RESEARCH SERVICES

Financial Sector Ratings Contacts: Karthik Srinivasan +91 22 6114 3444 [email protected]

INDIAN BROKERAGE INDUSTRY

Vibha Batra +91 124 4545 302 [email protected]

“Decline in market volumes amidst pricing pressures to impact revenue stream of brokers”

Saurabh Dhole +91 22 6114 3427 [email protected]

Kushal Modi +91 22 6114 3428 [email protected]

May 2016

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INDIAN BROKERAGE INDUSTRY “Decline in market volumes amidst pricing pressures to impact revenue stream of brokers” May 2016

ICRA RESEARCH SERVICES

Executive Summary After going through a good phase in FY2015, the Indian equity markets remained weak during most part of FY2016. Muted global growth and overall weak global sentiment affected the domestic capital markets. The total turnover at the exchanges (NSE, BSE and MCX-SX combined) declined (by ~9% YoY) in FY2016 when compared to FY2015. Softening commodity prices, the first rate hike by the US Federal Reserve (in almost a decade) and other geo-political risks continued to weigh heavily on the domestic markets. On the back of assumptions that the said global risks are unlikely to soften in the near term, ICRA expects brokerage revenues and profitability of brokerage houses to witness pressure in FY17 unless corporate earnings show signs of revival. At the industry level, Equity Average Daily Volumes (ADV) shrunk by ~10% YoY during FY16 to ~Rs 3.01 trillion. The aggregate market turnover was impacted largely st by the declining activity in the largest segment – options. This was partly due to increase in minimum option contract size from November 1 , 2015 which reduced the activity of intraday traders in the options market, which, as per anecdotal evidence, contributed substantial volumes. The increase in minimum contract size has resulted in number of option contracts reducing to almost half of previous levels. The industry Option volumes were further exacerbated by gradual withdraw liquidity enhancement incentives by exchanges on select products. Though, ADV moderated in the cash segment as well, the decline in this was relatively lower. The volumes in the option segment revived during Q4FY2016 and ADV during the period stood at Rs. 2.5 trillion as compared to Rs. 1.8 trillion during Q3FY2016. Turnover in the futures segment remained almost flat during FY2016 over FY2015. Consequently, the volume share in the overall market shifted away from the options segment with Cash:Futures:Options volume proportions adjusting to 7:17:76 during FY2016 from 6:15:79 in FY2015. The commodity broking activity levels continue to remain at muted levels, even though it is more than 30 months since the CTT (Commodity Transaction Tax) was imposed and the NSEL crisis occurred. The segment however witnessed an improvement in its activity levels (both on an ADTO as well as aggregate volume basis) albeit the pace of recovery remains low. In terms of monthly volume movements, there was a consistent MoM improvement in commodity volumes between February and July 2015 (grew at a compounded monthly rate of ~3% during this period). Post this period, aggregate volumes have moderated and remain largely flat on a MoM basis in the months between August and October 2015 and declined in November 2015 and December 2015. During Q4 FY2016, commodity volumes improved with ADTO improving to Rs. 0.27 trillion during the quarter. The activity in the currency derivatives segment, which remained subdued during 9MFY2016, improved during Q4FY2016. During Q4 FY2016, aggregate volumes in the segment increased to Rs. 14.82 trillion from Rs. 11.29 trillion during Q3 FY2016 (Rs. 13.75 trillion during Q2FY2016). When compared to the medium term average, Currency segment ADTO witnessed hardening to Rs. 0.25 trilllion during Q4 FY2016 as compared to ADTO of Rs. 0.19 trillion reported in Q3 FY2016. The uptick in the currency segment volumes may be attributed to raising of stipulated limits for bank stock brokers by SEBI within the currency derivative segment to US 1 $ 1 billion from US $ 100 million earlier . The rally in the domestic equity markets witnessed during FY15 was mainly driven by the return of the retail investors as poor performance of traditional asset classes (such as gold and real estate) made most investors over-dependent on the equity markets. With activity levels fostered not just by improved domestic 1

For bank stock brokers, trading limit now stands at higher of 15% of Open Interest and US$ 1 billion; for the rest of the brokers, limit continues to stand at higher of 15% of Open Interest and US$ 100 million.

