After a brief lull, consolidation in the domestic stock broking industry is picking up again. In a bid to gain a larger market share of the nearly Rs 15,000 crore commission industry, equity brokers are forging partnerships and mergers to extend geographical reach. Also, a few large corporate houses are planing a foray into the segment.
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Way2Wealth, the financial services arm of Coffee Day Holdings, acquired 50 per cent stake in Mumbai-based Techno Shares and Stock. The deal was struck on April 7 and values Techno at 2-3 times the firm’s top line. Another south Mumbai-based outfit Networth Stock Broking on Monday announced its decision to merge with Ahmedabad’s Monarch Projects. Networth was started by old market player S P Jain. It had Kolkata-based Ajay Kayan as its shareholder, who pitched himself against big bull Harshad Mehta in the late 1990s.
“It is an effective cost management strategy as the equity broking commissions have come under tremendous pressure due to high competition. It is our third such deal to scale in the retail segment. However, Techno also has a strong institutional desk, where we see synergy,” said Shashi Bhushan, chief executive officer of Way2Wealth.
“The deal will provide a capital boost to Techno and the current management will keep the show going. This will be the way for many brokers,” said Jaideep Mehta, chief executive officer of Techno Shares.
Coffee Day Holdings is a Rs 800 crore diversified business establishment. Mid-sized firm with predominantly western India presence, Techno will be its subsidiary. However Mehta, the original promoters of Techno, will run the management. Key reason for such deals is that clientele in India is built on personal relations and there is no guarantee they will stick to a firm post acquisition. More, new owners have to do the KYC norms again, which is added cost burden. Way2Wealth, the financial services arm of Coffee Day Holdings, acquired a 50 per cent stake in Mumbai-based Techno Shares and Stock. The deal was struck on April 7 and values Techno at 2-3 times, the firms top line.
Though, Techno and Networth deals are small in sheer monetary transactions, Centrum Capital and Kishore Biyani’s Future Group, too, are in the process of announcing plans to add more clients. Also, health care major Piramal Group is eying a large Mumbai-based financial services firm, say sources.
On a three-year basis, the size of the commission pool for stockbrokers has not grown, although operational costs and competition have. From Rs 15,000 crore in 2008, it went down to Rs 9,000 crore and is limping back. It could be Rs 13,000 crore to Rs 14,000 crore currently, say analysts. There are around 15,000 brokers and over 76,000 Sebi registered sub-brokers in the country. Among these, there are over 1,200 active brokers on NSE and over 600 on BSE.
The broking industry is facing dilemma owing to the lack of market growth and pressure on yields since the business volume mix is tilting in favour of derivative options. Options trading, which accounts for nearly 75 per cent of equity derivatives, is a low-yield business for brokers. Currently, brokers are scaling down business since it is becoming hard to sustain costs. Large brokers are surviving on the back of automation in business.
“It is mainly the mid level broking firms, which needs cash flow. Otherwise, while large brokers are surviving on strong balance-sheet, business for extremely small brokers come from very strong personal relations,” said Bhushan.
Few high profile deals the sector witnessed in the past couple of years include HSBC buying IL&FS Investsmart, Standard Chartered Bank acquiring UTI Securities, Aditya Birla taking over Chennai-based Apollo Sindhoori and Edelweiss Securities buying Anagram Securities.
However, it would be difficult to say if some of these deals were very successful. Axis Bank, which took over Enam Securities, is also expected to unveil its strategy in short time. It already launched Axis Direct, a internet broking platform.
Compared to large back office staff, leading stock brokers are doing 10 times more business with just 10-15 per cent staff. Also, there is a mad rush to grow the broking revenues from retail segment, as unlike wholesale, retail business is more sustainable. However, the main problem for brokers is that the entire capital market sector in the country is struggling for growth. It grew 70 per cent annually from 2004 to 2008 after which it has been stagnant. The high growth scenario for this sector, say experts, was still 3-4 years away and consolidation will follow till then.
