INDIAN BROKERAGE INDUSTRY

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1 ICRA RESEARCH SERVICES INDIAN BROKERAGE INDUSTRY Industry on its way to recovery; Rise in retail participation remains the key Financial Sector Ratings ICRA RATING FEATURE Contacts: Karthik Srinivasan Vibha Batra Viral K Shah viral.shah@icraindia.com Saurabh Dhole saurabh.dhole@icraindia.com April 2015 ICRA LIMITED P a g e 1

2 INDIAN BROKERAGE INDUSTRY Industry on its way to recovery; Rise in retail participation remains the key Executive Summary April 2015 ICRA RESEARCH SERVICES After going through a rough phase in the last couple of years, the Indian equity markets rebounded in FY15. Muted global growth, ample liquidity, comparatively limited opportunities in other emerging markets along with a renewed optimism in the Indian economy post the formation of a stable government brought large quantum of foreign money into the Indian Capital Markets. Other factors such as declining oil prices, lower inflation and the Government s inclination towards adhering to fiscal discipline improved the domestic macro economic outlook resulting in a renewed interest by investors in the domestic markets. Not only did the benchmark indices scale newer highs, even broader based mid-cap indices displayed a significant uptick during FY15. In our interactions with key industry participants, we noted a significant optimism with regard to future prospects for the brokerage business. At the industry level, Equity Average Daily Volumes (ADV) rose by ~14% YoY during 9MFY15 to ~Rs 2.36 trillion. While this may be considered as moderate, what is important to note is the strong uptick in cash volume ADV which increased by more than 55% YoY to Rs 0.21 trillion in 9MFY15. Equity derivative ADV rose by 11% in 9MFY15 to Rs trillion when compared with 9MFY14. Also, important to note is that equity options volumes, which have otherwise been driving the equity ADV growth in the past, ebbed in 9MFY15. Options ADV has remained nearly flat at Rs 1.65 trillion in 9MFY15 when compared to Rs 1.60 trillion for 9MFY14. Consequently, during 9MFY15, 53% YoY growth in total cash volumes and 48% YoY growth in total equity futures volumes have contributed to the robust growth in the overall market volumes. Also, for 9MFY15, mix of cash to futures to options volumes has corrected to 9:21:70 as compared to 7:16:77 for 9MFY14. In ICRA s view, these indicators clearly point at three key industry trends. One, broader set of investors (retail, institutional and HNIs) has participated in the markets during 9MFY15 as indicated by the strong increase in cash volumes. Two, with decreasing risk aversion, traders have preferred to move into the futures segment in place of the options segments. Three, volumes have increased in higher margin segment like the futures and, in particular, cash volumes, the overall revenue and profitability profile and, thereby, the credit profile of the brokerage industry is expected to improve. Retail investors seem to have returned to the capital markets indirectly as seen by the robust inflows into the equity schemes of Mutual Funds during the last 9-10 months. Further, many brokers have reported ~40-60% increase in activity levels of the clients. However, for retail brokers the activity levels remain much lower than what was observed in the heydays of FY08 or FY11. As per the data obtained from the exchanges, ~32-34% of overall volumes currently originate from internet / mobiles / tablet platforms. This particular phenomenon is expected to have a lasting impact on the manner in which the industry evolves with much of the incremental client addition for larger brokers being online clients. Also, the thrust on branch / franchisee model for client servicing is reducing in the larger cities / towns while limited traction in terms of setting up of branches remains in Tier II and Tier III towns. Many of the participants interviewed by ICRA have reported a decline in their number of branches as well as in franchisees. The commodity broking activity levels continue to remain at muted levels, even though it is more than 18 months since the CTT (Commodity Transaction Tax) was imposed and the NSEL crisis occurred. While the imposition of the CTT has kept most jobbers and arbitrageurs away, the occurrence of the NSEL crisis seems to have impacted investor confidence adversely, thereby, forcing most players to approach the commodity markets cautiously. The total volumes at the exchanges during Q3FY15 are less than one-fourth of the volume levels witnessed in Q1FY14 (just before the unfolding of the aforementioned developments). Commodity volumes across segments, during 9MFY15, reported contraction with bullion leading the pack by de-growing by 50% on an annualized basis over FY14. The share of the ICRA LIMITED P a g e 2

