Brokerages' shares come off highs amid hazy outlook, rising interest rates

Shares of leading listed brokerages have declined between 26% and 46% from 2022 highs

Shares of most brokerages have come off from this year’s high amid an uncertain outlook for Indian equities and rising interest rates. Shares of leading listed brokerages have declined between 26 per cent and 46 per cent from 2022 highs.

The last two years had seen brokerages clock a record addition of clients in the backdrop of a secular bull-run post the Covid-19 pandemic. The revenue growth for industry was more than 30 per cent in both FY21 and FY22. However, growth is expected to moderate to just 5 per cent this financial year. Rising market volatility and weakness in stock prices are among the key headwinds faced by the sector.

According to market observers, the broking industry has witnessed a lot of changes over the past few years, led by disruptions from discount brokers, buoyancy in the equity markets, digitisation, and increased interest among various investor groups.

Most brokers used the digital route to make deeper inroads into tier-2 and 3 cities/towns in the aftermath of the pandemic and add to their active client base. Low yields in the fixed-income asset class, relative underperformance of several active mutual fund schemes, and the entry of millennial investors have helped their cause.

Experts caution that the year ahead may be more challenging for the industry. “In almost every bull market, it looks like the broking industry can grow forever, but it cannot—there are significant risks,” said Nithin Kamath, founder and CEO of Zerodha, the country’s largest broker, in a tweet a month ago.

According to him, almost all revenue for the industry comes from active traders and being one requires lots of skill and some luck to do well. Most traders tend to become inactive when they don't earn. This means the industry needs a steady influx of new active traders even to sustain revenue.

“To get new users and hence new traders, you need markets to remain bullish. If the markets take a turn for the worse, the user growth drops, leading to a reduction in active traders and hence revenue. And brokerage firms can do nothing; it is like being a sitting duck,” Kamath said.

In a note in March, rating agency ICRA had said revenue growth for the broking industry FY23 would be flattish, highlighting key headwinds.

 “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.

According to experts, the stockbroking industry is going through a consolidation phase aided by Sebi’s structural reforms that are aimed at reducing systematic risks and increasing transparency in the marketplace.