Brokerage industry undergoing big transformation: IIFL Securities chairman

CY23 will be a very topsy-turvy year for equity markets, but it will also be excellent for long-term investors looking for sharp market dips to build strong positions: IIFL Securities chairman

It has been a choppy year thus far for global equity markets. R VENKATARAMAN, chairman, IIFL Securities, in conversation with Puneet Wadhwa, says that calendar year 2023 (CY23) will remain a very topsy-turvy year for equity markets with plenty of trading opportunities. However, it will also be an excellent year for long-term investors looking for sharp market dips to build positions in strong companies. Edited excerpts:

Dematerialised (demat) account openings hit their lowest level since December 2020 in April. Do you see it as rationalisation after a good run during the work-from-home period, or is market volatility keeping investors at bay?
 

This drop was expected after a period when equities were corrected and interest rates went up. The migration from equities to debt has been short-lived, and equities have caught up once more

After periods of a sharp acceleration in demat account opening and explosive growth in retail trading interest, it was to be expected that some cooling off in momentum would happen. But if we look ahead to the next six months, stability and flows should return.

How do you see 2023-24 (FY24) playing out for the brokerage industry?
 

Well-capitalised businesses offering diversified products will be resilient as investor focus shifts from direct equity in a volatile market. Goal-oriented financial advisory and planning will be the mainstay of the industry.

Brokers focused on first-time or small-ticket retail customers may see customer numbers come down. Since many investors have stopped trading in a volatile market, cost management will be crucial.

If the global economic situation improves and the US Federal Reserve cuts rates later this year, helping global liquidity, the markets may see encouraging momentum. All this will help retail and first-time customer-focused brokers.

Will discount brokers be able to sustain operations as costs rise?
 

The brokerage industry is going through a major transformation. For discount brokers, the focus is on technology and reaching out to a maximum number of retail customers.

For full-service brokers and advisors (like us), the focus is on providing customised advice and products to diversify investor portfolios.

How does IIFL Securities, as a brokerage, plan to tackle all these headwinds business-wise in FY24?
 

IIFL Securities is working towards sharpening its focus on affluent customers in line with the reorganisation scheme approved by the board in December. According to the scheme, IIFL Securities’ online retail trading business has been merged with 5Paisa Capital (part of IIFL Group).

After that, about 1.5 million of IIFL Securities’ customers will be hived off to 5Paisa Capital. This will allow IIFL Securities to focus on affluent broking and distribution businesses targeting the mass affluent customer segment (assets under management of over Rs 10 lakh).

On the investment banking side, IIFL Securities has been the no. 1 bank for initial public offerings (IPOs) for private sector companies in India for the past five years and has a good pipeline in the next few months.

But there has been a lull in big IPOs hitting the Street these past few months. Do you expect FY24 to remain tepid as far as fundraising activity is concerned, especially via the IPO route?
 

In 2022, 13 IPOs were launched. Except for Life Insurance Corporation of India, most were small- and mid-caps. The game has been raised with Mankind Pharma’s listing.

IPOs cool off when sentiment suffers. The unlocking after the pandemic has been in fits and starts, thanks to China’s delayed reopening. Supplies and prices will take time to adjust. Meanwhile, inflation has cooled off slower than expected; hence, central banks are keeping rates higher for longer. This has upset sentiments.

I think the rest of 2023 will see market sentiment remain subdued. Rate cuts by central banks will begin in 2024, or perhaps by late 2023, and that is when sentiment will improve and IPO momentum will pick up again.

What is your outlook for the equity markets this financial year?
 

CY23 will be a very topsy-turvy year for equity markets with plenty of trading opportunities, but it will also be an excellent year for long-term investors looking for sharp market dips to build positions in strong companies.

We expect to see one-to-two more corrections this year in India, as we saw earlier this year when the National Stock Exchange Nifty50 decisively dropped below 17,000.

Will the next round of earnings downgrades be led by heavyweights in the consumption/fast-moving consumer goods (FMCG) sectors amid sticky inflation?
 

On the contrary, FMCG may actually be a safe-haven category amidst turbulence and less vulnerable to earnings downgrades.

In the election-heavy 12 months ahead, related spending will be strong by the state and central governments. All this will, in turn, help revive the rural economy. Hence, we are less worried about FMCG.

Alternatively, consumer discretionary names will see a hit on earnings. Our FY24 earnings estimates have been cut by 3-5 per cent in the past few months, which will continue. We might edge down closer to Rs 900 for FY24, from the current level of Rs 924.