 "Brokerages get a bull market boost")
The rally in the equity markets in the last few months has given a booster to the net profits or profit after tax of the big domestic brokerages. The bottom-line of all the top listed brokerages has witnessed a double digit increase during the quarter ending September, data compiled from BSE showed. The benchmark Sensex went 3.2 per cent up during the period, but the S&P BSE MidCap and SmallCap indices are up 10-14 per cent in the September quarter (between June 30 and September 30).
Leading the pack is Motial Oswal Financial Services, whose net profit from the brokerage business increased nearly 34 per cent quarter-on-quarter (q-o-q) to Rs 208.7 crore. Similarly, IIFL’s capital market arm recorded a profit of Rs 140.2 crore – a 21.3 per cent increase q-o-q. Kochi-based Geojit BNP Paribas, which largely derives its income from equity broking and research, also saw its profit jump 13 per cent q-o-q to Rs 13.7 crore.
Mumbai-based Edelweiss Financial Services also saw a similar uptick in its income from broking business during the quarter. The net profit from broking and related businesses of the company went up nearly 9 per cent q-o-q to Rs 135.76 crore.
According to market participants, bigger brokerages are always in an advantageous position during market rallies as their income goes up rapidly due to increased activity by existing clients and addition of new clients. On the other hand, their expenditure doesn’t go up much as they already have a complete set-up.
”Whenever there is a bull run in the markets, new clients start coming in and market share of big brokerages starts increasing. It had happened in the bull run between 2003 and 2007. But the last seven – eight years were not great as costs assumed at the peak of bull run did not not come down and hence operating leverage works in a negative way. Now as market is picking up, we have started to gain market share and costs are being rationalised as income is increasing rapidly,” said Raamdeo Agrawal, Joint MD, Motilal Oswal Financial Services.
This breather for the brokerages couldn’t have come at a better time as tepid activity in markets during FY16 led to a sharp fall in the revenues of various brokerages. For instance, the gross revenues from broking arm of Geojit BNP Paribas fell 22 per cent in FY16 to Rs 168.3 crore from Rs 215.62 crore in the previous year.
Going ahead, brokerages expect their business to pick up given the healthy macro-economic indicators and positive run in the equity markets. “In the coming two years, we are excited about the capital markets business because markets will have some sort of reversion to mean. In our own case, broking revenue till now is the same that it was in 2008 and our investment banking is about half of what it was in 2008. For almost eight years, markets have not grown or some parts of capital markets have shrunk,” said Rashesh Shah, Chairman and CEO – Edelweiss Group in a post results analyst call.
In order to counter the inconsistent nature of broking business, all the major brokerages have diversified their business in the last decade and reduced their dependence on broking business. Majority of them have entered new segments like mutual funds, insurance and NBFCs. And for many of them, these new businesses have also been growing well so far.
| Good profit growth | |||
| Net profit (Rs cr) | Q1'FY17 | Q2'FY17 | Increase (%) |
| Motilal Oswal | 155.90 | 208.70 | 33.9 |
| IIFL | 115.50 | 140.20 | 21.4 |
| Geojit BNP Paribas | 12.05 | 13.70 | 13.7 |
| Edelweiss | 124.76 | 135.76 | 8.8 |
| Source: BSE |