Broking firms continue to take a hit, both on revenues as well as on profitability, the results announced by four broking firms reveal.
Intense competition and shrinking trading volumes were already hurting the performance, but a sharp correction in the secondary market coupled with a lull in the primary market has further aggravated the situation for them.
Edelweiss Financial Services, one of the leading broking firms in the country, today reported a 53 per cent drop in consolidated net profit to Rs 29.4 crore for the third quarter ended December 2011, despite an eight per cent growth in revenues to Rs 455 crore. The company did relatively better on a sequential basis, as both net profit and net sales rose 12 per cent and 19 per cent, respectively.
| NO RESPITE IN SIGHT Brokerage houses have seen a sharp drop in the bottom line | ||||
| Net sales | Net profit | |||
| Dec ’11 | % Chg* | Dec ‘11 | % Chg* | |
| Edelweiss | 453.77 | 7.72 | 29.44 | -52.74 |
| Motilal Oswal | 108.74 | -34.00 | 26.02 | -38.03 |
| Geojit BNP | 51.36 | -33.00 | 4.30 | -64.80 |
| Emkay | 30.80 | -21.00 | 1.02 | -80.05 |
| Figures (in Rs crore) for quarter ended December 2011 *changes are Y-o-Y Source: Capitaline; Data compiled by BS Research Bureau | ||||
For Edelweiss, the share of agency fee and commission business, which includes income from broking, investment banking, asset management and distribution businesses, declined to 18 per cent of the total income in the third quarter, from 25 per cent in the previous quarter. The interest and treasury income accounted for 82 per cent of the overall business, up from 75 per cent in the July-September quarter last year.
Motilal Oswal Financial Services saw sequential as well as yearly drop in both sales and profits in the third quarter. The Mumbai-based firm reported a net profit of Rs 26 crore, which was 38 per cent lower compared to the corresponding quarter of the previous year, while sales dropped 34 per cent to Rs 109 crore. The performance of relatively smaller brokerages - Geojit and Emkay - were equally bad.
“The December quarter has been tough, as activity levels got impacted due to market volatility, high inflation and interest rates. Rupee depreciation and overall weak global sentiments on the back of a continuing euro zone financial crisis added to the challenging operating conditions,” said Rashesh Shah, chairman and CEO, Edelweiss.
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During the December quarter, average daily cash turnover fell 13 per cent sequentially to Rs 11,880 crore, while the low-yielding future and options (F&O) turnover also dropped three per cent to Rs 1.33 lakh crore.
“The December quarter continued to be a slack quarter for broking firms as they continued to see a decline in their broking income. However, the drop was slightly offset by an increase in income from other businesses like asset management,” said an analyst tracking the sector, who is not authorised to speak to the media.
The 2008 bull run had seen brokerages clock their peak performance in terms of revenues and profitability. However, the subsequent correction, drop in volumes and surging cost due to intense competition weighed heavily on these firms. The going will continue to remain tough till the time there is a pick-up in the market and trading volumes.
“We expect the headwinds to moderate in the next two or three quarters, with RBI taking a pause in rate hikes before we see growth returning to the markets,” said Shah.
Analysts say in order to tide over these difficult times, broking firms will have to diversify in related businesses and implement stringent cost controls. Rating agency Crisil expects half of the profits of broking firms to come from new businesses like asset and wealth management, retail lending and insurance by 2012-13.