Bearish sentiments make brokerages bleed in Q2

The second quarter has proved difficult for brokerages, with their bottomlines directly getting impacted by a falling turnover and reduced investor appetite. All major brokerages have reported a fall in net profit, even with revenues registering a marginal increase.

Edelweiss Financial Services, which announced its results on Tuesday, saw net profit decline 60 per cent compared to the corresponding quarter of the previous financial year. The domestic broking entity reported a second quarter profit of Rs 26 crore as against Rs 66.10 crore in the first quarter. At Rs 385 crore, revenues remained almost flat, compared to Rs 376 crore in the previous quarter.

Rashesh Shah, chairman and CEO, Edelweiss, attributes the numbers to the “worsening global scenario, led by the eurozone debt crisis and recessionary trends in the US.” These factors have made foreign investors risk-averse to emerging markets, he says. Adds group chief operating officer Himanshu Kaji: “The brokerage industry is likely to face headwinds over the next 2-3 quarters, till the interest rate cycle peaks out.”

Edelweiss is not alone in facing headwinds. Geojit’s second quarter net profit declined 15 per cent to Rs 6.05 crore, from 7.08 crore in the same quarter last financial year. Meanwhile, revenues fell 11 per cent to Rs 63.57 crore from 71.38 crore in the same period.

“The decline in stock market volumes continues to be a matter of concern. Once the global financial and commodities markets settle down, we expect a sharp recovery of volumes in the Indian stock market,” said C J George, managing director, Geojit BNP Paribas Financial Services.

The equity market turnover has witnessed a sharp fall over the last few months. According to data compiled by BS Research Bureau, the average monthly cash market turnover has fallen 25 per cent compared to the beginning of this calendar year. Incidentally, the volumes have almost halved compared to those in January 2010. A similar trend emerges in the derivatives segment, too, with the volumes down around 25 per cent when compared to January 2011.

Motilal Oswal Financial Services, another large domestic entity, saw its bottomline shrink, but made up with sale of fixed assets and investments. At Rs 26.20 crore, the Mumbai-based firm’s adjusted net profit for the second quarter was down 18 per cent compared to the corresponding period of the previous financial year. However, compared to the first quarter of this financial year, it rose 24 per cent. At Rs 114.30 crore, revenues declined 27 per cent when compared to the second quarter of FY11.

Says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services, “Rising interest rates, high inflation, slowdown in core sector growth and global financial concerns have adversely impacted investor sentiments and participation in the capital markets.”