The broking industry is likely to post a record performance in the current fiscal supported by the healthy participation of retail investors and favourable systemic liquidity.
As per rating agency ICRA, the industry is likely to clock a total revenue of Rs. 27,000-28,000 crore in FY2022, registering a year-on-year (YoY) growth of 28-33 percent. Given this backdrop, the outlook for the brokerage industry is Stable.
However, the revenue growth rate is expected to taper to 5-7 percent in FY 2023 with an expected industry total turnover of Rs. 28,500-29,000 crore; but again, growth remains contingent on capital market performance and maintenance of similar yields as seen in recent years.
While broking entities have been attempting to diversify their portfolio offerings, with increasing focus on other services/businesses, the core broking business is expected to account for 70-75 percent of the total revenues over the near to medium term.
Expect markets to remain volatile
Giving further insight, Samriddhi Chowdhary, Vice President – Financial Sector Ratings, ICRA Ratings says, “The domestic capital markets reported a steady increase in transaction volumes in the current fiscal after a strong performance in FY2021. The average daily turnover increased by 126 percent to Rs. 63.07 lakh crore in 9M FY2022 from Rs. 27.92 lakh crore in FY2021 (Rs. 14.39 lakh crore in FY2020). The market performance was supported by favourable liquidity in both domestic and international markets, better-than-expected corporate earnings, pick-up in economic activity, rising internet penetration and healthy participation of retail investors.
"We expect the markets to remain volatile, going forward, amid various domestic and international cues. While the transaction volumes have reported a month-on-month growth, primarily led by the derivatives segment during the quarter, prolonged subdued capital markets could have a bearing on the cash segment turnover and other allied capital market businesses, which, in turn, could impact the industry’s earnings.”
Market rally began from April 2020
In terms of the recent trends, the market rally began from April 2020 with large cap indices and, subsequently, small cap and mid cap indices following suit. The benchmark indices registered a healthy 73-76 percent growth during April 2020 to December 2021, though the small and mid-cap indices outperformed with a growth of 124-172 percent after reporting a sluggish performance in FY2018 and FY2019.
The market, however, witnessed a correction in the current quarter, with benchmark indices trailing below their peak (mid-January) by 10 percent.
ICRA analysed the performance of its sample 18 brokerage companies, which also reflects the industry trends. The sample reported a strong uptick in earnings in FY2021, registering a Y-o-Y growth of 38 percent in total revenues.
The cost structure and operational efficiency of the brokerage companies also improved over the past few years with focus on customer acquisition through digital channels and improvement in economies of scale.
With the continued market rally, the capital market-related lending business, particularly the margin trade funding book, has scaled up significantly since March 2021, thereby leading to an increase in the borrowing level.
In this regard, an analysis of 10 prominent retail-oriented broking companies shows that the aggregate capital market loan book (comprising margin funding products, loan against securities, employee stock ownership plan funding) scaled up by 141 percent to Rs. 11,076 crore as of March 2021 from Rs. 4,591 crore as of March 2020, and further to Rs. 18,643 crore as of September 2021 (growth of 68 percent).
Performance of lending book would remain sensitive to capital market movts
Going forward, ICRA expects the gearing of the brokerage industry (particularly for larger entities with adequate ability to raise debt) to increase from the current levels. However, the performance of the lending book would remain sensitive to capital market movements.
The retail broking segment has become more dynamic and has witnessed a significant disruption in the last few years due to the growing prominence of discount brokerages. The competitively priced offerings of discount brokers and the no-frills basic accounts and services have resulted in the realignment of the pricing strategy across the industry.
Discount brokerage houses have helped expand market
According to Sainath Chandrasekaran, Assistant Vice President – Financial Sector Ratings, ICRA Ratings, “Apart from attracting clients from full-service providers, discount brokerage houses have helped expand the market by bringing on board a large number of first-time young investors. While the market share of traditional bank and non-bank brokerages in terms of active clients moderated in FY2021, primarily owing to the faster scaling-up of the discount brokerage houses, they reported a strong performance as reflected by the healthy operating metrics and surge in earnings. Going forward, the sustained participation of the retail segment across market cycles would remain key for sustained industry performance.”
Rise in number of retail investors in capital markets
The increase in retail investors in capital markets can be witnessed in the new account openings in the industry. The total number of demat accounts increased to 806 lakhs as of December 2021 from 551 lakhs in March 2021 and 408 lakhs in March 2020. This translates into a net addition of 28.33 lakhs accounts per month in the current fiscal, more than twice the monthly addition of 11.91 lakhs in FY2021 (4.1 lakhs per month in FY2020). Disclosures by prominent listed brokerage entities point towards an increasing share of younger age groups (less than 30 years) among new clients acquired.
Given the increasing competitive pressure and cost of acquisition of clients, brokerage companies are focusing more on increasing the share of wallet. For instance, among the ICRA sample of retail-focused entities, the average revenue per active client increased by 25 percent to Rs. 12,788 in FY2021 from Rs. 10,238 in FY2020.
Large established entities with a strong presence in online broking have increased their market share in the current environment. Many small brokers and sub-brokers have merged their operations with well-established players, given the increased regulatory oversight and the cost of implementing the processes.
Going forward, larger and well-established brokerage companies are expected to garner market share. The trend of consolidation is expected to continue with smaller broking players ceding market share to more established broking entities.