ICRA LIMITED P a g e | 1
Financial Sector Ratings Contacts: Karthik Srinivasan +91 22 3047 0028 [email protected]
Vibha Batra +91 124 4545 302
[email protected] Viral Shah +91 22 3047 0035
[email protected] Harsh Vardhan Babel +91 22 3047 0040
ICRA RESEARCH SERVICES
ICRA RATING FEATURE
INDIAN BROKERAGE INDUSTRY
“Headwinds tailing off for the brokerage houses; structural challenges remain”
March 2013
ICRA LIMITED P a g e | 2
Executive Summary
Buoyed by the global flows into the Indian market in the later part of CY2012, we witnessed strong traction in index movement both on the BSE and NSE. However the
9MFY12-13 continued to be weak for the Indian equity capital markets. In ICRA’s estimation, the brokerage revenue pool has remained flat at ~Rs 105 billion for FY12-13
when compared with FY11-12 despite the strong growth in Options volumes as the Cash volumes and Futures continued to slide and were lower even in absolute number
during this period as compared to the previous fiscal.
In 9M FY12-13, while the burden of collapsed retail participation has completely weighed down the retail broking operations, the combination of regulatory changes such
as capping of commission rates for domestic mutual funds as well as increasing and seemingly irreversible penetration of DMAs have been a heavy drag on its institutional
broking piece. In ICRA’s view, were these trends to continue, they could test the resilience of the industry and trigger significant structural changes especially in the
institutional broking segment.
Capital market ancillary businesses too continued to remain moribund. Slow demand for margin funding also impacted interest income while increasing penetration of high
frequency trading has led many medium to small sized broking houses to close arbitrage trading operations. While a few relatively large ticket public issuances kept
brokerage houses interested, fee income from the advisory piece has remained lacklustre. The difficult economic conditions ensured that revenues from the investment
banking operations for companies were a casualty. Fewer public issuances meant that distribution income remained weak, though was propped up by retail debt
issuances. While PMS operations continued to provide steady run rate for some large brokerage houses, at industry level equity PMS AUMs have only declined.
A brightening outlook for the commodities and currencies broking segment stands out against the dark tones of the beleaguered equity broking industry. While for the
commodities segment, traded turnover declined nominally, ICRA has observed a more broad based increase in market participation and robust increase in customer
addition aided by increased investor awareness. The currencies segment on the other hand too continued to gain traction.
There are reasons for optimism as the dispiriting mood which pervaded the industry is now slowly giving way to newfound hope and optimism. Equity cash volumes have
shown signs of improvement in Q3FY12-13 and beyond. Broader based retail participation is showing the early signs of returning to the markets. The cash volumes
recorded for the month of January 2013 were the highest since February 2012. Equity options, largely understood to be the forte of the more savvy institutional investors
are attracting a steady trickle of the higher end retail investors. The commodities and currencies segment are emerging as dependable avenues for diversification for
brokers. The government stepping on the gas with regard to reforms initiative and declining interest rate scenario is doing much for improving investor sentiment. The
month of January 2013 saw very strong FII inflows into the country. The disinvestment plans and planned public offerings may provide the much needed boost to
investment banking and distribution operations.
In H1FY12-13, ICRA has observed that total capital market related revenues for select top brokers who account for ~35% market share has remained almost flat in H1FY12-
13 (annualized) when compared to FY11-12. However, costs have declined more sharply by ~7-8% (annualized) over the same period leading to improvement in cost-
INDIAN BROKERAGE INDUSTRY
Headwinds tailing off for brokerage houses; structural challenges remain March 2013
ICRA RESEARCH SERVICES
ICRA LIMITED P a g e | 3
income ratio and other profitability indicators. Early indicators for Q3FY12-13 indicate growth in the quarter – revenue for 9MFY12-13 (annualized) has grown by 3-5%
when compared to FY 11-12 and profitability has improved further.
The Union Budget 2013, amongst other proposals, has reduced Securities Transaction Tax (STT) on equity futures contracts to 0.01% from 0.017%, introduced
commodities transaction tax (CTT) on non-agriculture commodities futures trading and allowed participation of FIIs in the currencies derivative segment. In ICRA’s view,
while these proposals could provide a fillip to equity derivative volumes as well as currency derivative volumes, the imposition of the CTT could impact the gross returns of
the arbitrageurs by 20-30% and consequently significantly impede the growth of the segment at least over the short term. Also, arbitrage activity could return to the
equities segment or move to the currencies segment, which could help growth of these segments.
However, in ICRA’s view the underlying economic picture remains uncertain. In the absence of any strong global economic recovery, this phase of cautious optimism is
largely contingent upon government delivery of the reforms programme. Any let up in execution could mean that this build up of hope could unravel very quickly.
At the same time, ICRA has noted that the industry brokerage revenue pool has been stabilizing. Commodities and currencies have emerged as dependable sources of
diversification and the brokers have re-aligned their business models vigorously to contain costs. Consequently, in ICRA’s view, brokers are better tuned to face the
challenges ahead. ICRA revises its outlook on the sector to “Stable” from “Negative”.
This note covers the financials of 151 entities constituting ~35% of equity broking revenue market share
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, Indiabulls Securities Limited, India Infoline Limited, JM Financial Limited , Kotak Securities Limited, Motilal Oswal Financial Services Limited, Reliance Securities Limited, Sharekhan Limited, Religare Enterprises Limited and Globe Capital Market Limited
ICRA LIMITED P a g e | 4
The report includes an update on the…
I. Equity markets update in 9MFY12-13……………………………………………………………………………………………………………………….…………………………….………………………………………6 a. Trends in cash, futures and options volumes b. Trends in trading activity by investor class c. Trends in transaction size and number on the exchanges d. Trends in trading activity on the BSE and NSE and impact of entry of MCX-SX e. ICRA’s estimation of the equity brokerage revenue pool
II. Commodities markets update in 9MFY12-13………………………………………………………………………………………………………………………….………………..……………………………………11
a. Trends in exchange traded volumes b. Trends in spot exchange activity c. Trends in exchange wise traded volumes market share d. Impact of possible regulatory diktats on the commodities markets e. ICRA’s estimation of the commodities brokerage revenue pool f. Analysis of operating risks in commodities trading
III. Currencies markets update in 9MFY12-13……………………………………………………………………………………………………………..…………….………………………………………………………15
a. Trends in exchange traded volumes b. Trends in exchange wise traded volumes market share c. ICRA’s estimation of the currencies brokerage revenue pool
IV. Other capital markets related businesses……………………………………………………………………………………………………………………….………………………………………………………….…16
a. Key trends investment banking operations and outlook b. Key trends in capital market lending operations c. Key trends in other capital markets businesses d. Key trends in non-capital markets related forays and ICRA’s outlook
V. Key Industry trends in 9MFY12-13………………………………………………………………………………………………………………………………….……………………………………………………………19
a. Key trends to watch out for in the institutional broking space Impact of capping of brokerage commissions for domestic institutional investors Impact of increased penetration of Direct Market Access (DMAa) ICRA’s views on industry consolidation
b. Key trends to watch out for in the retail broking space
Trends in customer addition Other initiatives taken by brokers to re-invigorate activity levels Trends in online trading Trends of options trading
ICRA LIMITED P a g e | 5
VI. Performance update for H1FY12-13 for 15 top brokers ………………………………………………………………………………………………………………………………………….…….………………23 a. Trends in capital markets related revenue b. Trends in operating costs c. Analysis of profitability and profitability linked ratios d. Initial impressions for 9MFY12-13 performance
VII. ICRA’s outlook for the Brokerage Sector for FY13-14……………………………………………………………………………………………………………………………………………………………………24
ICRA LIMITED P a g e | 6
EQUITY MARKETS UPDATE IN 9MFY 12-13
Strong growth in overall market turnover in 9MFY12-13; however cash and futures volumes continue to slide
9MFY12-13 continued to remain challenging for the Indian equity markets. With
the domestic capital markets bound quite tightly with the global markets, the
combination of weak developed markets recovery, slowing growth in emerging
economies and closer to home – persistently high inflation, slowing economy,
weakening public finances, depreciating rupee, slowing exports and deteriorating
current account deficit dampened investor sentiment. In Q3FY12-13 however, a
slew of reforms, proposed legislations and possible bottoming out of economic
cycle buoyed investor outlook and brought some life back into the equity
markets.
