INDIAN BROKERAGE INDUSTRY

Transcription

1 RESEARCH SERVICES Financial Sector Ratings INDIAN BROKERAGE INDUSTRY Healthy outlook for the brokerage industry, riding on the capital markets rally Contacts: Karthik Srinivasan Rohit Inamdar What s Inside Samriddhi Chowdhary samriddhi.chowdhary@icraindia.co m Kushal Modi kushal.modi@icraindia.com Amaan Elahi amaan.elahi@icraindia.com Executive Summary... 4 Equity Markets: Performance Update... Error! Bookmark not defined. Resurgence in market after a slow FY Error! Bookmark not defined. Market volumes increase in FY Error! Bookmark not defined. Derivatives Segment: Healthy growth in ADTO with the market skewed in favour of index options... Error! Bookmark not defined. Cash Segment: Increased activity in Q4FY2017 helps overcome the slow performance of the previous quarter... Error! Bookmark not defined. September 2017 BROKERAGE INCOME: Industry brokerage income estimated to increase marginally to Rs billion for FY Error! Bookmark not defined. ICRA RESEARCH SERVICES Commodity Markets: Performance Update... Error! Bookmark not defined. Commodity Markets: Commodity volumes decline post demonetisation... Error! Bookmark not defined. ICRA LIMITED P a g e 1

2 Table of Contents Executive Summary... 4 Equity Markets: Performance Update... 6 Equity: Resurgence in the Market After a Slow FY Equity: Market Volumes Increase in FY Derivatives Segment: Healthy Growth in ADTO; Market Skewed towards Index Options... 9 Cash Segment: Increased Activity in Q4FY Brokerage Income: Industry Brokerage Income Estimated to Increase to Rs billion for FY Commodity Markets: Performance Update Commodity Markets: Volumes Decline Post Demonetisation Currency Markets: Performance Update Currency: Volumes Remain Volatile in the Last Few Quarters Other Industry Trends Other Capital Market Related Business: Healthy Traction Supported by the IPO Momentum International Stock Exchanges Commence Operations Resurgence in FII Inflow; Increasing Activity of DII Segment Healthy Outlook for Mutual Funds as AUM nears Rs. 20 trillion Mark Enhanced Operational and Monitoring Guidelines to Bring in Discipline SEBI Approves Margin Trading for Stock Brokers SEBI s Discussion Paper on Derivatives: Regulatory Frame-work to be Further Strengthened Healthy Growth in Loan-Book Supported by the Uptrend in Capital Markets Institutional Broking Segment: Volumes Rise Driven by the Cash Segment; Blended Yields Continue to Soften Retail Broking: Healthy Growth in Volumes though Yields show a Marginal Contraction; Online Channels Continue to Gain Traction Clients and Network: Franchisees Remain the Preferred Mode for Widening Networks IPO Financing Market ICRA LIMITED P a g e 2

3 Growing IPO Financing Market as Investors Seek Listing Gains HNI Investors Exposed to Market Risk While Structuring and Lien Helps De-Risk Lenders IPO Financing Market to Continue to Witnesses Heady Traction in FY Annexure: Snapshot of IPO Performance from April Financial Performance Update Financial Performance Update for FY Outlook ICRA s Outlook for FY ICRA LIMITED P a g e 3

