INDIAN BROKERAGE INDUSTRY

ICRA RESEARCH SERVICES INDIAN BROKERAGE INDUSTRY Financial Sector Ratings ICRA RATING FEATURE Contacts: Karthik Srinivasan +91 22 6179 6365 karthiks@icraindia.com Vibha Batra +91 124 4545 302 vibha@icraindia.com Brokerage industry developing into a winner takes all market; Near Term outlook contingent on outcome of the General Elections May 2014 ICRA LIMITED P a g e 1

INDIAN BROKERAGE INDUSTRY Brokerage industry developing into a winner takes all market; Near Term outlook contingent on outcome of the General Elections May 2014 Executive Summary ICRA RESEARCH SERVICES Financial year FY14, was yet another difficult year for the domestic brokerage industry despite the pick-up in trading volumes in the latter half of the year. The rupee volatility, current account deficit, fiscal deficit, persistent inflation along with perceived delays in policy formulation together contributed to erosion in investor confidence in the Indian capital market for a major part of the year. However, perception of improvement in major macro-economic indicators buttressed expectations of the economy bottoming out and led to an improvement in the global risk perception of India in the later part of the last fiscal. In anticipation of a stable national government post elections in May 2014, the Q4FY14 FII inflows of USD 9.4 billion infused optimism in an otherwise lackluster year for the Indian capital markets. Not only did the benchmark indices scale newer highs in March 2014 and continued their upward march in April 2014, even broader based mid-cap indices displayed a significant uptick in Q4FY14. At the industry level, Equity Average Daily Volumes (ADV) rose by ~22% to Rs. 511 trillion in FY14 buoyed by the continued rise in volumes of option trading, which accounted for ~78% of the overall market volumes in FY14 (~76% in FY13). Despite the modest rise of 2% in FY14 after the last few years of steady decline, the proportion of cash volumes to overall traded equity volumes continued to decline to 6.5% as compared to 7.8% in FY13. On the other hand, futures volumes rose by ~19% in FY14 while options volumes displayed a strong growth of 25% over the same period. Anecdotal evidence suggests that more and more non-institutional investors have been taking a liking to trading in options. A broad based investor segment could ensure that the dominant share of options volumes to total equity volumes continues over the medium term. The institutional broking business faced significant headwinds in FY14 despite some improvement in the later part of the year following strong FII activity and successful big-ticket divestments. Anecdotal evidence suggests that Foreign brokers have fared better than domestic institutional brokers and the better part of the incremental institutional flows have accrued to foreign brokers. Consequently, the domestic institutional brokers share has slipped to ~25% while that of the foreign brokers has strengthened to ~75% compared to the usual one-thirds and two-thirds share respectively in the past. Also, as a large proportion of incremental flows have been from long-only funds, the penetration of Direct Market Access (DMAs) has stabilized at ~30-35% of overall volumes. ICRA notes signs of consolidation in the industry as many small and mid-sized foreign brokers have cut down operations significantly. In ICRA s view, as the cycle turns, large brokers who have withstood this test of the last few years successfully may be better positioned to ride the possible upside. On the retail equities side, the going remained tough as the retail participation was at multi-year lows for a large part of FY14. Post the strong FII inflows in Q4FY14, retail volumes also saw traction and were higher by 5-25% in March - April 2014 as compared to the average of the rest of the year. However ICRA notes that the same exuberance has not been seen consistently across retail brokers and the sustainability of this increase in retail participation remains a question. Three trends pertaining to FY14 are worth highlighting. One, recognizing the downturn was more protracted than earlier estimated, ever rising costs of servicing customers, compliance costs as well as connectivity costs in an environment seeing pressures on revenue is causing some of the larger standalone brokers to change their positioning and incrementally focus on the affluent client segment from mass markets. To control costs, while the sales teams continue to be pruned down, the brick and mortar models (including franchisee route) are now being consolidated. Smaller clients are being persuaded to go online as servicing them becomes increasingly unviable. However, while letting go of some ICRA LIMITED P a g e 2

