Declining volumes hit brokerages

With the volumes declining by 35-50 per cent on both the stock exchanges, big brokerage houses are feeling the pinch.

Retail participation has taken a beating and this would spell doom for the fourth quarter earnings of broking houses, according to analysts.

Things have been quite pessimistic for the industry as a whole with the Union Budget asking companies to consider the securities transaction tax as business expense and hiking short-term capital gains tax to 15 per cent.

Analysts estimate that some brokerage houses might even report losses in the fourth quarter if the market remains bearish.

Sources revealed that some large broking companies may be hurt more than others because they are highly leveraged and enjoy a huge exposure to the market.

The proprietary trading books of some of these brokerages have taken a hit, thereby leading to increased mark-to-market losses. Default by clients is not ruled out in a situation where the markets have tested last September lows.

From the January peak, the turnover in the cash market is down by 35 per cent, while the derivative turnover has reduced by 50 per cent, hitting the main income stream of brokerage houses.

A lot of broking firms which used to provide margin funding are either going slow or have stopped altogether after accumulating huge non-performing accounts.

The stock prices of brokerage companies have nosedived as a result. From a situation characterised by huge premiums last year, these stocks are now trading at 52-week (one-year) lows.

Gagan Banga, managing director, Indiabulls Financial Services said, "This is a period of consolidation for us. We have been in a high-growth phase since some time, but we will consolidate now." Indiabulls has not opened a single branch in the last one year.

Brokerage houses such as Motilal Oswal, Edelweiss Capital and Religare Securities, which collected funds through initial public offerings (IPOs) or Karvy Stock Broking, Angel Broking and JRG Securities, which raised money through private placements, may have enough capital to meet their immediate plans. But, their quarterly earnings may see a fall, thanks to the drop in trading volumes since the January crash in stock prices.

Several firms contacted by Business Standard declined to reveal the margins by which their revenues have been hit. But going by conservative estimates, there could be a 30 per cent hit on fourth quarter profits. These firms are likely to compensate for declining trading volumes through other income streams such as investment banking and distribution.

Another revenue stream, distribution of initial public offering (IPOs) applications, has also been affected following the Reliance Power fiasco. Given the low confidence among retail investors, distribution of investment products such as mutual funds may also take a backseat, said analysts.

Market watchers say that sustaining talent could be difficult at a time when the broking business is not able to achieve the required turnover.

Some houses may also put branch expansion on hold till the dust settles.

Vikas Khemani, Co-Head, Institutional Equities, Edelweiss Securities said, "Our volumes have come down and there has been an impact. But we have been able to maintain our market share. This period will only give us time to consolidate."