The domestic equity brokerage turnover (BSE and NSE combined) registered an
increase of 16% (annualized) in 9MFY12-13 to Rs 309 trillion (Rs 356 trillion in
FY11-12). This strong increase continued to be fueled mainly by equity derivative
volumes with cash volumes declining by 9% (annualized) in 9MFY12-13 when
compared with FY 11-12 while equity derivative volumes grew by 19% over the
same period.
Within the equity derivative segment, futures volumes continued their
downward trend and declined by 13% (annualized) in 9MFY12-13 when
compared to FY 11-12 while options volumes increased by a further 29%
(annualized) over the same period.
In terms of volume composition, cash market trades accounted for 8% of overall
volumes in 9MFY12-13 as compared to 10% in FY 11-12 and 13% in FY10-11.
Were the same trends to continue, cash volumes are likely to decline even in
absolute number in FY12-13 when compared to the already battered volumes of
FY11-12. Similarly, futures volumes constituted ~16% of overall volumes in
9MFY12-13 when compared to 22% for FY 11-12 and 29% for FY 10-11. Again, on
the current trajectory, it looks unlikely for the futures volumes in FY 12-13 to
upstage the FY 11-12 levels in absolute numbers. Options volumes constitute the
remainder 76% of overall volumes in FY12-13. Consequently, equity derivative volumes, led by options volumes have continued their upward surge and now account
for 92% of overall exchange traded volumes in 9MFY12-13 as compared to 90% in FY 11-12 and 87% in FY 10-11.
Chart 1: Common size analysis of equity volumes
Source: ICRA analysis, NSE and BSE website
Chart 2: Common size analysis of equity volumes
Source: ICRA analysis, NSE and BSE website
0%
20%
40%
60%
80%
100%
Q1F
Y09
Q2F
Y09
Q3F
Y09
Q4F
Y09
Q1F
Y10
Q2F
Y10
Q3F
Y10
Q4F
Y10
Q1F
Y11
Q2F
Y11
Q3F
Y11
Q4F
Y11
Q1F
Y12
Q2F
Y12
Q3F
Y12
Q4F
Y12
Q1F
Y13
Q2F
Y13
Q3F
Y13
Common size analysis of equity volumes
Turnover - Cash Total F&O
ICRA LIMITED P a g e | 7
Within the year, cash volumes as a percentage of overall volumes have largely
remained stable. Cash volumes seen at ~7.4% of overall volumes for Q1FY12-13
improved marginally to 7.6% in Q2FY12-13 and 8% in Q3FY12-13. However,
within specific time frames within the year - last fortnight of September 2012,
early weeks of October 2012 as well as smaller pockets in November 2012, the
cash volumes as a percentage of overall volumes were reported upward of 10%
as markets rallied to efforts of the government to institute the much awaited
reforms.
Within the Options segment, the index option based on NIFTY accounted for
nearly 93% of the total options volume in 9MFY12-13 as compared to 96% for FY
11-12, providing adequate liquidity and further fueling investor appetite.
However in 9MFY12-13, stock options have gathered momentum with traded
volume growth of 81% (annualized) when compared to FY11-12 albeit on a
smaller base. Also, based on anecdotal evidence, ICRA has learnt that penetration of options as an asset class is slowly tricking down to the higher end retail
investors who are increasingly getting comfortable delving into this area. In ICRAs’ view, strong growth of stock options and options segment in general could be an
indicator of increased investor comfort with newer segments within the equity capital markets space and a indicator that the traction in the options trading may
continue.
Average daily volumes (ADV) in 9MFY 12-13 (Rs 1.65 trillion) increased by 15%
when compared to FY 11-12 (~Rs 1.43 trillion). ADV grew at a faster clip in
Q3FY12-13 (Rs. 1.70 trillion) as compared to Q1FY12-13 (Rs 1.59 trillion).
For the month of January 2013, ADV of unprecedented Rs 1.84 trillion was
recorded, which is higher by ~11% when compared to 9MFY11-12. Cash volumes
ADV was strong at ~Rs. 153 billion, higher by ~22% when compared to ADV of Rs
126 billion for 9MFY12-13.
Anecdotal evidence suggests that proprietary trading segment participation
increased in 9MFY12-13 by ~500 bps to ~25-30%, share of institutions segment
has remained stable at ~20-25% while retail contribution has declined to ~45-50%.
Chart 3: Y-o-Y growth – Equity Brokerage Turnover
Source: NSE and BSE website, ICRA analysis
Chart 4: Equity Brokerage Turnover - Yearwise
Source: ICRA analysis
ICRA LIMITED P a g e | 8
Within the institutional segment, contribution of the DII segment over the past 7
quarters remains between 40-50% of FII volumes. However, the nature of trading
has differed significantly. While over this time frame FIIs have been net buyers of
Indian equities to the tune of ~Rs. 1 trillion, the DIIs have been net sellers to the
tune of Rs 500 billion. In the month of January 2013, FIIs have pumped in more than
USD 4 billion into Indian equity markets. For many, this remains a pre-cursor to
capital markets revival.
Dip in number of transactions in the cash segment; increase in number of trades
and trading size for the derivatives segment
In terms of trading activity in the market, the number of trades in the cash segment
declined by ~17% (annualized) while average trade size remained flat when
compared to FY11-12. The average trade size stood at Rs 18,950 in 9MFY12-13 as
compared to Rs. 19,009 in FY11-12. Number of trades reported a decline to 1.12
billion in 9MFY 12-13.
In the derivatives segment at the exchanges, number of contracts continued to increase by ~14% (annualized) in 9MFY12-13 as compared to FY 11-12. Average trade
size also reported a marginal 4% increase to ~Rs. 0.27 million per trade in 9MFY12-13 as compared to Rs 0.26 million per trade in FY 11-12.