clients can be acceptable to larger brokers, the smaller brokers cannot afford any such luxury and continue to face challenges regarding their future. The second big change was the emergence of online trading, which accounts for ~35-40% of retail volumes. As a result, discount brokers who have positioned themselves to provide a platform to execute trades without significant research or back-end support but at a fraction of the cost have had a new lease of life. ICRA notes that these outfits are garnering market share and creating a niche for themselves. Three, the banker-brokers continue to gain from strength to strength. While the rest of the industry has been going slow on customer addition, banker-brokers have been adding clients aggressively. Aided by strong parent balance sheets and thus larger resources and a better grip on technology, the banker-brokers have added to the competitive landscape. As a result, the industry continues to consolidate at a brisk pace with players exiting the markets rather than a conventional Merger & Amalgamations route. ICRA estimates, the overall equity brokerage revenue pool for FY14 to be in the range of Rs 96-98 bn, a marginal 1-2% growth over that for FY13. The underperformance of the retail equity brokerage revenue pool may have been partially compensated by the performance of the institutional brokerage piece over the same period. Commodities broking has been one of the brighter spots in the otherwise lacklustre performance of the Indian brokerage industry over the last 2-3 years. Lack of competition from banker-brokers as well as foreign brokers as well as strong future prospects meant brokers had taken to commodities broking in an attempt to diversify their revenue profile. However FY14 ended as one of the most disappointing years for commodities broking on account of the imposition of the Commodities Transaction Tax (CTT) which took away a large chunk of jobber / arbitrageur volumes from the market and impacted liquidity. This combined with lower volatility in the commodity prices coupled with the NSEL crisis and its fallout further impacted volumes, which then became a self-feeding phenomenon. Accordingly the ADV declined to Rs 102 trillion in FY14 compared to Rs 170 trillion in FY13 representing a decline of 40% on a Y-o-Y basis. Brokers responded by attempting to spur activity by compromising on their yields which in ICRA s estimation have declined to ~1.1-1.2 bps for 9MFY14 compared to ~1.3-1.4 bps in FY13. In ICRA s estimation, the overall commodities broking revenue pool declined by ~50-55% in FY14 to ~Rs 8-10 bn. Regulatory changes also impeded the growth of the currencies broking segment where volumes sharply declined by ~50% in FY14 when compared to FY13 and we estimate that the currencies broking revenue pool may have dipped below Rs 1 bn. ICRA has analyzed the financial performance of 15 prominent entities accounting for ~35% of the overall equity market share. For 9MFY14, the revenue growth has remained flat (annualized) when compared to FY13 as the drop in the equity, commodities and currencies pool was somewhat compensated by higher market share for the top brokers. However, in general standalone retail brokers have fared much worse than banker-brokers. The brokers continue to defend their costs and the cost-income ratio has only seen a marginal rise to 81% for 9MFY14 as compared to 79% for FY13. Consequently, profitability indicators worsened for the brokerage companies. Profitability as a percentage of total revenues declined to ~10% in 9MFY14 compared to ~11% in FY13. Return to assets also fell to ~1.4% in 9MFY14 compared to 2.1% in FY13. ICRA expects GDP growth to improve to 5.0-5.5% in FY15, factoring in a mild improvement in manufacturing growth and a pickup in investment activity in H2FY15. Other critical parameters such as current account deficit, fiscal deficit and even inflation parameters have improved significantly for FY14 when compared to FY13. As the key Indian macro-economic indicators display the initial signs of stability, all eyes remain on the outcome of the General Elections in May 2014. Brokers are largely unanimous in their view that a stable government and subsequent policy action may go a long way in bringing back investor confidence and thus improving the investment climate. The broking industry continues to steadily consolidate as some of the weaker players exit the business and the stronger players strengthen their position. The top 100 brokers account for ~80% market share as at March 2014 as compared to 77% as at March 2013. On the other hand, the industry has seen sub-broker attrition to the tune of 20% of the base as at April 2013 in H1FY14. For the larger standalone brokers, improved retail participation may buy more time to find the correct business mix to ICRA LIMITED P a g e 3

combat the structural changes in the industry and diversify even beyond the capital market business borders. However for the smaller brokers, unless there is a rapid increase in retail participation, they will continue to face significantly higher pressures compared to their larger and more diversified peers. Thus the outcome of the General Elections could potentially determine the pace of consolidation within the broking industry. Amongst the various categories of brokers, we believe that bankerbrokers are in a relatively better position to respond to the structural changes in the retail broking industry given the ability of the group to provide a composite product offering to the clients while keeping costs under control. This note covers the financials of 15 1 entities. However, for market share, brokerage revenue pool analysis, ICRA has used data for 13 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 Financial Limited, Karvy Stock Broking Limited Kotak Securities Limited, Motilal Oswal Financial Services Limited, Sharekhan Limited and Religare Securities Limited 2 For market share and revenue pool analysis, from the above mentioned list, data for ICICI Securities, J M Financial and Indiabulls Securities has not been used. Data for Anand Rathi group however has been used. ICRA LIMITED P a g e 4