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market outlook but also by easing of inching up along with a host of other tools that facilitated ease of use, the markets saw a retail investor coming back. The retail volumes (in ADV terms) for these brokers witnessed a surge of 49% YoY to Rs. 516 billion in FY15 from Rs. 347 billion in FY14 with cash segment witnessing a higher growth as compared to derivative segment. The improvement in sentiments, however, failed to continue their momentum in H1FY16. Fall of more than 7% in the domestic equity markets stalled incremental retail participation to a noticeable extent during H1FY16 with broking volumes at top 16 brokerage houses falling by around 37% (in ADV terms) during H1FY16 to Rs. 325 billion. The derivatives segment posted a much sharper decline (of 38%) when compared to the cash segment (which declined by 31%). Consequently, the mix of Cash to Derivatives in the brokerage volumes shifted to 18:82 in H1FY16 from 16:84 in FY15. The recent guideline that is expected to increase the minimum size of the options contract from Rs. 2 lakh to Rs. 5 lakh also impacted the derivatives volumes in the retail segment the most (when compared to the institutional segment). We expect volumes in the derivatives segment for retail participants to shrink by 10-15%. In their short span of 2-3 years, discount brokerage houses have made their presence felt in the industry. Few discount brokerage houses have also decided to start offering margin funding services to their clients to deepen their client relationships. With increase in client base of discount brokerage houses and other players entering the online broking segment, online volume for the brokerage houses (as a %age of overall retail volume) rose to 30% from 27% in FY15. In ICRA’s estimates, during FY2015, the total revenues of the 11 prominent brokers analysed improved substantially mainly driven by surge in broking revenues during the year. Also, revenues from other lines of businesses which include interest income, depository income and wealth management fees also improved during FY2015. Operating expenses of these companies increased during FY2015 with an increase in scale of operations; however, since the revenue growth outpaced growth in expenses, cost to income ratio of these companies declined. Profitability metrics of the 11 prominent brokers studied by ICRA showed substantial improvement. The aggregate RoA of these companies improved to ~4.1% during FY2015 vis-à-vis ~3.6% during FY2014. However, the improvement in aggregate RoE of these companies was sharper as the gearing levels of these companies increased to finance their capital market financing book to meet increased client appetite for equity market exposures. Based on the trends seen till H1FY16, ICRA estimates that the broking revenues for the industry has declined slightly by ~7-8% in FY2016 compared to FY2015 on the back of lower volumes and also pricing pressures across the segments. Further a rise in cost structures as many players had resumed hiring and expansion plans following a benign FY2015 is expected to keep the overall profitability matrices of brokerage houses under pressure for FY2016. 2

3

This note covers the financials of 11 entities. However, for market share, brokerage revenue pool analysis, ICRA has used data for 16 prominent brokerage firms.

2

The 11 brokerage houses analyzed in the note are Angel Broking Limited, Bonanza Portfolio Limited, Emkay Global Financial Services Limited, HDFC Securities Limited, Indiabulls Securities Limited, India Infoline Limited, JM Financials Limited, Karvy Stock Broking Limited, Motilal Oswal Financial Services Limited, Reliance Securities Limited and Sharekhan Limited. 3

For market share and revenue pool analysis, from the above mentioned list, data for Indiabulls Securities has not been used. Data for Kotak Securities Limited, Religare Securities Limited, Edelweiss Financial Services Limited, Phillip Capital (India) Private Limited, Geojit BNP Paribas Limited and Sushil Financial Services Private Limited, however, has been used.

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This report on the Indian brokerage industry includes an update on … I.