Chart 5:Institutional participation in Indian equities
Source: ICRA Analysis, moneycontrol
Chart 6:Total number of trades – cash segment
Source: ICRA Analysis, NSE and BSE website
Chart 7:Total number of trades – derivative segment
Source: ICRA Analysis, NSE and BSE website
ICRA LIMITED P a g e | 9
Industry revenue pool from equity broking remains stagnant at Rs 105 bn; flat when compared to FY 11-12
Gross brokerage yields remained largely stable in 9MFY11-12 when compared to FY 11-12. However, the decline in cash volumes as well as the futures volume at the
expense of options volumes impacted overall gross blended yield which in ICRA’s estimation has declined by ~15-20% when compared to FY 11-12. ICRA has also
noted increasing penetration of proprietary options volumes, which do not have any brokerage revenue potential. However, ICRA has also noted increased delivery
based buying especially in Q3FY11-12, which remain very lucrative from brokerage industry perspective. Consequently, the decline in cash and futures volumes as
well increased proprietary activity in options trading has been offset by increased delivery based buying by clients and increased options trading in general. Hence,
in ICRA’s estimation, the annual brokerage revenue pool remains at Rs 100 - 105 billion, flat when compared to FY 11-12. For the purpose of this estimation, ICRA
has not considered the increase in overall volumes as seen in the month of January 2013.
In ICRA’s view, if the trajectory of cash volumes as well as overall market activity levels as seen in the month of January 2013 were to continue, the brokerage
revenue pool could expand by as much as 15-20% in the near term.
Derivative volumes on the Bombay Stock Exchange (BSE) primarily dependent on incentives doled out and lower transaction fees
In a bid to revive its sagging fortunes, the BSE launched a derivate trading incentive scheme in September 2011. According to Securities and Exchange Board of India
(SEBI) directive, an exchange can run the scheme for six months to bring in liquidity in the underlying instrument. Accordingly, brokers generating the liquidity would
be paid out of the BSE’s own resources. The scheme would be discontinued when
average trading volumes at the exchange during the previous 60 days reaches 1%
of the market capitalization of the underlying.
Predictably, the BSE got a strong response to its market making activities.
Arbitrageurs thrived and proprietary trades got a fillip as incentives doled out and
significantly lower transaction charges made it a compelling case to trade. Volumes
soared in response. ADV have been seen in the range of Rs 250 bn - 350 bn for
9MFY12-13 – almost 20-30% of those seen on the NSE. However, more than 90% of
the trades have been contributed by proprietary trades. Most brokers interviewed
by ICRA have conceded that FIIs have largely remained conspicuously absent.
The jury remains out on whether this points to more sustainable and broad based
participation. While build up in open interest has been strong, bulk of it has been in
the out of the money options which cannot be construed as sustainable market
participation. Out of the money options open interest is again not indicative of
retail participation. Also, whenever the BSE has withdrawn the incentive scheme, volumes have nosedived.
In ICRA’s view, the task is cut out for BSE. While it has the deep pockets to keep the programme running, it can not run an incentive programme, at least in the
current form indefinitely. Before the exchange starts withdrawing or reducing incentives, non-incentive-linked volumes need to rise to meaningful levels. Else, when
market-making activity reduces, spreads could widen to such an extent that genuine traders will find little reason to continue trading.
Chart 8: BSE and NSE Derivative Volumes
Source: ICRA Analysis, NSE and BSE website
ICRA LIMITED P a g e | 10
Entry of MCX-SX could queer the pitch for BSE and NSE
Following the conclusion of the long tussle with SEBI, MCX-SX obtained the license to become a full-fledged bourse. The exchange has been allowed to start trading
in equity, equity derivatives and other asset classes just like its rivals – BSE and NSE. MCX-SX had also started an aggressive campaign to add members in the months
of October – November 2012 and has been successful in adding about 700 members.
While the NSE has strong market leadership in both the cash and futures market trading, BSE has been trying hard to wrest some influence back. The entry of MCX-
SX could queer the pitch for BSE and NSE. MCX has made strong progress as a commodity exchange and boasts of upward of 85% market share. Commodity volumes
on the MCX account for ~35-40% of equity volumes. While MCX-SX could try to woo their commodity broking customers into equity trading through their MCX-SX
platform, ICRA believes that getting commodity customers into the equity fold may not be easy owing to difference in mindsets of these two customer segments.
Consequently, liquidity on the MCX-SX at least in the early life of the exchange may be dependent largely on account of volumes poached from rival exchanges.
While it would be premature to judge, the activity on the initial few days at the MCX-SX has been rather tepid. ICRA believes growing and sustaining the volumes
over the medium term would largely dependent on the newer product introduction as well as strong technological platform innovation.
ICRA LIMITED P a g e | 11
COMMODITIES AND CURRENCIES SEGMENT UPDATE IN 9MFY12-13
COMMODITY MARKET
Commodity prices have seen a decline in recent past, affected by global economic slowdown and slowing growth rate in China, one of the largest consumers of
commodities. However, declining commodity prices were partially offset by a weakening rupee which softened the hard landing for commodities markets in India.
Lower volatility in the bullion market (the largest constituent of commodities market in India) impacted investor interest, thereby leading to lower trading volumes.
Better performance in Equity capital markets in 2012 may have also attracted portfolio reallocation away from commodities. Subsequently the volumes in
commodity markets remained flat in 9MFY12-13 when compared to FY11-12.
Growth in Exchange traded commodity volumes stagnates after seeing healthy growth for last couple of years
Commodities broking turnover, which saw healthy growth in the last few years, peaked in Q2FY12 and the volumes have stagnated since then with an Average Daily
Volume (ADV) of ~ Rs 0.6 trillion. However, 9MFY12-13 saw easing of commodity demand, leading to lower growth in their prices. Bullion which constitutes the
largest turnover volumes within the commodity segment saw returns and volatility in gold and silver reducing compared to previous years. The precious metals
segment, which is the largest contributor to exchange traded volumes (in value) in commodity futures markets, saw a decline on annualized basis of ~ 21% during
9MFY12-13. Both, gold and silver saw decline in volumes traded (in quantity) by 27 – 28% on an annualized basis in 9MFY12-13.
