Domestic brokerages cash in on D-Street party

Tighter cost structure, online expansion, and MF distribution help broking outfits shore up revenues

The record run-up in the market has helped domestic brokerages— both pure-play and diversified— shore up revenues. The euphoria is reflected in the doubling of share prices of all major listed players this year.

The frenzy present during the previous bull run of 2003-07, however, has largely been missing. Brokerages have cut costs, adopted the online model more aggressively and refrained from reckless expansion — all characteristics of the previous bull run. They are also handholding investors better. While direct equities continue to remain the bread-and-butter for most, brokers are pushing mutual funds, especially to newer clients, something unheard of a decade ago.

Revenues of the industry are expected to grow by 15-20 per cent in FY18 on the back of healthy overall volume growth and an increase in the share of the cash segment, a recent ICRA note suggests. Volumes are likely to grow by 20-25 per cent, supported by positive investor sentiment and a benign capital market outlook.

There are five key changes that have seeped into the broking ecosystem in the aftermath of the global financial crisis of 2008.

Direct to indirect

Direct equities are no longer the sole focus for most brokers. Indeed, if you are new to equities, your dealer is more likely to tell you to invest through mutual funds than direct equities. “Direct participation in equities is not back to the levels it was in 2007-08 and mutual funds have become a large portion of the target portfolio given by brokers to their employees. MFs, in fact, now contribute as much as 40 per cent to the volumes from 0-2 per cent a decade ago,” said Prasanth Prabhakaran, senior president and chief executive officer at YES Securities.

Offline to online

It’s no longer about setting up physical branches; online and digital have become the new buzz words for brokers. Online customers do not need dealers to punch in their transactions or interact with relationship managers, leading to higher profitability.

Angel Broking introduced ‘ARQ’ last year, a predictive investment engine that dishes out advice based on the goals and risk profiles of individual investors. Retail broker Sharekhan (now part of BNP Paribas) announced earlier this year that it would spend $15-20 million (~100-130 crore) in the next five years for a digital push. This would include a greater focus on mobile services, fully-automated robo-advisory services, and upgrading its trading platform. “Back in 2006-07, internet and mobile contributed 20-25 per cent of the volumes for brokers, now the figure stands at anywhere between 45 and 65 per cent for top brokers,” said Prabhakaran.

No frenzied hiring The domestic broking sector significantly reduced its manpower after the global financial crisis hit home in 2008. It resumed hiring in 2014-15 to cater to the surge in clients but the additions were a lot restrained compared to a decade ago. IT and automation have ensured that brokers have to rely on much smaller sales teams now than they did before. Top brokers have focussed on adding relationship managers who can “move” clients with them and cater to high net worth individuals.“Brokers have been running a tighter ship for the past five years. Cost is under control and the run-up in the market has propped up revenues,” said Rahul Rege, business head, retail, Emkay Global Financial Services.

Diversification Broking activities are no longer the mainstay, owing to the expansion into areas such as lending, private wealth management, asset management and even insurance. Take Motilal Oswal Financial Services, for instance. About 57 per cent of its profit after tax contribution for FY17 came from its new businesses such as asset management, wealth management and housing finance versus 45 per cent in FY16. “From FY04 to FY08, our growth was driven by one engine: Broking. That helped us deliver 10x growth in profits through that cycle. Now, we have four drivers, which should help improve our long-term ROE (return on equity) towards a sustainable 20 per cent plus,” Motilal Oswal’s recent strategy note said.

Tailor-made research With artificial intelligence coming into play, brokers are better able to track needs of individual clients. For example, if you are a client who largely invests in large-cap stocks, you won’t be given reports on midor small-cap stocks. Similarly, if you do delivery-based trades, you will not get intra-day calls. Smartphones have also made it easier to chat with clients and give updated notifications. “Investors are better informed and are avoiding shady stocks,” said B Gopkumar, CEO, Reliance Securities. “No one’s betting their whole house on the market. There’s a lot of money still sitting on the sidelines.”