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Icra, in a recent report, upgraded the sector to ‘stable’ from ‘negative’, on the grounds that lower costs, abating competition and diverse business prospects will help firms face challenges.
India Infoline rose 3.4 per cent on Tuesday, Motilal Oswal Financial Services gained 5.3 per cent and Geojit BNP Paribas Financial Services firmed up 0.7 per cent. Religare Enterprises declined 1.1 per cent to a new low and Edelweiss Financial was down 1.5 per cent. The BSE benchmark Sensex on Tuesday gained 1.4 per cent to 19,143.17 points.
Motilal Oswal is trading at 11.4 times 2013-14 estimated price to earnings (P/E) ratio, Edelweiss is at 13.3 times and India Infoline is at 8.64 times, according to earnings estimates of Espirito Santo in its report late in 2012. (STILL A LONG WAY TO GO)
Analysts say shares of broking firms, in the last few years, have been ‘high-beta’, which usually outperform the market in a bullish phase and fall sharper during declines. For instance, in 2009 and 2012, when the broader markets rose, these stocks outperformed the market and they fell at a sharper rate when indices fell. So far in 2013, these stocks have fallen steeper than the mid- and small-cap indices.
“Profitability of broking firms may continue to remain under stress till the stock market sees a sustained bull run because of competition, growth of direct market access and thin margins,” said Rajesh Cheruvu, chief investment officer, RBS Private Banking India.
Analysts believe a sustained bull run and heightened stock market activity are unlikely, unless retail investors and traders return to the market. Many of them have abandoned the market after the crash in 2008, as the losses were severe. Though retail investors have returned in spurts, the absence of a multi-year rally — like the one seen between 2003 and 2007 — has largely kept them away. Turn to TSI, Page 3 >
Institutional clients have also become less reliant on brokers, said analysts. “Dependence on the sell side analysts has come down with most of the buy side platforms setting up their captive research, making relationships less sticky between brokers and portfolio managers,” said Cheruvu.
In the absence of broad-based investor participation, brokers have managed to stay afloat by cutting costs and diversifying into commodities and currency broking, along with margin funding.
“Retail participation remains uncertain, regulatory changes mean institutional equities business could face significant structural challenges and other capital markets businesses may remain morose,” said Icra’s analysts led by Karthik Srinivasan in a report. “While brokers have cut costs aggressively, in Icra’s view, the scope for further cost rationalisation could be limited.”
The opening up of the currency derivatives market and growth of the commodities market present opportunities for brokers to broad-base their revenues, added Cheruvu.
BSE needs to raise non-incentive volumes meaningfully: Icra
BSE Ltd cannot run its market-making programme to boost the equity derivatives segment in the current form indefinitely despite the bourse’s deep pockets, said ratings agency Icra. Futures and options volumes that are not an outcome of the incentive programme need to rise meaningfully before the exchange starts withdrawing or reducing the incentives, it added. Though the open interest build-up in the segment has been strong, the bulk of the activity has been in the out-of-the money options, which cannot be construed as sustainable market participation, according to Icra. “More than 90 per cent of the trades have been contributed by proprietary trades. Most brokers interviewed by Icra have conceded that FIIs (foreign institutional investors) have largely remained conspicuously absent,” said Icra in its latest report. “Out-of-the-money options open interest is again not indicative of retail participation. The jury remains out on whether this points to more sustainable and broad-based participation.”