Chart 9: Commodity Market Turnover – Quarter wise Chart 10: Gold & Silver – Quarterly Trading Volume
Source: FMC website, NCDEX and MCX website, ICRA Analysis Source: FMC website, ICRA Analysis
0.1 0.2
0.1 0.2 0.2
0.2 0.3 0.3 0.3
0.3 0.4
0.49 0.51
0.70
0.57 0.59 0.55
0.60 0.56
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
-
10
20
30
40
50
60
Q1
FY0
9
Q2
FY0
9
Q3
FY0
9
Q4
FY0
9
Q1
FY1
0
Q2
FY1
0
Q3
FY1
0
Q4
FY1
0
Q1
FY1
1
Q2
FY1
1
Q3
FY1
1
Q4
FY1
1
Q1
FY1
2
Q2
FY1
2
Q3
FY1
2
Q4
FY1
2
Q1
FY1
3
Q2
FY1
3
Q3
FY1
3
Av
era
ge
Da
ily T
urn
ov
er (
Rs
Tri
llio
n)
To
tal M
ark
et
Tu
rno
ve
r (R
s T
rilli
on
)
Commodities Brokerage Turnover - Quarterwise
Total Market Turnover Average Daily turnover (RHS)
-
1
2
3
4
5
6
7
-
50
100
150
200
250
300
350
(in
'00
0 T
on
ne
s)
(in
'00
0 T
on
ne
s)
Quarterly Trading Volume
Silver Gold (RHS)
ICRA LIMITED P a g e | 12
CY2012 also saw better performance from equity capital markets with the Nifty
gaining ~ 27.7% in 2012 compared to a decline of ~ 24.9% in 2011. So the
performance difference in commodity market and equity market has reduced.
Consequently, exchange traded commodity volumes (by value), which had grown
by ~49% to Rs 182 trillion in FY11-12 (ADV of ~Rs 0.59 trillion) declined ~ 5% on
an annualized basis during 9MFY12-13 to Rs. 130 trillion (ADV of Rs 0.57 trillion).
Precious metals, non-precious metal products, agricultural commodities and
energy products in aggregate contribute to more than 99% of the overall
exchange traded commodity volumes (by value). Amongst these asset classes,
during 9MFY12-13, precious metals (gold, silver) contributed to ~ 46% overall
value traded followed by energy products which contribute to ~ 22% of value
traded in 9MFY12-13 (56% and 16% respectively in FY 2011-12). Within precious
metals, trading in silver contributed to 53% of the overall value traded with gold
contributing to the remaining 47% in 9MFY12-13 (57% for silver and 43% for gold
in FY 2011-12). Non precious metal products contribute to 19% of overall value
traded in 9MFY12-13 (16% in FY11-12) and agriculture products contribute to
13% of the overall value traded in 9MFY12-13 (12% in FY11-12).
For 9MFY 12-13, commodity ADV is observed at ~35-40% of equity volumes.
However since currently, commodity trading on the exchanges does not allow
‘options’ trades, in value terms commodity futures market volumes are higher by
more than 200% when compared to futures volumes on equity markets.
Spot market activity beginning to take shape in commodity segment
The commodity spot exchange market has started picking up volumes in the last
2 years, albeit a very small fraction of the commodity futures market volumes.
The ADV at National Spot Exchange Limited (NSEL), the dominant exchange in this
segment, has been ~ Rs 9.50 billion in 9MFY12-13. E-series products constitute
the majority volumes in the spot market, which functions just like cash segment
in equities, but offering commodities like gold, silver and copper in the demat
form in smaller denominations. NSDL and CDSL act as the depository for holding
commodity units in the electronic form. Investors can take physical delivery of
accumulated demat units at multiple centers. The spot exchange is widely used
by arbitragers to combine spot and futures transactions on commodities.
Chart 11: Commodity Turnover – Asset Class wise
Source: FMC website, NCDEX and MCX website, ICRA Analysis
Chart 12: National Spot Exchange Volumes – Quarter wise
Source: NSEL website, ICRA Analysis
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY08-09 FY09-10 FY10-11 FY11-12 9MFY13
Ave
rage
Dai
ly T
urn
ove
r ( R
s tr
illio
n)
Turo
ver
Commodity Brokerage Turnover - Yearwise
Agricultural Commodities Bullion Metals
Energy Others Average daily turnover
-
2
4
6
8
10
12
14
-
200
400
600
800
1,000
1,200
Rs
in b
illio
n
Rs
in b
illio
n
National Spot Exchange Volumes
Total Turnover Average Daily Volume (RHS)
ICRA LIMITED P a g e | 13
MCX remains the market leader with more than 85% market share despite decline in bullion turnover
With the grant of recognition to the Universal Commodity Exchange, Navi
Mumbai the total number of Recognized Commodity Exchanges has become 22
(16 Regional and 6 National Exchanges). The five National Commodity Exchanges
contributed 99.76 % to the total value of trade in the Commodity Futures Market
in Q2FY12-13 as per FMC.
These are MCX, Mumbai (85.63 %), NCDEX, Mumbai (11.56 %), ACE Derivatives
and Commodity Exchange Ltd., Mumbai (1.35%), NMCE, Ahmedabad (0.73 %)
and ICEX, Mumbai (0.49 %). As compared to the equities broking segment which
only has two major exchanges with a third national exchange just started, the
commodities segment, depending on the asset class has multiple national
exchanges. MCX remains the market leader with most of the other exchanges
focusing on agricultural commodities. Many of the regional commodity
exchanges specialize in trading of few specific agri products based on local
markets. However, more number of national commodity exchanges will provide
better competition.
There is interest shown from large institutions in the commodity market, as they
are setting up new commodity exchanges based on the potential seen in the commodity markets. As compared to global standards, where generally commodity
markets are bigger than equity markets by many folds, the Indian commodity market is yet to be developed.
Institutional participation and trading in commodity options awaits parliamentary approval
Currently regulations only allow Indian corporate and agricultural houses to trade in the commodity markets apart from the retail investors. All other institutional
investors are not allowed to participate in the Indian exchange based commodity markets.
The cabinet has approved the Forward Contract Regulation Act (Amendment) Bill, 2010 in Oct-12 to amend the Forward Contract Regulation Act, 1952. However it
needs to be passed by both Houses of Parliament and was not done in the Winter Session of Parliament. It may be taken up in the Budget session of the Parliament,
though it is not very high on priority list for the government. The amended bill will make the commodity futures market regulator, Forward Markets Commission
(FMC), an autonomous regulator from one overseen by a ministry of Consumer Affairs.
The Bill also seeks to facilitate entry of institutional investors and pave the way for introduction of new category of products, like Options. Globally, commodity
options account for ~ 50% of the overall exchange based commodity volumes on the major commodity exchanges. If the proposal is accepted, ICRA expects the
commodity markets to gain with wider participation and higher liquidity.
Chart 13: National Spot Exchange Volumes – Quarter wise
Source: FMC website, ICRA Analysis
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13
Others
ACE
ICEX
NMCE
NCDEX
MCX
ICRA LIMITED P a g e | 14
The government had to remove the controversial clause allowing banks to participate in commodities futures from the Banking Regulation Amendment Bill, to
secure its passage in Q3FY12-13. So bank participation in commodity trading market may not be seen in the near future. The FMC is asking bankers to ask their
borrowers to hedge themselves for their commodity exposure, which should help increase participation in exchange traded commodity market.
Introduction of Commodity Transaction Tax of 0.01% on Non-agricultural commodity futures: to have marginally negative impact on the commodity segment
The Union Budget 2013 has introduced the Commodity Transaction Tax of 0.01% on Non-agricultural commodity futures, (similar to STT levied on equity futures
transactions). CTT was first proposed in the 2008 Budget, but was not implemented due to opposition by traders, brokers and commodity exchanges over concerns
of it potentially impeding the growth of a nascent segment. With huge proprietary volumes on the exchange, imposition of CTT is expected to reduce the spreads
available for commodity arbitrage trades in cash to future transactions by ~ 20 – 30% and in future to future transactions by ~ 40% to 50%. However, the wider
effect on the client volumes would remain to be seen.
