Retail investors yet to join the party

Though Sensex rises 22.76% in Q2, brokerages' income falls

The Sensex may have shot up 22.76 per cent in the second quarter of the current financial year, but brokerages' earnings numbers reflect that retail investors have not yet returned to the market following the sharp 30 per cent correction in stock prices in a matter of days in June.

Simply put, retail investors have not really participated in the turnaround of the index's fortunes from a low of 8929 in mid-June to above 13,000 level now.

Retail broking houses including IL&FS Investsmart, Geojit Financial Services, India Infoline, Indiabulls Financial Services and Emkay Stock & Securities saw income from their pure brokerage business come down. However, Indiabulls and India Infoline were able to offset the decline by net addition of clients in the second quarter, while Geojit Financial Services could soften the blow through higher revenues from commodities trading subsidiary.

"The trade volume in the stock market continues to be low, as retail investors are still waiting on the sidelines. We expect an enhanced participation from retail investors only after some sort of correction," said Gagan Banga, director of Indiabulls Financial Services. The brokerage added 56,000 clients in the September quarter, thereby offsetting the decline in per-client business during the period.

C J George, managing director of Geojit Financial Services, which saw its net profit fall 43 per cent, admitted that operations in the last quarter were hit mainly because most of the clients stayed away from the markets in the quarter. "Investors are yet to return to the market in a big way. We feel that the third quarter will be much better," he said.

IL&FS Investsmart, in which US brokerage E*Trade recently took controlling interest, saw 30 per cent drop in net profit for the second quarter.

Analysts expect that the cut-throat competition in the brokerage business will impact the firms' margins in the coming quarters. "Already, there is a significant decline in business owing to non-participation by retail investors. There is pressure on broking fees as well, considering that several players have announced lower brokerage fees," said a research analyst with a brokerage firm.

Nirmal Jain, CMD of India Infoline, said, "Our trading volumes were impacted to a lesser extent compared to the overall decline in trading volumes in the NSE cash and F&O segments, because of client acquisitions and research."

With low retail participation to continue for some time more, broking houses are also looking to boost their revenues from the fee-based income such as selling of mutual fund products, commission from IPO applications, insurance products and portfolio management services.