Brokerage firms: Volume growth

Despite strong revenue growth, profitability may not rise much as major clients have been FIIs, who pay lower brokerage.

The recent run-up on bourses has not just benefited business houses and investors, but brokerage firms, too. The stock of Motilal Oswal Financial Services (MOFS) has risen almost 34 per cent in the past month, while India Infoline and Edelweiss have gained 23.6 per cent and 21 per cent, respectively.

The total daily turnover in the cash and derivatives segments on the Bombay Stock Exchange and the National Stock Exchange has increased 25 per cent to an average of Rs 1.2 lakh crore in the September quarter, as compared to the March 2010 quarter. Thus, brokerage houses are likely to see better top line during the second quarter of 2010-11. However, profitability may not be as high, as major clients in the recent bull run have been foreign institutional investors, who pay lower brokerage.

Moreover, the turnover has risen in the derivatives segment only. While it added to the growth in the daily turnover, revenues from derivatives will exert pressure on blended commission yields, as derivatives are low-yield products. The only positive is that during the last six months, daily volumes of futures have doubled from Rs 18,000 crore to Rs 37,000 crore, while that of options (where commissions are flat) have increased marginally from Rs 55,000 crore to Rs 58,000 crore.

The brokerage industry faces challenges of lower commission yields associated with changing product mix and increasing competition. Analysts say if retail participation had been better in the September quarter, the revenue and margin growth would have been more robust, as these yield higher commissions. However, they added that a pick-up in institutional activities was usually followed by an increase in the retail turnover. Players like MOFS, which have higher retail presence and strong customer base, can benefit only when there is more retail interest.