Small brokers will struggle to sustain themselves, says R Venkataraman

Rising compliance costs and the need for higher investments in technology are pushing up operational expenses for the broking industry, says R Venkataraman, managing director at IIFL Capital. In an email interview with Puneet Wadhwa, he explains that brokers will also need to add more revenue streams (wealth management, distribution, etc.) to counter the pressure in the broking segment. Edited excerpts:

 

Have the 2024-25 January–March quarter earnings lifted market confidence?

 

IIFL Nifty earnings estimates were downgraded between March 31 and May 12 by 4.8 per cent for 2025-26 (FY26) and 3.5 per cent for 2026-27. The cuts were driven by fears of earnings disappointments, and actual results did little to allay those concerns. Beneficiaries of soft crude, such as cement, saw marginal upgrades, but most other sectors saw downgrades, especially banking, due to rising credit costs, slowing deposit growth, and expected interest rate cuts.

 

Will 2025 be a year for developed markets (DMs) rather than emerging markets (EMs)?

 

This is hard to predict — if conditions are right, and they are indeed improving, all countries will prosper. However, the chances of EMs outperforming DMs seem higher, as a weaker US dollar and soft commodities create an ideal environment for EM central banks to lower rates. Globally, faith in the US dollar is waning, which supports a weaker dollar. The dollar index has dropped about 7 per cent year-to-date in 2025.

 

How is India likely to perform within EMs?

 

India is well positioned within EMs. It has low debt (unlike Malaysia), a diversified industrial and manufacturing base (unlike Indonesia), a large workforce (unlike Thailand and Malaysia), and a geopolitical location far enough from China (unlike Vietnam). 

 

What’s your view on midcaps and smallcaps?

 

The Nifty Midcap 150 index trades at a forward price-to-earnings (P/E) of 28x, which is pricier than the Nifty Smallcap 250 index at 23x. The Nifty overall trades at 23x FY26 forward P/E based on our estimates. The smallcap segment looks promising; stocks likely to perform well include KIMS Hospitals, Tube Investments of India, Deepak Fertilizers and Petrochemicals Corporation, JB Chemicals, and Apollo Tyres.

 

Dematerialised account openings have slowed, and systematic investment plan (SIP) flows into equities have dipped from peak levels. Do you expect a reversal soon?

 

SIP flows should stabilise and return to their previous growth path as fears of intense trade wars fade after six months of Trump’s presidency and 20 days of India-Pakistan tensions. Although SIP inflows have slowed, they remain above $3 billion per month. Domestic institutional investors continue buying, supported by steady SIP inflows, and cash levels have not increased significantly. 

 

Do you expect broking-segment revenues to take a hit in FY26?

 

We expect FY26 to be excellent for the broking industry. As fears recede, this will support earnings (valuation multiples) and capital raising through equities, which accounts for about 1 per cent of gross domestic product annually, to resume robustly.

 

Is consolidation in broking likely in the next 12–18 months?

 

Rising compliance costs and the need for higher technology investment are pushing operational costs higher. Also, regulatory changes targeting broking fee structures and limiting speculative derivatives volumes have hurt profitability. Given these pressures, small brokers will struggle to sustain themselves, likely leading to industry consolidation. Separately, brokers will need to diversify revenue streams (wealth management, distribution, etc.) to offset broking segment pressure. Larger brokers, with stronger balance sheets, will find it easier to invest in these new areas, reinforcing the case for consolidation, favouring bigger players.

 

What’s your take on the portfolio management services (PMS) segment?

 

The PMS industry is also under pressure from rising compliance, higher operating costs (especially talent), and increasing competition. The challenge of generating alpha in a volatile market creates headwinds for smaller PMS firms.

 

The launch of specialised investment funds by mutual funds, with a minimum investment of around ₹10 lakh, compared to ₹50 lakh for PMS, adds to the competition for new capital. Given these factors, PMS profitability will be under strain, and consolidation may occur as money flows into stronger hands. 

India’s edge: Outperforming emerging markets

 

-  Low debt — unlike Malaysia

  -  Diversified industrial base — unlike Indonesia

  -  Large workforce — unlike Thailand and Malaysia

  -  Geopolitically distant from China — unlike Vietnam