However, short term concerns notwithstanding, market players believe that the long term prospects of this segment remains strong.
Commodities broking revenue pool estimated at Rs 17-23 billion per annum
As per ICRA estimates (based on segment wise market volumes and segment wise average yields of the industry adjusted for the proprietary volumes), the flat
commodity market volumes along with marginal reduction of commodity brokerage yields by 5-10% has led to the commodity brokerage revenue pool in the range
of ~ Rs 17 – 23 billion. At 9MFY 12-13 levels, the commodities brokerage revenue pool as a percentage of equity brokerage revenue pool stands at 16-22% (~17-23%
in FY 11-12) representing a increasing source of revenue diversification for brokerage houses.
Commodities market involve higher operating risk compared to equity markets
Compared to equity markets, the operating risk is higher in the commodity segment with physical holding of the commodity at exchange warehouses and various
classes of the same commodity based on quality. The liquidity is also low for some of the agricultural based commodities, which may lead higher price fluctuations
and malpractices of artificial pressure in prices. ICRA has seen few cases of commodity brokers incurring operating losses on account of these risks.
Commodity segment provides diversification opportunity for Indian brokerage houses
As a lot of regulatory changes may take place in the near future, the near term performance of commodity brokerage market may be dependent on government’s
actions. However, the commodity segment is still in a developing stage in India and expected to grow in the long run. The commodity broking business provides a
source for diversification of revenue for the equity brokerage houses. There are expectations that the gush of liquidity caused by quantitative easing III in the US
may once again find its way into commodities asset classes. Any increase in volatility could then mean good news for brokers. ICRA takes note of the strong
customer addition and increased investor awareness for the commodity markets. Consequently, ICRA believes that commodity trading is steadily emerging as a
sustainable mode of diversification for capital market intermediaries.
ICRA LIMITED P a g e | 15
CURRENCIES:
Currency segment growing at a steady pace; first mover advantage in currency options makes NSE the market leader
In 9MFY12-13, the exchange traded currencies segment has been growing at a
steady pace. Turnover on all the exchanges together was recorded at Rs. 61.22
trillion, indicating a decline of ~18% on an annualized basis. This was explained by
high turnover recorded in H1FY11-12 before the Competition Commission of India
ruling which mandated transaction charges on trades done by the exchanges.
Predictably, this ruling impacted volumes and volumes recorded in H2FY11-12 were
much lower at Rs. 35.48 trillion. Hence when compared to volumes recorded in
H2FY11-12, market turnover in 9MFY12-13 recorded an increase of 15%. ADV was
reported at Rs 33 billion in 9MFY12-13 as compared to Rs 40 billion in FY11-12 and
Rs 29 billion in H2FY11-12.
As an outcome of the two year long dispute between MCX-SX and SEBI, it was not
accorded the license to trade in currency options while NSE and the USE led the race.
NSE seems to have benefitted significantly. What started out as a two-horse race for
market share has ended up with NSE much ahead with a market share of between
58-63% in 9MFY12-13 as compared to MCX-SX, which has lagged behind with a
market share in the range of 35-42% over the same period.
In terms of currency pairs traded, USD-INR currency pair trading accounts for more
than 95% of overall trading with other three currency pairs - EURO-INR, GBP-INR and
JPY-INR in that order. Options’ trading continues to be allowed only in the USD-INR
pair. Market participants have reported a steady increase of clients – both genuine
hedgers as well as arbitrageurs. Market participants have noted that globally
currency OTC segment have been much lower than exchange traded segment.
Consequently, as the regulatory regime for this segment evolves as well as more
clients get enlisted, this segment is expected to gain significant traction. Market
participants have however conceded that growth of this segment is expected to face
a bottleneck on account of unavailability of experienced executives.
Currency brokerage revenue pool pegged at ~Rs 4-5 billion
As per ICRA estimates, currency broking yields have remained in the range of 0.5 –
0.6 bps in 9MFY12-13. The steady increase in currency market volumes as well as
currency brokerage yields has led to an expansion of the currency brokerage revenue pool to Rs 4-5 billion, an increase of ~8-12% when compared to FY11-12.
Chart 14:Currency market turnover -Quarterly
Source: ICRA Analysis, USE, NSE, MCX-SX website
Chart 15:Currency exchange market share
Source: ICRA Analysis, USE, NSE, MCX-SX website
ICRA LIMITED P a g e | 16
OTHER CAPITAL MARKETS LINKED BUSINESSES
Investment banking operations struggling for most brokerage houses; improved investor sentiment provide semblance of hope
In general, 9MFY12-13 continued to be a disappointing period for investment banking outfits. With dwindling public issuances on account of adverse capital market
conditions, merchant banking operations were impacted. Further, the high cost
structure and revenue dependent on outcomes have all ensured that investment
banking operations of many brokers remained in the red. Over the last 3-4 years,
SEBI has reported that more than 130 companies withdrew their DRHPs or allowed
the SEBI observations to lapse. Consequently, listing worth Rs 600 bn were either
scrapped or deferred over same period.
That apart, market participants believe that the last few months have provided a
semblance of hope. A few relatively strong offerings in December 2012 and January
2013 set the engines in motion. ICRA’s estimates based on anecdotal evidence
reveals that deal pipelines for investment banking outfits have more than doubled
over the past 12 months. Some investment bankers have been selectively hiring and
in case improved operating environment continues, many more are expected to
follow suit.
Industry participants believe that short–term concerns aside, the growth prospects
for companies in India are good and there is a healthy appetite for capital. In case,
the government is able to push through the divestment programme, it could go a
long way in improving investor sentiment as these shares are likely to be available at a discount to the retail investors. Also the plethora of private equity investors
looking for exits from the investments made in 2007-08 could ensure a strong tailwind.
ICRA has observed that investment banking outfits trying to diversify into debt investment banking have found the going tough in a deeply competitive marketplace.
Some have been forced to shut shop. Relatively smaller investment banking outfits have been positioning themselves as solution providers for SMEs. In ICRA’s view,
the number of private equity investments looking for exits may provide strong opportunities for broking firms focusing attention on this segment. However, the
regulator clamp down on issues which trade below the issue price may also expose these firms to significant reputational risks.
Mixed bag for other capital markets businesses
9MFY12-13 was a mixed bag for other capital markets businesses. While third party wealth management products distribution remained skewed towards debt
products, PMS AUMs remained stable for large brokers while smaller brokers saw significant erosion. With SEBI increasing the minimum entry limit per investor for
portfolio management from Rs 0.5 million to Rs 2.5 million the AUMs under PMS are expected to remain under pressure.
