Market fall halts expansion plans of brokerages

After cashing in on the market bull run during the past two years, broking companies seem to have caught the shiver.

With trading volumes crashing by nearly 50 per cent from its January peak and retail investors showing no signs of returning to the markets, several small broking firms have decided to cut down on their branch expansion plans, say industry players.

The scenario is quite opposite to what it used to be a year ago, which saw several small- and medium-sized brokerages putting branch expansion on fast track to cash in on the booming stock markets.

The loss in volumes will hit the firms' revenues. However, the same is not true in the case of larger broking firms. The broader Sensex has declined nearly 20 per cent since the peak of 20,873.33 to Rs 16,542 crore, scaring away investors from the market. A risk-aversion has happened for equities, which is not letting the volumes grow.

Trading volumes in the futures and options segment on the National Stock Exchange has fallen to 40,644.51 crore as compared to a high of 96,144 crore in December. Similarly, in case of cash, volumes have dropped to 5818.71 crore as opposed to 9315.64 crore on the Bombay Stock Exchange.

Says Harshad Apte, vice-president, strategies, India Infoline: "Branch expansion will certainly take a hit in case of smaller firms, especially ones who are dependent on broking as a means of revenue. But for large firms, which have diversified stream of revenues, it is not a cause of concern."

Adds Dinesh Thakkar, managing director, Angel Broking: "Larger firms have already capitalised by means of IPOs or private placements, so there is no capital constraint as such. Those who depend on internal accruals for margin trading, especially medium and small broking firms, will be affected."

But, analysts believe that current market fall has put a question mark on visibility of earnings for most broking firms. Third quarter results of almost all broking firms had been excellent, thanks to an amazing bull-run. But fourth quarter results will be impacted because of loss in revenues. Going by conservative estimates, broking firms can see a 30 per cent hit on fourth quarter profits.

However, the pace of consolidation will accelerate in the broking industry as many small players will be forced to shut shops and sell it to bigger ones. Only those who have enough margins and are not totally dependent on broking will survive.