Running to Stand Still

Transcription

1 July 2009 : Running to Stand Still Author(s): Sandeep Hebbar shebbar@omadvisory.com Contact: Om Advisory, 189, Block 19, Jeevan Mitra, JP Nagar, Phase 1, Bangalore support@omadvisory.com Ph: Om Advisory Pvt. Ltd All rights reserved.

2 Copyright Notice Om Advisory owns and retains all proprietary rights over the content of the report. The report contains copyrighted material, trademarks, and other proprietary information of Om Advisory. Except for that information which is in the public domain or for which you have been given permission, you will not copy, modify, publish, transmit, distribute, perform, display, or sell any such proprietary information. Propreitary information on the report may be distributed or re-published only through express, written consent of Om Advisory and with clear mention of "Source: Om Advisory" whenever used. Opinions, advice, statements, offers, or other information or content made available through the report should not necessarily be relied upon. Om Advisory does not guarantee accuracy, completeness, or usefulness of any information on the service and neither adopts nor endorses nor is responsible for the accuracy or reliability of any opinion, advice, or statement made. Under no circumstances will Om advisory be responsible for any loss or damage resulting from anyone's reliance on information or other content available in the report, or transmitted to Om advisory clients. Purchase of the report implies acceptance of the Terms and Conditions of Om Advisory services as stated in by the client. Om Advisory Pvt. Ltd All rights reserved.

3 Table of Contents 05 Executive Summary 09 Introduction 11 Market Background 11 Exchange-Traded Market 12 Trading Model and Technology Infrastructure 12 Trading Turnover on Exchanges 14 Investor Categories 17 Regional Spread 18 Trading Characteristics of Retail Investors 20 Pre-2008-Economic-Meltdown Growth 20 Growth of Brokers 21 Competition and Market Share 23 Compression of Brokerage Commissions 25 Equity Brokerage Industry Revenue 25 Key Players 28 Online Brokerage 31 Electronification in the Industry 34 Post-Economic-Meltdown Growth 34 FY09 Performance of Top Firms 35 Future Growth Prospects 38 Competition 39 Expansion of Service Portfolio 40 Electronification of the Industry 41 Conclusions Om Advisory Pvt. Ltd All rights reserved.

4 List of Figures 05 Projected Growth of Cash Trading Turnover 06 Projected Growth of Derivatives Trading Turnover 06 Share of Cash Trading Turnover of Brokerages 07 Growth of Mean Brokerage Fees 08 Projected Growth of Equity Broking Industry Revenues 09 Global Comparison of Trading Intensity 11 List of Exchange Traded Securities 11 Share of Trading Value, FY09 12 Electronic Trading Infrastructure 13 Trading Turnover Growth - Cash 14 Trading Turnover Growth - Derivatives 14 Cash Trading Turnover Share by Investor Class 15 Derivatives Trading Turnover Share by Investor Class 15 Growth of Mutual Fund Year End AUM 16 Growth of Foreign Participation in Equity Markets 18 Regional Share of Cash Trading Value 19 Share of Trades for Delivery vs. Total (by Value) 20 Growth in Number of Brokers and Brokerage Firms 21 Growth in Number of Sub-Brokerage Firms 22 Global Comparison of Brokerage Industry 22 Share of Cash Trading Turnover of Brokerages 23 Institutional Brokerage Market Share, Growth of Mean Brokerage Commissions 25 Growth of Equity Broking Industry Revenue 26 Revenue Growth of Major Brokerages 26 Profit Margin Growth of Major Brokerages 27 Service Portfolio Diversification of Major Brokerages, FY08 28 Branch Channel Network of Major Brokerages, Customer Accounts of Major Brokerages, Growth of Internet Channel Enabled Brokerage Firms 30 Growth of Online Customer Base and Trading Turnover 31 Exchange Trading Infrastructure Steadily Turns Electronic 32 Source of Institutional Trade Orders 32 Ownership by Foreign Institutions 34 Broking Revenue Growth of Major Firms 35 Profit Margin Growth of Major Brokerages 36 Share of Equity Market Instruments in Household Financial Assets 36 Global Comparison of Equity Market Assets 37 Projected Growth of Cash Trading Turnover 37 Projected Growth of Derivatives Trading Turnover 38 Projected Growth of Mean Brokerage Fees Om Advisory Pvt. Ltd All rights reserved.

