Buoyant market sentiment, record addition of clients lift brokerage stocks

Share prices of many brokers have surged over 100% in a year

Stocks of most brokerages have rallied substantially over the past year on the buoyant outlook for the sector and record addition of clients.

Angel One, IIFL Securities, and Geojit have seen their share prices zoom more than 100 per cent, while the likes of Emkay Global Financial Services and ICICI Securities have gained 92 per cent and 62 per cent, respectively, during the period.

This was during the period when the benchmark indices Sensex and Nifty50 rallied 51 per cent and 53 per cent, respectively.

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, digitization, 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 fixed-income asset class, relative underperformance of several active mutual fund schemes, and the entry of millennial investors has helped their cause.

“We believe the industry is moving towards a fee for service model wherein a customer is charged a fee as per services availed, instead of a standard or fixed charge. With financial savings rising and lower interest rates, equity as an asset class will continue to remain attractive," said a research note by ICICI Securities (I-Sec).

The top five digital-only brokers — Zerodha, Upstox, Angel One, 5paisa, and Groww — cornered a market share of over 53 per cent until the end of July, with a cumulative tally of 12.6 million active clients. This figure stood at 17 per cent at the end of FY19.

A few years ago, brokers, such as Zerodha, had disrupted the industry with their discounting model, which remains the mainstay of digital brokers to this day. Most digital brokers charge a flat Rs 20 for intraday and F&O trades. Traditional brokers, too, have slashed their charges since and pricing is no longer a key differentiator. They have also been hiring aggressively on the digital technology and sales sides over the past year.

According to I-Sec's research note, while discount brokers may continue to grow, their revenue growth is largely dependent on client additions as the scope for higher pricing remains difficult. Hence, earnings growth from pure brokerage income is likely to remain limited.

“I am pessimistic about the valuations of brokerages around the world, including that of Zerodha. This is because the performance of broking is directly tied to market performance. If people aren’t making money or there is no greed, activity usually drops off a cliff,” said Zerodha founder Nithin Kamath in a tweet last week.

“The best tech, products, and low pricing won't help," he added, citing a report from JPMorgan on US discount broker Robinhood, whose app downloads are down by 78 per cent and active users by 40 per cent from Q2CY21.