4 INDIAN BROKERAGE INDUSTRY September 2017 Executive Summary The domestic capital markets revived in FY2017, after a year of lackluster performance, supported by favouarble market sentiment, healthy foreign institutional investment (FII) inflow, as well as growing domestic institutional investor (DII) participation in the market. Equity turnover at the exchanges registered a robust growth of ~35% in FY2017 supported by the revival in the capital markets and the base effect given the subdued performance in FY2016, which was a period of de-growth. The Average Daily Turnover (ADTO) increased to Rs trillion in FY2017, from Rs trillion in FY2016. The impact of demonisation remained limited, with the growth in the market turnover slowing down in Q3 FY2017, to again pickup in the following quarter. Both the decline in market volumes in FY2016 as well as their improvement in FY2017 was led by the derivatives or the futures and options (F&O) segment which witnessed a 9% decline and a 36% growth in the two years respectively. The share of the derivative segment in the total market turnover increased further to 94%, from ~93% during the period FY2013 to FY2016. The total turnover for the derivatives segment increased to Rs. 944 trillion in FY2017 (ADTO of 3.81 trillion) from Rs 693 trillion (ADTO of 2.80 trillion) in FY2016, registering a growth of 36%. The healthy traction continued in Q1 FY2018 with a total F&O turnover of Rs. 328 trillion. The options segment witnessed a growth of 38% in ADTO in FY2017, surpassing the growth in both futures (24%) and cash (21%) segment, with the markets adjusting to the higher lot size requirement for derivative trading. The options growth rate remained healthy in Q1 FY2018, at 45% (over FY2017 level), as against 23% and 21% for futures and cash segment respectively. The options segment remains the most active in the derivatives market accounting for 84% of derivative turnover in FY2017 (86% in Q1 FY 2018), with index options accounting for 77% of the derivatives turnover (79% in Q1 FY2018). The total cash turnover in FY2017 stood at Rs trillion, registering a growth of 22% over Rs trillion in FY2016. After a healthy start to the fiscal, cash volumes dropped in Q3 FY2017 (turnover of 13 trillion in Q3 FY2017, 10% lower than Q2 FY2017) following the demonetisation drive of the GoI. However, volumes picked up in Q4 FY2017. The large scale intra-promoter group transfer of equity shares across several listed entities in March 2017 pursuant to revision in the tax regime further fuelled the transaction volumes. After a healthy performance in H1 FY2017, the commodities market registered a downward slide post demonetization, with the effect most pronounced in the bullion segment. The commodity markets registered a turnover of Rs trillion (ADTO of Rs trillion) in H2 FY2017, as compared to volume of Rs trillion (ADTO of Rs trillion) in Q2FY2017. The turnover further reduced to Rs trillion (ADTO of Rs trillion) in Q1 FY2018. The strong performance of the equity markets also resulted in a shift in investor preference towards equity and mutual funds as compared to commodities as asset classes. Currency trading volumes of brokerage houses remained volatile in the past nine quarters after growing sizably in Q4 FY2015. Currency volumes in Q4 FY2016 were ~11% higher than the volumes in Q4 FY2015; however, in Q4 FY2017, the volumes declined by ~17% from the volumes in Q4 FY2016. Due to demonetisation, the volumes surged by 66% on a month-on-month basis in November Appreciation of the Rupee during Q4 FY2017 did not impact the volumes which declined to Rs trillion from Rs trillion in Q3 FY2017. ADTO, which spiked to Rs trillion during Q3 FY2016 largely on account of demonetisation, declined to Rs trillion during Q4 FY2017. During Q1 FY2018, volumes rebounded to Rs trillion with ADTO spiking to Rs trillion, which is higher than the ADTO in the previous three quarters. ICRA LIMITED P a g e 4