THE EQUITY MARKETS …… ………………………………………………………………………………………………………………………………………………………………………………………………………………6 a. Trends in cash, futures and options volumes b. Trends in market share for the top brokers c. ICRA’s estimation of the equity brokerage revenue pool

II.

THE COMMODITIES & CURRENCIES MARKETS…………………………………………………………………………………………………………………………………………………………………………………9 a. Commodities - Trends in exchange traded volumes b. Commodities - Trends in mix of commodities traded to overall volumes c. Commodities - ICRA’s estimation of the brokerage revenue pool d. Currencies - Trends in exchange traded volumes e. Currencies - ICRA’s estimation of the brokerage revenue pool

III.

Other Capital Markets Related Businesses …………………….……………………………………………………………………………………………………………..……………………………………………..12

IV.

Other Key Industry trends…….. ……………………..………………………………………………………………………………………………………….…………………………………………………………………14

V.

Performance Update – FY15…………………………………….. …………………………………………………………………………………………………………………………..………….……….……..…………19

VI.

ICRA’s Outlook for FY17………………………………………….……………………………………………………………………………………………………………………………………..….…………………………21

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Please contact ICRA to get a copy of the full report CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Tel: +91-124-4545300, 4545800 Fax; +91-124-4545350 REGISTERED OFFICE th 1105, Kailash Building, 11 Floor, 26, Kasturba Gandhi Marg, New Delhi – 110 001 Tel: +91-11-23357940-50 Fax: +91-11-23357014 MUMBAI Mr. L. Shivakumar Mobile: 9821086490 3rd Floor, Electric Mansion, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025 Tel: +91-22-61143400, 24331046/53/62/74/86/87 Fax: +91-22-2433 1390 E-mail: [email protected]

GURGAON Mr. Vivek Mathur Mobile: 9871221122 Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Tel: +91-124-4545300, 4545800 Fax; +91-124-4545350 E-mail: [email protected]

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CHENNAI Mr. Jayanta Chatterjee Mobile: 9845022459 Mr. P Kalaivanan Mobile: 9894204551 5th Floor, Karumuttu Centre, 498 Anna Salai, Nandanam, Chennai-600035. Tel: +91-44-45964300, 24340043/9659/8080 Fax: 91-44-24343663 E-mail: [email protected] [email protected] KOLKATA Ms. Vinita Baid Mobile: 9007884229 A-10 & 11, 3rd Floor, FMC Fortuna, 234/ 3A, A.J.C. Bose Road, Kolkata-700020. Tel: +91-33-22876617/ 8839, 22800008, 22831411 Fax: +91-33-2287 0728 E-mail: [email protected]

AHMEDABAD Mr. Animesh Bhabhalia Mobile: 9824029432 907 & 908 Sakar -II, Ellisbridge, Ahmedabad- 380006 Tel: +91-79-26585049/2008/5494, Fax: +91-79- 2648 4924 E-mail: [email protected]

HYDERABAD Mr. M.S.K. Aditya Mobile: 9963253777 301, CONCOURSE, 3rd Floor, No. 7-1-58, Ameerpet, Hyderabad 500 016. Tel: +91-40-40676500 Fax: +91-40- 40676510 E-mail: [email protected]

PUNE Mr. L Shivakumar Mobile: 9821086490 5A, 5th Floor, Symphony, S. No. 210, CTS 3202, Range Hills Road, Shivajinagar, Pune-411 020 Tel: +91- 20- 25561194, 25560195/196, Fax: +91- 20- 2553 9231 E-mail: [email protected] BANGALORE Mr. Jayanta Chatterjee Mobile: 9845022459 'The Millenia', Tower B, Unit No. 1004, 10th Floor, Level 2, 12-14, 1 & 2, Murphy Road, Bangalore - 560 008 Tel: +91-80-43326400, Fax: +91-80-43326409 E-mail: [email protected]

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CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350 Email: [email protected], Website: www.icra.in REGISTERED OFFICE 1105, Kailash Building, 11 Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50; Fax: +91 11 23357014 th

Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231 © Copyright, 2016 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 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.

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