Domestic brokerages, riding high after a euphoric 2017, were hit by incessant market volatility in 2018, which impacted volumes and retail interest in direct equities.
The country’s equities went through bouts of volatility, especially between January and March, as well as August and October.
The crash in mid- and small-caps, in particular, hit investor confidence. Wealthy investors, who had put money into portfolio management schemes, were in for a shock as returns turned negative.
“Volumes have dipped, margins have shrunk and distribution of products has become more difficult. With the volatility likely continue, we expect a tough year for brokerages in 2019,” said Prasanth Prabhakaran, chief executive officer of YES Securities.
Most of the retail money in shares after 2015 has come through the mutual fund (MF) route. This trend has only accelerated this year. The assets under management (AUM) of equity MFs stood at Rs 8.3 trillion as of November 2018, compared to Rs 7.3 trillion a year ago.
“Retail participation is expected to moderate with investors recouping the losses arising from market corrections. The broking yields are expected to contract further, given the competitive pressures and the increase in low-yielding derivatives as well as the non-delivery segment. This, in turn, is expected to result in moderation of profitability from core broking operations in the current fiscal after a year of supernormal profits,” said a note put out by ICRA.
The proliferation of discount brokerages has been instrumental in driving down costs and impacting margins. Discount brokers typically charge a flat fee of Rs 20 per trade.
In the full-service segment, brokerage varies between 10 paise and 30 paise for delivery-based trades and below 4 paise for intra-day trades in the cash segment. Charges in the options segment are Rs 20-50 per lot.
Overall, the industry may post growth of 5-10 per cent in FY19 with an estimated revenue projected at Rs 195-200 billion, according to Icra.
Services like margin funding and distribution of financial services could help support the income profile of full-service brokerages. Distribution margins, however, will be impacted with the Securities and Exchange Board of India (Sebi) disallowing payment of upfront commission to distributors this year. Upfront fees are paid immediately on sale of a particular scheme.
Declining volumes compelled some brokers to reduce manpower this year, said market observers.
Large domestic brokers are now focusing on the online space, with emphasis on automation. The share of internet and mobile trading continues to see an uptick, and now contributes 60-65 per cent of the overall volumes for top brokers, according to estimates.
The number of brokers operating in the cash segment has almost halved in the past three years as high compliance costs, declining margins and closure of regional stock exchanges have forced more than 3,000 brokers to shut shop.