5 Resource mobilization in equity markets, through a mix of channels like public issuances (including IPO follow-on public offering or FPO, and rights issues), qualified institutional placement (QIP) and preferential placement, remained healthy in FY2017, with a total quantum of Rs. 887 billion raised during the year from 561 offerings. The aggregate resource mobilsation, however, was lower than the record level of Rs. 984 billion in FY2016. While public issuances remain healthy, with 8% growth in the funds raised during FY2017, the aggregate amount raised declined on account of dip in preferential placement and QIP which reported a de-growth of 42%, albeit on a small scale, and 12% respectively. During FY2017, Rs. 359 billion was raised through a mix of IPOs and rights issue (Rs. 333 billion in FY2016). A key characteristic of the primary market was the performance of the IPO issuances during the year with a gradual diversification in the sectoral mix of entities accessing capital markets. Despite their increasing focus of the broader credit markets on consumer-finance businesses, the capital market lending space (which is largely retail) for ICRA sample of brokers picked up in FY2017, post a subdued performance in the previous fiscal. With the recent change in SEBI guidelines allowing brokers to offer margin funding facility with lower margins than those mandated by RBI to NBFCs, ICRA expects margin funding book to further increase during FY2018. Buoyed by the healthy response to the IPOs, there has been a surge in interest in IPOs to capitalize on the listing gains. This is evidenced by the high participation of the non-institutional investor (NII) category; The median subscription level for the NII category stood at 83 times for the IPOs in FY2017, as against 2 times for FY2016. This in turn has created a market for providing funding to the HNI investors for investing in the IPOs. Pegged at Rs. 600 to Rs. 650 billion, the IPO funding market is expected to remain active in the current fiscal as well with a number of prominent IPOs lined up. With a large number of clients opting to conduct transactions online, the relevance of brick and mortar stores has partly reduced. Furthermore, ever since their emergence in the Indian brokerage landscape, discount brokerage houses (DBH) have forced the older players to re-think the mechanics of their existing models repeatedly. Most industry players have consolidated their networks and prefer to have fewer branches per city. There nevertheless remain a large number of customer interactions through branches, and the branches also impart a level of psychological comfort to customers. ICRA expects the broking industry revenue pool to increase to Rs. 180 billion to Rs. 190 billion in FY2018, registering a 15-20% y-o-y growth on the back of healthy volume growth coupled with rise in cash volumes. The volume growth is expected to be about 20-25% in FY2018, supported by positive investor sentiment and a benign capital market outlook. The IPO pipeline for FY2018 is expected to encourage retail participation and activity levels on the exchanges. Growing retail segment would lend support to the overall blended yields in light of competitive pressure. The recent margin trading guidelines by SEBI is expected to have an encouraging effect on cash volumes. Given the higher yields in the cash segment, this would augur well for the brokerage houses. Margin trading would also help support the income profile and shore up the profitability of full-service brokerage houses given the price based competition from discount brokerage houses. While the brokerage houses were allowed to offer margin trading earlier as well, the strict guidelines made the product uncompetitive as compared to the facilities offered by NBFCs. Margin funding, thus, was conducted out of the NBFC arms of the brokerage houses. The revised guidelines make margin funding a viable product for brokerage houses. Supported by the resurgence in capital markets, the total revenues for the sample pool of brokerage houses analysed by ICRA (referred to as ICRA pool) reported a healthy growth of 22% in FY2017. While the revenue stream continues to be dominated by brokerage revenues, attributing to 87% of total revenues, the depository income and distribution income reported a healthy growth in FY2017. With brokers increasingly favouring expansion through franchisees rather than branches, cost structure and operational efficiencies have improved which is likely to protect brokerage houses during challenging times. Accordingly the net profit of the ICRA pool of brokerage houses has reported a 56% growth in FY2017 to Rs 10 billion. Going forward, a further improvement in the profitability of brokers is expected in FY2018 driven by higher revenues due to uptick in the equity markets, higher interest income and control on expenses provided the brokers are able to maintain their credit costs in margin lending business. ICRA LIMITED P a g e 5

6 Business Contacts Mr. L. Shivakumar Tel: / Mr. Jayanta Chatterjee jayantac@icraindia.com Tel: / Media and Public Relations Ms. Naznin Prodhani naznin.prodhani@icraindia.com Tel: Ms. Malika Munjal malika.munjal@icraindia.com Tel: Branches Registered Office: 1105, Kailash Building, 11 th Floor, 26, Kasturba Gandhi Marg, New Delhi Tel: Ahmedabad 907 & 908, Sakar II, Ellisbridge, Opp. Town Hall, Ahmedabad Tel: /01 Corporate Office: Building No.8, 2 nd Floor, Tower A, DLF Cyber City Phase II, Gurgaon Tel: Bengaluru 1 'The Millenia', Tower- B, Unit No. 1004, 10 th Floor,1 & 2 Murphy Road, Bengaluru Tel: Bengaluru 2 2 nd Floor, Vayudooth Chamber, 15-16, Trinity Circle, M.G. Road, Bengaluru Tel: Chennai Hyderabad 1 Hyderabad 2 ICRA LIMITED P a g e 6

7 5 th Floor, Karumuttu Centre, 634, Anna Salai, Nandanam Chennai Tel: Kolkata A-10 & 11, 3 rd Floor, FMC Fortuna 234/3A, A.J.C. Bose Road, Kolkata Tel: /01 No , 301, 3 rd Floor, 'CONCOURSE', Above SBI-HPS Branch, Ameerpet, Hyderabad Tel: Mumbai 3 rd Floor, Electric Mansion Appasaheb Marathe Marg, Prabhadevi, Mumbai Tel: A, 4 th Floor, SHOBHAN, , A&B Somajiguda, Raj Bhavan Road, Hyderabad Tel: Pune 5A, 5 th Floor, Symphony, S. No. 210 CTS 3202 Range Hills Road, Shivajinagar, Pune Tel: info@icraindia.com Helpdesk: Website: Copyright, 2017, ICRA Limited. All Rights Reserved. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies, while publishing or otherwise disseminating other reports may have presented data, analyses and/or opinions that may be inconsistent with the data, analyses and/or opinions presented in this publication. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. ICRA LIMITED P a g e 7