average daily turnover volumes declined significantly in the equity markets last year. This led to a lower opening of new client accounts by brokerage firms, analysts said.
According to the SEBI (Securities and Exchange Board of India) Dashboard report, the incremental addition of demat accounts has been declining for the past few months. Around 21.4 lakh new accounts were added during April-November 2022 against 27.6 lakh in April-November 2021.
The driving factor behind this declining trend is market volatility on account of various global factors. Mediocre activity in the IPO market, compared to the previous year, could also have contributed to this trend, SEBI said in its monthly release.
The daily average turnover volumes in the local equity markets have declined over 19.5 percent in 2022 to Rs 61,279 crore from Rs 75,198 crore a year ago.
"The retail broking segment witnessed a moderation in fresh investor addition in the current fiscal after witnessing record client additions in the past two fiscals. Furthermore, the industry witnessed a moderation in participation from existing retail investors, which was evident from the marginal decline in the active NSE client base in 8M FY2023, despite over 1.6 crore new demat accounts being opened during the same period” said Deep Inder Singh, Vice President & Sector Head, Financial Sector Ratings, ICRA.
Derivatives tell a different tale
However, in the futures and options segment, the turnover volume is hitting record highs every month, analysts said.
"Though volumes are growing, since you consider contract value, and not margin money, as volumes in the derivatives segment, the yields came down. That is the reason why despite volume growth in the derivatives segment, brokers are not making money," said Siddarth Bhamre head of research, Religare Broking Ltd.
Schemes like zero brokerage, limited brokerage or competitive brokerage in the segment are also not helping brokerages.
Krishnan ASV, Institutional Research Analyst, HDFC Securities, suggests that the poor performance by broking stocks is broadly reflective of investor concerns about how conventional brokers can stay relevant over the next few years, especially with the emergence of the millennial new-to-market investors who have a high propensity for DIY (Do-It-Yourself) trades, and, hence, prefer agile platforms.
“This remains a significant handicap for conventional brokerage houses, where we are yet to see any of the listed legacy brokers emerge with a comparable digital play,” Krishnan added.
Rating firm ICRA expects that the securities broking industry to clock a gross operating income of Rs 37,700-38,700 crore in FY2023, registering a 3-6 percent growth, compared to about 33 percent in FY2022.
ICRA analysed the performance of 21 brokerage companies, accounting for about 60 percent of the industry’s gross operating income. Supported by industry-wide tailwinds, the ICRA sample reported strong growth of 38 percent in gross operating income in FY2022. Moreover, the aggregate net profits grew by 36 percent, aided by economies of scale.
However, with the dampening of investor sentiment on account of adverse macroeconomic developments, particularly in Q1FY2023, the performance moderated in H1FY2023, with an 8 percent YoY decline in net profit.
Further, the capital market loan book, primarily comprising margin trade funding and the employee stock option plan (ESOP) funding book, grew a marginal 4 percent in H1FY2023 after doubling in the past two years. Rising interest rates also moderated the net interest income and profitability of this segment, the ICRA report added.
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