Over the past year, the majority of brokerages’ shares have fallen as a result of volatile markets, a decrease in the number of new clients added, and moderate trading activity in the cash segment.
Shares of ICICI Securities and Geojit Financial Services have slid about 37% in the past year. Motilal Oswal, Emkay Global, 5paisa Capital and IIFL Securities have seen their shares tumble in excess of 20%. Angel One is the only broker whose stock has gone up.
From April 2020 to March of last year, there was a significant increase in the investor base as a result of a shift toward working from home, increased savings, a sustained bull run, and a robust pipeline of IPOs. According to market observers, however, brokerages’ additions of active customers have significantly slowed over the past few months due to a decline in the stock market and a variety of regulatory mandates.
“The business is at a standstill. We won’t be able to see the kind of revenue and profits that have been generated over the past two years for quite some time. The brokerage industry appears to be capable of indefinite expansion in almost every bull market, but it is not. The founder of Zerodha, the largest broker in the nation, Nithin Kamath, stated, “There are significant risks.”
According to data, the number of active clients in the brokerage industry decreased by 1% in November to 36 million, marking the fifth consecutive month of decline.
The market isn’t likely to rise as much as it did in 2020, according to experts. The upside may be limited by high valuations and a slowdown in global growth. The Nifty is expected to finish CY23 at 19,500, indicating modest but positive returns.
According to Kamath, “even if the markets go up, the interest of new people who want to trade and invest is likely to be lower.”
The majority of new clients added in the past two years were young investors under the age of 30. The general consolidation of benchmark indices, rising interest rates, and a decrease in public offerings may have impacted this segment’s sentiment.
The broking industry is expected to clock gross operating income of Rs 37,700-38,700 crore in FY23, registering a 3-6% growth YoY, compared with around 33% growth in FY22, according to ICRA.
ICRA senior analyst Subhrajyoti Mohapatra stated, “While the scale-up of the margin trading facility has supported the growth in other allied income streams, core broking income is expected to continue to account for the lion’s share of the revenue mix at 60-70% of the gross operating income.”
Gross operating income increased by 38% in FY22, according to the sample of 21 brokerages analyzed by ICRA. Additionally, economies of scale contributed to a 36% increase in overall net profits. However, the performance moderated in H1FY23, with a 8% YoY decrease in net profit, as the negative macroeconomic developments, particularly in Q1FY23, dampened investor sentiment. In addition, after having doubled in the previous two years, the capital market loan book, which primarily consists of margin trade funding and the employee stock option plan funding book, increased by a mere 4% in H1FY23.
The risks posed by regulations are getting worse for the broking industry. Although the regulator has done an excellent job of reducing system risks, some of these issues could also be detrimental to the brokerage industry. Kamath stated, “I keep saying internally that we are possibly one circular away from a 30% drop in revenues.”
After the Karvy incident, in which client securities were misappropriated, Sebi has been gradually tightening regulations for stock brokers. The regulator issued new guidelines for segregating and monitoring collateral at the client level, as well as changes to the rules for pledging shares. A short-margin penalty of 0.5-5% of the shortfall per day was imposed by peak margin rules last year on brokers who fail to secure the minimum margin for intra-day positions. The exchanges now conduct cyber security framework audits of all brokers every three months.