3 bullion volumes (which once used to account for majority of the trades at the exchanges) in the overall volume mix has declined to 30% during 9MFY15 while the proportion of energy and agri-commodities declined to 22% and 16% respectively during this period. The rising activity in the currency derivatives segment in the last few months is seen as an early sign of improvement after the segment had witnessed sizeable reduction in volumes post the imposition of various currency-speculation restrictions by the RBI and SEBI in September The improvement in volumes can largely be attributed to lifting of certain restrictions by the RBI a few quarters ago. Volumes had picked up in Q2FY15 with a 27% sequential rise in quarterly volumes to Rs trillion vis-à-vis Rs trillion in Q1FY15. However, in Q3FY15, volumes shrunk sequentially by about 8% to Rs trillion. In the retail brokerage industry, ICRA had, in its industry report in May 2014, recognized the emergence of discount brokers, strong foothold of the banker brokers, changed positioning of larger standalone brokers as well as the challenging environment for smaller standalone brokers. ICRA notes that the retail brokerage segment is now gradually segmenting itself among three different niches. At one end are the larger standalone brokers who, as equity markets have gained momentum and retail investors have started trickling back into the markets, have gained market share to clearly demonstrate their value proposition. In the middle are banker brokers, who have also gained market share though not necessarily at the same pace as the standalone brokers. Low cost of acquisition of newer clients, strong parent balance sheets and thus larger resources and a better grip on technology are significant competitive advantages and ICRA expects banker-brokers to continue flourishing and be the preferred choice, particularly for the new to the market investors. However, the most significant structural change is the strides taken by discount brokers. Measured against parameters like market share, client activity levels and even profitability, discount brokers have made good progress over the past months. Their value proposition is enticing many first time investors / traders and they compete both with the banker brokers as well as standalone brokers. In ICRA s view, going forward, these discount brokers could continue to gain traction, though scaling up would continue pose a challenge. However, all these players continue to improve their market presence largely at the expense of smaller standalone brokers. ICRA notes that only a handful of smaller standalone brokers have benefitted from the increased retail participation and higher activity levels of these customers and many have continued to lose market share. ICRA believes that while buoyant capital markets may potentially offer some respite to the smaller standalone brokers, many of them lack the wherewithal to invest for the future and hence may continue to lose market share. Foreign institutional investors (FIIs) have invested ~USD 44 billion in Indian Capital markets in FY14-15, the highest investment by FIIs in any fiscal year. Of this ~USD 17 billion has been invested into Indian equities. Even Domestic Institutional Investors (DIIs) have turned net buyers over the same period. Anecdotally, risk perception about India as an investment destination has reduced and allocation to India amongst emerging market funds have increased. Consequently, institutional brokers have flourished. In ICRA s view, the revenue mix between foreign brokers and domestic institutional brokers has shifted in favour of the Indian brokers marginally. ICRA estimates that the total broking revenue for the 15 brokers analysed has registered a significant rise of about 20-25% in FY15 (based on trends seen till H1FY15) vis-à-vis for the full year FY14. The growth in income is attributable to nearly all business lines which include brokerage income, interest income, depository income, wealth management fees and trading income. The total operating expenses underwent a marginal decline in FY14. The cost mix has remained nearly the same during these years with employee expenses being the largest component (48% of total expenses during both these years). However, in 9MFY15, ICRA s estimates suggest there has been an annualized increase (over FY14) of about 15-16% in total expenses over FY14. Increase in expenses was largely driven by aggressive shoring up of sales force by brokerage houses with increasing retail participation. With improvement in operating leverage, lead primarily by robust revenue growth, profitability metrics witnessed improvement in FY14 enabling these companies to report an aggregate RoE of around 8.3% during this period. Further, robust revenue growth in 9MFY15 enabled these players to improve the aggregate RoE to 11.3% for this period. In terms of leveraging, companies have increased the ICRA LIMITED P a g e 3

4 borrowings on their balance sheet in order to grow the capital markets financing books. In ICRA s estimates, as on Dec-14, the gearing levels rose to x times vis-à-vis 2.08x times as on Mar-14. This note covers the financials of 15 1 entities. However, for market share, brokerage revenue pool analysis, ICRA has used data for 16 2 prominent brokerage firms. 1 The 15 brokerage houses analyzed in the note are Angel Broking Limited, Bonanza Portfolio Limited, Edelweiss Financial Services Limited, Emkay Global Financial Services Limited, Geojit BNP Paribas Limited, HDFC Securities Limited, ICICI Securities Limited, Indiabulls Securities Limited, India Infoline Limited, JM Financials Limited, Karvy Stock Broking Limited Kotak Securities Limited, Motilal Oswal Financial Services Limited, Religare Securities Limited and Sharekhan Limited. 2 For market share and revenue pool analysis, from the above mentioned list, data for ICICI Securities and Indiabulls Securities has not been used. Data for PhillipCapital (India) Private Limited, Reliance Securities Limited and Sushil Financial Services Private Limited, however, has been used. ICRA LIMITED P a g e 4

