Broking companies report tepid Q1

Srividhya Sivakumar

Government should do something quickly so that capital markets look attractive for common investors; apart from compulsory investors/traders. In the last more than one year, the UPA government  has done very little to revive the interest of the common investors towards Indian Capital Markets and drive them towards it....!! Is the government hearing...??!!

Markets may be in the process of recapturing their previous peaks, but stocks of brokerage firms seem a long way from it. Way below their 2008 highs, these stocks have brutally underperformed the narrow indices — Sensex and Nifty — so far this year. So, what explains their poor performance?

Driven by fall in retail participation in the markets, shift in volumes from cash to F&O, and the ban on entry load for mutual funds, broking companies have had difficultly in keeping with their earlier (peak) earnings momentum. A look at how their June quarter results stacked up.

Financial performance

Most broking companies have only reported a lacklustre financial performance for the quarter. While the year-on-year sales (consolidated) during the quarter ranged from flat for some to more than 100 per cent growth for others, it failed to trickle down to the bottomline. For instance, while India Infoline reported a 29 per cent growth in sales, its profits fell by about 17 per cent. Religare Enterprises, on the other hand, made losses for the quarter in spite of a 42 per cent growth in sales. The loss here, however, was primarily because of the investment that the company has been making in building a presence in investment banking.

Notably, while most companies managed to grow their sales over the year, sequential performance was rather tepid, with most reporting a fall in sales and profits. For instance, Geojit BNP Paribas reported 7 per cent fall in revenues and 16 per cent fall in profits on a sequential basis.

Shift in trading patterns

An overall shift in trading volumes from cash segment to the options segment in derivatives, seems to have been the main reason behind the poor growth in earnings for these companies. While cash volumes were down 32 per cent in June quarter compared with the corresponding quarter last year (down 10 per cent sequentially), option volumes have risen steadily.

The segment now contributes roughly about 51 per cent of the total market turnover (44 per cent in March 2010 quarter).

Overall, F & O contributed to about 84 per cent of the total market turnover in the quarter gone by as against 72 per cent last year (80 per cent in March 2010 quarter). These hold relevance as the brokerage commissions are typically higher for cash market transactions and low for options. Take the case of Edelweiss Capital. Though the company improved its daily volumes from Rs 3,900 crore in the March 2010 quarter to Rs 4,080 crore in the June quarter, its broking yield fell from 5.67 basis points to 4.6 bps. In the case of Religare, too, though it has managed to improve its market share in equity broking from 3.4 per cent reported in the March quarter to 3.5 per cent now, its blended yields have continued to remain under pressure. Besides changes in trading patterns, the overall subdued growth trend in equity broking could also be attributed to rising competition in the brokerage space.

Other takeaways

Interestingly, firms with a reasonably strong presence in verticals besides equity broking, have done relatively better — the performance of Edelweiss Capital and Motilal Oswal Financial Services being cases in point. Even though broking revenues form a chunk of the overall pie, these companies have been able to partly offset the lower growth there with higher growth in investment banking and lending operations.

That said, most companies have seen a robust growth in lending activities to promoters against pledging of their shares. IPO financing, however, hasn't taken off as much, though the performance of some the recent IPOs has improved.