5 Executive Summary The Indian equity markets was on a sustained bull run during , with annualized returns of 30%+ and trading turnover CAGRs of 40.7% and 97.8% for the cash and derivatives markets respectively. In fact, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) ranked 4th and 8th globally in terms of cash market trading intensity in In addition to widespread participation by domestic retail and institutional investors, liberalized investment environment and a fully electronic exchange trading infrastructure ensured high participation of the foreign institutional investors (FIIs). India ranks amongst the top 3 emerging markets in terms of registered FIIs. However, 2008 brought cataclysmic economic events with it and did not spare the domestic markets as well. Trading turnover value dropped by 24.9% and 17.3% in the cash and derivatives markets respectively. Based on analysis of past growth, high share of retail investors (62% and 63% of trading turnover in cash and derivatives markets respectively for FY08), country s macro-economic and demographic fundamentals, new regulatory developments and the political situation, Om Advisory expects the markets to recover during FY10. Trading turnover of the cash and derivatives markets is expected to touch Rs. 65 trillion and Rs. 230 trillion respectively during FY12 (see Figure 1 and Figure 2 on page 6). Figure 1: Projected Growth of Cash Trading Turnover Turnover (Rs Trillion) FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 Source: SEBI, Om Advisory Om Advisory Pvt. Ltd All rights reserved. 5

6 Figure 2: Projected Growth of Derivatives Trading Turnover Notional Turnover (Rs Trillion) FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 Source: SEBI, Om Advisory Indian brokerage industry dates back to 1850s, but started growing strongly in the 1990s after the creation of the regulatory body, the Securities Exchange Board of India (SEBI) and incorporation of NSE. But competition is intense as there are far too many brokers - almost double the number of brokers in the US - competing for a much smaller market. The market is extremely fragmented with the top 5 firms accounting for only 14.6% of the turnover share during FY08 (see Figure 3). Figure 3: Share of Cash Trading Turnover of Brokerages 100% Share in Trading Turnover 80% 60% 40% 20% 0% FY02 FY03 FY04 FY05 FY06 FY07 FY08 Top 5 Top 6-10 Top Top Top Rest Source: NSE, Om Advisory Om Advisory Pvt. Ltd All rights reserved. 6

7 The brokerage market is largely retail and the retail investors are spread across the country (with majority from Mumbai). Online trading channels can play an important part in catering to the regional spread and has indeed shown good growth (30.6% CAGR in number of internet enabled brokerage firms, 71.1% CAGR in number of customers and 49.7% CAGR in share of total traded value since 2003). However, retail investors have shown an overwhelming preference for non-delivery based trading (70.8% of the total cash market turnover during FY08). Intra-day trading makes physical distribution channel necessary because it offers high market data latency and proximity to trading advice of the brokers/ other investors. Growth in the number of sub-broker network reflect this (CAGR of 46.1% from 150 in 1993 to 44,074 in 2008) as expansion of sub-brokerage network means less capital outgo for the brokers. High competition has resulted in a steady compression of brokerage commissions over the years (see Figure 4) and intensely since 2008 when Reliance Money, one of the new entrants with a massive physical distribution network, dropped it to extremely low levels. For a relatively young market, commissions are lower than even in the advanced markets. Figure 4: Growth of Mean Brokerage Fees Fees (BPs) FY06 FY07 FY08 FY09 FY10 FY11 FY12 Derivatives Cash Non-Delivery Cash Delivery Large Trades Cash Delivery Small Trades Source: Industry Sources, Om Advisory Compressing commissions result in industry equity broking revenues to grow slower (see Figure 5 on Page 8) than the trading turnover growth. While tolerable during boom years, it can play havoc with the industry during periods of economic distress. Profitability of the major players is already down and high operating capital requirements has put the survival of small brokers at stake. Om Advisory Pvt. Ltd All rights reserved. 7

8 Figure 5: Projected Growth of Equity Broking Industry Revenues Revenue (Rs Bn) FY06 FY07 FY08 FY09 FY10 FY11 Source: Om Advisory In order to improve profitability, top firms have been consciously trying to broaden their portfolio of services. But this is likely not to pay high dividends over the short to medium term due to the economic, competitive and regulatory headwinds against these service lines. However, Om Advisory believes that domestic brokerages that have already invested in setting up an institutional trading infrastructure can make inroads into the FII market as restrictions around the issuance of participatory notes has opened up this market. This will also lead to better electronification in the industry, particularly in the front office trading systems and usage of Direct Market Access (DMA). Overall, from here, the industry will likely traverse the following path: Likely recovery of trading turnover in FY10. Further consolidation of the market share of the top 100 brokers. Possible decline in the number of brokers but increase in the number of sub-brokers. Rise in market share of Reliance Money but muted industry profitability in the short and medium term. Gain in FII market share by few of the top domestic brokerages. Their success is likely to draw in other players into this segment. Technology is a key success enabler for this client category and the overall electronification of the industry will progress rapidly over the next few years. Technology usually commoditizes financial services and especially, broking services. With commoditization of services, consolidation will invariably follow, especially in such a fragmented market. Over the medium term, top brokerages will scout for M&A opportunities amongst other top firms. Om Advisory Pvt. Ltd All rights reserved. 8