Chart 16: Public Issuances
Source: Prime database
0
20
40
60
80
100
0
100
200
300
400
500
600
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
10
M2
01
2-1
3
No
. of
pu
blic
iss
uan
ces
Am
ou
nt
(Rs.
Bn
)
Public Issuances
Issuances (Rs. Bn) No. of issues
ICRA LIMITED P a g e | 17
Smaller retail brokers continued to close down equity markets proprietary arbitrage operations as increased penetration of algorithmic trading have thinned the
spreads and made operations unviable. The mediocrity of the recent performance in proprietary arbitrage trading is in part the result of massive growth. Whereas in
the past it was plausible for smart managers to spot market anomalies, several hundred managers in a large industry would be unlikely to earn spectacular returns.
However, with algorithms not yet written for commodities trading, brokers have shifted attention to this segment. Larger brokers have ramped up fund allocation
for proprietary commodities arbitrage. ICRA estimates, based on anecdotal evidence suggest that gross returns in commodity proprietary arbitrage operations (pre-
interest and tax) remained in the 15-17% p.a range. Warehousing as well as other related costs set returns back by 2.5-3.0%, allowing net returns (pre-interest and
tax) in the 12-14% range. However, with the proposed imposition of the commodities transaction tax on non-agriculture futures trading in the Union Budget 2013,
ICRA estimates the gross returns to be impacted by 20-30%. With MCX-SX starting equity trading in the second week of February 2013, market participants are
hopeful of revival of the “exchange to exchange” arbitrage opportunities returning as volumes pick up on MCX-SX. Also, reduction of STT on futures transactions on
the equity markets may lead to renewed interest into this segment.
Brokers looking to scale up their margin funding book
For a large part of FY12-13, margin funding books were in scale down mode for many capital market entities. With borrowing costs averaging between 12-18% and
outlook for equity markets bleak, returns looked uncertain. Also, the mid-caps and the small caps stock prices beaten down, demand for margin funding was
impacted.
Increasing retail participation in the equity capital markets have also led to a return of the demand for margin funding. Consequently, brokers have been turning
their attention to ramping up their margin funding book. As per anecdotal evidence in the last 2-3 months, margin funding / LAS book sizes for brokers have
increased by 20-30%. Industry participants believe that if equity markets hold up, sustained demand is likely to continue. Declining interest rates may also aid
demand. However, initial signs point that brokers have also been careful about scaling up this book. Industry participants have insisted for collateral preferable from
the BSE-200 category, beefed up security cover, insisted for transfer of shares to broker accounts rather than create a pledge in investor accounts and only extended
these loans to clients with existing relationships. ICRA has also observed some initial traction in the funding against commodities for clients. Brokers insist that
demand for funding against commodities remains a huge opportunity. However, proposed imposition of CTT in the Union Budget 2013 may temper this optimism, at
least for funding against non-agricultural commodities.
Non capital market related lines of diversification for few capital market players gain traction; some contemplating entering into other NBFC lending segments
Some brokerage entities having access to capital had forayed into non-capital market related businesses – consumer funding, mortgage financing and SME loans. In
FY12-13, the books continue to be in scale up mode with no significant asset quality concerns surfacing. Some of these players are also contemplating entering into
other asset classes where they have been able to find opportunities exciting. Also, buoyed by the apparent success in scaling up NBFC operations of these few
players, some other larger capital markets players are bucking the trend and now exploring non-capital markets related forays.
While these entities are funding long tenured assets and also been able to tie up long maturity bank loans, the pace of their growth has been such that there has
been no discernable reduction in their dependence on short term borrowings, which inherently is not a stable source of borrowing. Consequently, in ICRA’s view,
these entities remain vulnerable to ALM mismatches.
ICRA LIMITED P a g e | 18
ICRA continues to watch this space closely. In ICRA’s view, while these players have been successfully scaling up operations in these businesses over last 3-4 years,
they have yet to withstand the test of business cycles. While asset quality for these lines of businesses remains at comfortable levels at present, the ability to
maintain the same through business cycles would remain a key sensitivity.
ICRA LIMITED P a g e | 19
KEY INDUSTRY TRENDS IN 9MFY 12-13 Capping of brokerage yields to DIIs and increased penetration of Direct Market Access (DMAs) could point to a significant structural change for institutional
equity brokers; consolidation possible
The SEBI in its Press Release dated August 16, 2012 capped brokerage commission fees at 12 basis points for the cash segment and at five basis points for the
futures and options (F&O) segment for mutual funds. This development has benefitted the domestic mutual fund industry, which has been through difficult times
over the last few years with abolition of entry loads and ebbing of long term money flows. In ICRA’s view, this development along with the increased penetration of
DMAs is expected to have a profound impact on landscape of institutional broking in India.
The institutional brokerage segment in India is largely dominated by the foreign brokerage houses. From the investors perspective, the activity ratio of the FIIs (who
have a strong preference for foreign brokerage houses) by far outnumber the DIIs. In ICRA’s estimates, the overall annual institutional brokerage revenue pool is
reckoned between Rs 22-25 billion. Of this revenue pool, foreign brokerage houses account for between 66-75%, while the rest is accounted by domestic brokerage
houses. These numbers change by ~3-5% depending on the state of the capital markets. In adverse capital market situations, the scramble for safety ensures more
volumes go to foreign brokerage houses while in strong bull markets, the domestic brokerage houses’ relatively stronger corporate access ensures more volumes to
them.
Before these regulations, in ICRA’s estimate gross brokerage yields on cash market transactions for institutional investors were in the range of 5-20 bps, contingent
on volume generation. In general FIIs paid lesser than DIIs on account of large volume generation. However, over the past few years, institutional brokers have
conceded that protecting their yields has been difficult. Anecdotal evidence suggests that gross cash yields are lower by 15 - 25% as compared to three years into
the past. Institutional brokers have also conceded that while the capping of yields is applicable only to mutual funds, they have been under increasing pressure from
their other clients – namely the FIIs and the insurance companies to reduce the yields for them. To add to their cup of woes, high competitive intensity has also
ensured high customer attrition. Consequently, these new regulations are only expected to bite more.
Over the last few years, while the penetration of DMAs has been generally increasing, over the past few quarters, this trend is becoming increasingly pronounced.
Two factors largely influence the demand for DMAs – cost and confidentiality. Over the past few years while costs were always an issue, confidentiality was the
primary focus area for investors. Clients - especially FIIs have since long patronized foreign brokerage houses on account of greater degree of trust regarding
confidentiality of their trades. However, lackluster performance of the Indian capital markets have impacted their returns and hence caused these investors to pivot
and focus on costs as well. While there are different kinds of DMAs, in general DMAs price brokerage yields at anywhere between 20-40% of full service brokerage
commission. In certain select instances pricing has been seen at even lower. However, the lower yields also necessitate extremely limited client servicing.
From the demand perspective – different kind of investors have been buying into Indian equities. On the FII side, the biggest FIIs are those with emerging market
funds with specific allocation to India. These funds are largely Exchange Traded Funds and consequently research offered by Institutional investors is of limited
importance. For these investors DMAs are a boon.