This report includes an update on I. The equity markets in FY13-14 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 markets in FY13-14. 9 a. Trends in exchange traded volumes b. Trends in mix of commodities traded to overall volumes c. ICRA s estimation of the commodities brokerage revenue pool The currencies markets in FY13-14....12 a. Trends in exchange traded volumes b. ICRA s estimation of the currencies brokerage revenue pool Key Industry trends in FY13-14... 14 a. Key trends to watch out for in the retail broking space b. Key trends to watch out for in the institutional broking space V. Financial performance for FY13-14 for 15 top brokers...... 19 VI. ICRA s outlook for the Brokerage Sector for FY14-15... 20 ICRA LIMITED P a g e 5

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 122002 Ph: +91-124-4545300, 4545800 Fax; +91-124-4545350 REGISTERED OFFICE 1105, Kailash Building, 11 th Floor, 26, Kasturba Gandhi Marg, New Delhi 110 001 Tel: +91-11-23357940-50 Fax: +91-11-23357014 MUMBAI Mr. L. Shivakumar Mobile: 9821086490 1802, 18 th Floor, Tower 3, Indiabulls Finance Centre, Senapati Bapat Marg, Elphinstone, Mumbai 400 013 Ph : +91-22-6179 6300, Fax : +91-22-2433 1390 E-mail: shivakumar@icraindia.com GURGAON Mr. Vivek Mathur Mobile: 9871221122 Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +91-124-4545300, 4545800 Fax; +91-124-4545350 E-mail: vivek@icraindia.com CHENNAI Mr. Jayanta Chatterjee Mobile: 9845022459 Mr. Leander Rayen Mobile: 9952615551 5th Floor, Karumuttu Centre, 498 Anna Salai, Nandanam, Chennai 600035 Tel: +91-44-45964300 Fax: +91-44-24343663 E-mail: jayantac@icraindia.com leander.rayen@icraindia.com KOLKATA Ms. Vinita Baid Mobile: 9007884229 A-10 & 11, 3rd Floor, FMC Fortuna, 234/ 3A, A.J.C. Bose Road, Kolkata - 700020 Tel: +91-33-22876617/ 8839, 22800008, 22831411 Fax: +91-33-2287 0728 E-mail: vinita.baid@icraindia.com AHMEDABAD Mr. Animesh Bhabhalia Mobile: 9824029432 907 & 908 Sakar -II, Ellisbridge, Ahmedabad- 380006 Tel: +91-79-26585049/2008/5494, Fax:+91-79- 2648 4924 E-mail: animesh@icraindia.com HYDERABAD Mr. M.S.K. Aditya Mobile: 9963253777 301, CONCOURSE, 3rd Floor, No. 7-1-58, Ameerpet, Hyderabad 500 016. Tel: +91-40-23735061, 23737251 Fax: +91-40- 2373 5152 E-mail: adityamsk@icraindia.com PUNE Mr. Amit Khare Mobile: 9763200633 5A, 5th Floor, Symphony, S. No. 210, CTS 3202, Range Hills Road, Shivajinagar, Pune-411 020 Tel : +91-20- 25561194, 25560195/196, Fax : +91-20- 2553 9231 E-mail: amit.khare@icraindia.com BANGALORE Mr. Jayanta Chatterjee Mobile: 9845022459 'The Millenia', Tower B, Unit No. 1004, 10th Floor, Level 2, 12-14, 1 & 2, Murphy Road, Bangalore - 560 008 Tel: +91-80-43326400, Fax: +91-80-43326409 E-mail: jayantac@icraindia.com ICRA LIMITED P a g e 6

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 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350 Email: info@icraindia.com, Website: www.icra.in REGISTERED OFFICE 1105, Kailash Building, 11 th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50; Fax: +91 11 23357014 Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231 Copyright, 2014 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. 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