Domestic broking industry's revenue growth to moderate in FY23, says ICRA

The revenue growth for the domestic broking industry could moderate from around 30 per cent in FY22 to 5 per cent in FY23, said the rating agency, ICRA, in a report.

For the ongoing fiscal year, the industry is expected to clock record revenues of Rs 28,000 crore, which will be around 30 per cent higher than those in FY21. The growth rate, however, will drop to mid-single digits next financial year.

“We expect the markets to remain volatile, going forward, amid various domestic and international cues. While the transaction volumes have reported a month-on-month growth, primarily led by the derivatives segment, prolonged subdued capital markets could have a bearing on the cash segment turnover and other allied capital market businesses, which, in turn, could impact the industry’s earnings,” said Samriddhi Chowdhary, vice president – Financial Sector Ratings, ICRA Ratings.

The average daily turnover increased by 2.3 times to Rs 63 trillion in first nine months of FY22 from Rs 28 trillion in FY21 and jumped over 4.4 times from Rs 14.4 trillion crore in FY20.

ICRA said the growth has been supported by favourable liquidity in both domestic and international markets, better-than-expected corporate earnings, pick-up in economic activity, rising internet penetration and healthy participation of retail investors.

The 18 brokerages that ICRA has analysed have reported 38 per cent growth in revenues in FY21. Their cost structure and operational efficiency has also improved over the past few years with focus on customer acquisition through digital channels and improvement in economies of scale, the rating agency has said.

Many brokerages have scaled up their lending business, particularly the margin trade funding book. This has led to an increase in the borrowing levels for the broking industry.

The aggregate capital market loan book (comprising margin funding products, loan against securities, employee stock ownership plan funding) for 10 prominent retail-oriented broking houses has increased 2.4 times to Rs 11,076 crore as of March 2021 from Rs 4,591 crore as of March 2020, and further to Rs 18,643 crore as of September 2021.

ICRA said the outlook remains stable for the industry.

Going forward, ICRA expects the gearing of the brokerage industry (particularly for larger entities with adequate ability to raise debt) to increase from the current levels. However, the performance of the lending book would remain sensitive to capital market movements.

In recent years, the retail broking segment has seen significant disruption due to the growing prominence of discount brokerages, which has resulted in the realignment of the pricing strategy across the industry.

This has helped bolster the investor base for the industry. The total number of demat accounts have increased to 80.6 million as of December 2021 from 55.1 million in March 2021 and 40.8 million in March 2020.

ICRA said large established entities with a strong presence in online broking have been able to increase their market share. The trend of consolidation is expected to continue with smaller broking players ceding market share to more established broking entities, it added.

The rating agency said broking houses are looking to diversify their revenue streams. However, the core broking business would still account for about three-fourths of the revenues in the medium term.