The other kind of investors has been the hedge funds – usually buying both index as well as individual stocks. For these investors, investment horizon could be as
little as a few weeks or a few months at best. Also, their continued presence in the Indian capital markets horizon cannot be taken for granted. Due to their largely
fickle nature, the cost-benefit of servicing them has always been a focal discussion area for institutional brokers with some large institutional brokers making a
deliberate attempt to stay away.
ICRA LIMITED P a g e | 20
The other investors – India long only funds are funds which require access to research as well as corporate access. These include FIIs with India dedicated funds,
Indian DIIs – including insurance companies and mutual funds. However uncertainty in the global economic scenario has built strong risk averseness leading to lower
incremental flows for the foreign long only funds. The domestic mutual funds industry in itself has been facing dwindling long dated funds, cost containment issues
and redemption pressures. As already mentioned earlier, they have been net sellers in Indian equities in 9MFY12-13. Insurance companies, with the exception of LIC
have been relatively smaller players. Also tight regulations by IRDA on investment norms have ensured that participation from insurance players may remain at
lower levels.
It is here that the new regulations and the advent of DMAs would bite. ICRA notes that at an average, for ICRA rated entities, ~20-30% of institutional broking
volumes are now through DMAs. Institutional brokers rated have been split in their view regarding the future of DMAs. While some strongly believe that this is a
trend here to stay, others differ on the premise that at some stage capital markets may revive and newer growth stories may emerge. At such times they believe,
Indian equity markets may be inundated by fresh portfolio inflows and these investors would require servicing. The remunerative potential from these flows could
be very large.
All this presents a quandary for institutional brokers. Institutional broking unlike retail broking entails a higher entry and exit barrier. Also, due to weak global
economic outlook, institutional broking allied segments such as investment banking have also remained in the red for many brokers. Also, with retail participation
muted, profits from retail broking operations have not been able to subsidize costs for institutional broking. FII flows have been volatile and DIIs have been net
sellers. Consequently, many of them have been forced to cut costs. Employee spending and that on making market presence constitute bulk of the costs for
institutional brokers. Conferences have been the high impact but high cost format for brokers aspiring to further their market presence. Cost per conference,
depending on venue, location, guests could range from Rs. 2 – 10 million. Consequently, expenditure on conferences have been on the wane. Brokers have
embarked upon the relatively inexpensive road-shows and webinars to touch base with their clients. Many brokerage houses have realigned their analyst teams and
tried to bring on board lower cost resources.
The problem is particularly acute for smaller institutional brokers but hardly restricted to them alone. Unsurprisingly some brokers have found the going tough. A
few have closed down institutional broking operations while many others are only pulling along in hope for a turnaround. Unless Indian equity markets turnaround
in the next few quarters, ICRA expects smaller domestic institutional brokers to shut shop. ICRA also believes that acquisitions in the institutional broking space may
remain elusive. Institutional brokers do not generally benefit by increased allocation from FIIs or DIIs in the event or a merger between two institutional brokers.
Also, benefits such as client acquisitions generally can be got by customary acquiring large teams from competing brokerage houses. Hence, in ICRA’s view, while
current state of institutional broking may force players to put their shops on the block, takers for the same may only be limited.
Muted retail participation showing early signs of improvement; retail brokers further cut costs by going slow on offline customer addition
ICRA has observed that in the wake of weak retail segment participation, the pressures on profitability have only got more severe for retail brokers. Some small
retail brokers have been making losses even the larger ones have been facing significant pressures on profitability.
Their fingers already burnt in 2008 and its aftermath, broad based retail participation in the equity markets remained conspicuously absent. Even the prolonged
range bound index movement for bulk of the last year could not entice the retail segment back into the markets. In fact, the number of demat accounts even
showed some decline below 20 million as at March 2012. Consequently the sudden sharp uptick in the indices did not go unnoticed, but was “too soon, to sharp”
for many investors. Hence, retail brokers remain cautiously optimistic for a full-scale return of the retail investor. Nevertheless, announcements of reforms
ICRA LIMITED P a g e | 21
programme as well as initiatives for easing the pressure on public finances has helped improve sentiment. A few relatively well performing IPOs in the early part of
December 2012, also brought back some confidence. Consequently, the retail segment slowly trickled back into the broader market. ICRA has observed a sharp
decline in market share for the top-10 brokers while moderate decline in the market share of the top-100 brokers indicative of return in interest levels for the retail
segment, who generally patronizes the smaller retail brokers.
Retail brokers have long argued the merits of adding customers in difficult times to take the benefits of the upside when good times return. Consequently, while
market conditions remained adverse over the last few years, customer addition by retail brokers continued unabated. In ICRA’s view, now this phenomenon has run
its course. ICRA has also observed that retail brokers tweaked their business model by pulling the plug on offline client acquisition. With low activity levels and the
relatively high customer acquisition cost (Rs 3000-4000 one-time cost) not
paying off by client activity levels, retail brokers have also rationalized on
their client acquisition teams. Consequently, many retail brokers are now
concentrating their energies on improving client activity levels. Efforts have
been made by many retail brokers to understand their client trading habits
and customize their client engagement initiatives to suit their mindsets.
For example, if a retail broker has observed that over a period of time, their
client has only bought shares of “A” category stocks, the trading calls sent out
to the investor would be more fundamental research based. Conversely, if a
client has historically delved into intra-day trading, such customized calls are
being sent to them. In case of select retail brokers, specific conferences have
been held with clients to understand their mindsets and engage with them to
build portfolios that could perfectly suit their risk-taking abilities. All this has
helped retail brokers cut their costs further, while improving customer
engagement.
Conversely, increased thrust has been placed on adding online trading clients. Consequently, select brokers have been upgrading their technology platforms as well
as their sales force to push their online trading offering. In ICRA’s view, providing an online trading platform has given brokers better pricing power as compared to
offline clients. Also, once the initial set-up costs are complete, online trading requires much lower client servicing costs as compared to offline clients. Consequently,
online trading is more profitable for brokers. However, ICRA notes that with select exceptions, bank owned brokerage houses have largely established themselves as
pioneers in online broking. Consequently, for non-bank owned brokerage houses, adding online customers has remained a challenge on account of greater
resistance for the average retail investor to shift from the more trusted bank portals towards the relatively unknown. Also, bulk of the retail investors have online
broking accounts linked to their bank accounts making it difficult for non-bank owned retail brokers to wean away these clients to them, despite most of them
having payment gateway tie-ups with 30-35 banks. Consequently, retail brokers have conceded that most of their online broking clients are conversions from offline
clients and not genuine online broking customers.
Chart 17: Top Brokers equity broking market share
Source: NSE, ICRA Analysis
-
10
20
30
40
50
60
70
80
FY07-08 FY08-09 FY09-10 FY10-11 FY11-12 9MFY12-13
Perc
enta
ge
Equity Broking Market Share
Top 5 Top 10 Top 25 Top 50 Top 100
ICRA LIMITED P a g e | 22
In ICRA’s opinion, with heavy clouds still hanging over the sustainable retail participation, this approach from retail brokers could help somewhat ease pressures on
profitability. However, while the larger retail brokers have been able to adapt to the changed market dynamics, the smaller retail brokers could continue to lose
money. ICRA expects some consolidation action in the retail broking space over the medium to near term.
