Brokerage houses make the most of a long bull run
Larger companies garnering market share amid a stellar industry growth
The brokerages and securities analysis industry has benefited from the bull run in the markets, with daily trading volumes doubling and retail interest rising, as witnessed by the addition of over 1 million new demat accounts every month, according to ICRA.
The equity markets had an aggregate turnover of ~4,222 trillion between April-december 2020, a year-on-year (YOY) growth of 66 per cent. Average daily turnovers increased to ~22.46 trillion, from ~13.89 trillion in April-dec 2019.
Brokerage revenues have grown from an estimated ~13,500 crore in FY16 to around ~27,500 crore in FY21. There are at least 300 active brokerages, and around 20-25 of these are listed.
It’s a highly competitive landscape. The bigger firms are grabbing more market share. ICRA estimates the top 10 firms had a 5year CAGR of 17 per cent in revenues. The top 20 brokerages together held 84 per cent of overall active client accounts (December 2020). The industry has evolved from transactions-based brokerages to flat fees and a wider range of products and services. Some brokers have tied up abroad to offer trades on hard-currency assets.
In Q4FY21, a sample of 17 listed brokerages, registered 38 per cent growth in revenues year-on-year to around ~4,594 crore from ~3,320 crore. These firms saw 135 per cent growth in PBDIT (profit before depreciation, interest and tax) to ~2,750 crore from ~1,168 crore. Financing costs are significant for this segment, but were restricted to ~962 crore, a decrease from ~966 crore the previous year. Profits before tax jumped 1,300 per cent YOY to ~1,705 crore from ~122 crore. Net profits for this sample grew an amazing 3,500 per cent YOY to ~1,333 crore, from ~37 crore.
The industry has smoothly managed the transition from an online-offline model to completely online. Aggressive discount brokerages have grabbed market shares, and are likely to continue gaining.
The industry is inherently cyclical. If the stock market is up, there are more traders and more volumes per capita. There is a strong, direct correlation between revenues and stock market-index movements, and direct correlations with inflows to the equity segment of the mutual fund industry. There is an inverse correlation with interest rates. All of these variables were in favour, during the Q1FY22. Mutual fund equity inflows were up; real interest rates were low; stock market indices were up. So, the industry can be expected to generate growth in Q1FY22.
Despite cyclicality, growth is also likely through the long term. A low percentage of household savings is invested in financial instruments. In FY21, there was 130 per cent growth in new demat accounts opened. An increase in the smartphone base and cheap data enables easy mobile trading via apps, which is a driver.
Recent guidelines about tighter regulation of margins, and use of client securities will increase brokers’ funding requirements. This could be a reason for revenue growth to moderate and financing costs to rise. Shares across the industry are trading at new record highs, or within 5 per cent of record highs, which were mostly recorded in the last six weeks. It’s a strong momentum trade.