5 This report on the Indian brokerage industry includes an update on I. THE EQUITY MARKETS 6 a. Trends in cash, futures and options volumes b. Trends in market share for the top brokers c. ICRA s estimation of the equity brokerage revenue pool II. III. IV. THE COMMODITIES & CURRENCIES MARKETS 9 a. Commodities - Trends in exchange traded volumes b. Commodities - Trends in mix of commodities traded to overall volumes c. Commodities - ICRA s estimation of the brokerage revenue pool d. Currencies - Trends in exchange traded volumes e. Currencies - ICRA s estimation of the brokerage revenue pool Other Capital Markets Related Businesses Other Key Industry trends V. Performance Update 9MFY VI. ICRA s Outlook for FY ICRA LIMITED P a g e 5

6 Please contact ICRA to get a copy of the report CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon Ph: , Fax; REGISTERED OFFICE 1105, Kailash Building, 11 th Floor, 26, Kasturba Gandhi Marg, New Delhi Tel: Fax: MUMBAI Mr. L. Shivakumar Mobile: rd Floor, Electric Mansion, Prabhadevi, Mumbai Ph : Fax : shivakumar@icraindia.com GURGAON Mr. Vivek Mathur Mobile: Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon Ph: , Fax; vivek@icraindia.com CHENNAI Mr. Jayanta Chatterjee Mobile: Mr. Leander Rayen Mobile: th Floor, Karumuttu Centre, 498 Anna Salai, Nandanam, Chennai Tel: Fax: jayantac@icraindia.com leander.rayen@icraindia.com KOLKATA Ms. Vinita Baid Mobile: A-10 & 11, 3rd Floor, FMC Fortuna, 234/ 3A, A.J.C. Bose Road, Kolkata Tel: / 8839, , Fax: vinita.baid@icraindia.com AHMEDABAD Mr. Animesh Bhabhalia Mobile: & 908 Sakar -II, Ellisbridge, Ahmedabad Tel: /2008/5494, Fax: animesh@icraindia.com HYDERABAD Mr. M.S.K. Aditya Mobile: , CONCOURSE, 3rd Floor, No , Ameerpet, Hyderabad Tel: , Fax: adityamsk@icraindia.com PUNE Mr. Amit Khare Mobile: A, 5th Floor, Symphony, S. No. 210, CTS 3202, Range Hills Road, Shivajinagar, Pune Tel : , /196, Fax : amit.khare@icraindia.com BANGALORE Mr. Jayanta Chatterjee Mobile: 'The Millenia', Tower B, Unit No. 1004, 10th Floor, Level 2, 12-14, 1 & 2, Murphy Road, Bangalore Tel: , Fax: jayantac@icraindia.com ICRA LIMITED P a g e 6

7 ICRA Limited An Associate of Moody's Investors Service CORPORATE OFFICE Building No. 8, 2 nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon Tel: ; Fax: info@icraindia.com, Website: REGISTERED OFFICE 1105, Kailash Building, 11 th Floor; 26 Kasturba Gandhi Marg; New Delhi Tel: ; Fax: Branches: Mumbai: Tel.: + (91 22) /53/62/74/86/87, Fax: + (91 22) Chennai: Tel + (91 44) /9659/8080, / 3293/3294, Fax + (91 44) Kolkata: Tel + (91 33) / / / , Fax + (91 33) Bangalore: Tel + (91 80) /4049 Fax + (91 80) Ahmedabad: Tel + (91 79) /5049/2008, Fax + (91 79) Hyderabad: Tel +(91 40) /7251, Fax + (91 40) Pune: Tel + (91 20) /95/96, Fax + (91 20) Copyright, 2015 ICRA Limited. All Rights Reserved. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies, while publishing or otherwise disseminating other reports may have presented data, analyses and/or opinions that may be inconsistent with the data, analyses and/or opinions presented in this publication. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. ICRA LIMITED P a g e 7