Retail brokers seen educating clients on options trading; activity levels amongst retail clients on the rise
ICRA has observed a few interesting trends for the retail customer behavioral pattern over the past 3-4 quarters. Retail brokers have taken to the classroom to
educate the retail investor about options trading. Many retail brokers have reported that while getting the retail investor to the classroom has been tough, the get
him acquainted with the nitty-gritty of options has been easier and that the average retail investor in showing increasing intrigue regarding this asset class.
Consequently, pockets within the retail investor have been realizing the benefits of options trading and also using equity stock options to reduce the holding cost of
holding delivery stock. Increasing proportion of equity stock options trading to 8% of total options trading for 9MFY12-13 from 5% in FY 11-12 provides evidence of
the manifestation of this phenomenon. This has also helped retail brokers re-invigorate their client activity levels. Brokers have also been aiding the trend by sending
out periodic options trading calls to their retail clients ICRA estimates based on anecdotal evidence that client activity levels (based on one trade per quarter) has
improved by an average of 4-5% in the last quarter.
Consequently, as retail investors are getting educated about options trading, the futures segment has lost significant momentum. As already mentioned earlier,
futures volumes on the exchanges have declined even in absolute number in 9MFY11-12. This can be part explained by the strong traction in the options segment.
Options volumes have led to decline of futures volumes in two ways. The first is pricing. Trading in one lot into options is far cheaper than that for futures. Also, the
perception that buying options limits the overall losses, while buying futures can theoretically entail unlimited loss has been to the detriment of futures volumes.
Consequently, futures volumes have fallen off the radar.
ICRA LIMITED P a g e | 23
PERFORMANCE UPDATE: H1FY12-13 ICRA has attempted to plot the financial performance of brokerage entities for H1FY12-13. For this objective, ICRA has analyzed the quarterly results of 15
prominent entities in the brokerage sector taken largely from public domain. In ICRA’s estimation, these entities account for ~35% of overall equity broking market
share.
ICRA has noted that some brokerage houses have ventured outside the capital markets
domain such as consumer funding, mortgages, insurance etc. Consequently, in terms of
methodology, ICRA has used the standalone financials of entities and weeded out the
impact of non-capital markets businesses on financial performance. The net results
reflect ICRA’s best estimates.
Overall revenue remains flat in H1FY12-13 (annualized) compared to FY 11-12…
In line with ICRA’s estimation that the equity brokerage revenue pool has remained flat
in FY12-13 when compared to FY 11-12 and minor decline in the commodities broking
revenue pool, the total revenues for the entities covered by ICRA remained almost flat
(minor de-growth of ~1%) (annualized) in H1FY12-13 when compared to FY 11-12. In
ICRA’s estimation, while the revenue pool has remained stagnant, increased market
share for the top brokers (covered in the earlier section) would have ensured slightly
higher revenues In ICRA’s estimation which would have been off-set by lost traction in
other capital markets ancillary activities.
In ICRA’s estimation, overall operating expenses also declined by ~7-8% in H1FY12-13.
Over the past couple of years, while there has been some rationalization in the
employee expenses – both on account of rationalization of pay structures as well as
overall headcount, reduction in public offerings ensured lower printing and stationary
expenses, consolidation of branches, renegotiation of rental expenses have all ensured
that brokerage entities have been able to keep a firm lid on costs and further tighten it
over a period of time. In ICRA’s view, while brokers have cut costs aggressively, in ICRA’s
view, the scope for further cost rationalization could be limited.
However, with decline in expenses being more pronounced than that for revenues, cost-
income ratio for the entities covered decreased by 500 bps to 77% in H1FY12-13 from
82% in FY11-12. The increase in cost-income ratio once again reinforces that despite
severe cost cutting measures, the sharper decline in revenues for brokerage entities has
exerted significant pressure on profitability.
Chart 18: Return on Net Worth
Source: ICRA Analysis
Chart 19: Cost-income ratio
Source: ICRA Analysis
12.30%
13.1%
8.9%
10.1%
0%
2%
4%
6%
8%
10%
12%
14%
FY10 FY11 FY12 H1FY13
RONW
RONW
86%
77%
82%
77%
72%
74%
76%
78%
80%
82%
84%
86%
88%
FY10 FY11 FY12 H1FY13
Cost-income ratio
Cost-income ratio
ICRA LIMITED P a g e | 24
Consequently, profitability indicators improved for the brokerage companies. Profitability as a percentage of total revenues improved to ~15% in H1FY12-13 as
compared to 13% in FY11-12. Return to assets improved to 3.6% in H1FY12-13 from 3.3% in FY11-12.
Initial impressions for Q3FY12-13 have been positive. While ICRA has not been able to analyse the results for all the entities enlisted above, revenue growth in
Q3FY12-13 (annualized) of 3-5% (annualized) has been observed when compared to FY11-12 which implies relatively strong performance in the quarter. Costs have
have not grown, consequently profitability has been strong in Q3FY12-13 on the back of increased cash volume led revenue growth
ICRA’S OUTLOOK FOR FY13-14 FOR THE SECTOR Old troubles may continue to plague the industry ahead. Retail participation remains uncertain, regulatory changes mean institutional equities business could face
significant structural challenges and other capital markets businesses may remain morose. While brokers have cut costs aggressively, in ICRA’s view, the scope for
further cost rationalization could be limited. Also, the Indian capital markets remain largely entwined with the global and domestic economy. As long as strong signs
of recovery do not emerge in the global economy, uncertain times may continue for the domestic capital markets.
However, the past 3-4 months have generally provided more good news than bad. The interest rate cycle seems to have peaked, liquidity flows in the country have
been strong, retail participation giving signs of returning to life and positive noises by the government have all in aggregate helped dispel some gloom that beset the
industry.
ICRA has noted that the industry brokerage revenue pool has been stabilizing. Commodities and currencies have emerged as dependable sources of diversification.
Brokers have re-aligned their business models vigorously to contain costs. Competitive pressures exist but have abated somewhat. Consequently, in ICRA’s view,
brokers are better tuned to face the challenges ahead. ICRA revises its outlook on the sector to “Stable” from “Negative”.
ICRA LIMITED P a g e | 25
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
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: [email protected] [email protected]
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: [email protected]
MUMBAI Mr. L. Shivakumar Mobile: 9821086490 3rd Floor, Electric Mansion, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025 Ph : +91-22-30470000, 24331046/53/62/74/86/87 Fax : +91-22-2433 1390 E-mail: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
ICRA LIMITED P a g e | 26
ICRA Limited
An Associate of Moody's Investors Service
CORPORATE OFFICE
Building No. 8, 2nd
Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002
Tel: +91 124 4545300; Fax: +91 124 4545350
Email: [email protected], Website: www.icra.in
REGISTERED OFFICE
1105, Kailash Building, 11th
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, 2013 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.