ICRA RESEARCH SERVICES

Financial Sector Ratings

ICRA RATING FEATURE Contacts: Karthik Srinivasan +91 22 3047 0028
karthiks@icraindia.com

INDIAN BROKERAGE INDUSTRY

Headwinds tailing off for the brokerage houses; structural challenges remain

Vibha Batra +91 124 4545 302

vibha@icraindia.com

Viral Shah +91 22 3047 0035

viral.shah@icraindia.com

Harsh Vardhan Babel +91 22 3047 0040

harsh.babel@icraindia.com

March 2013
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INDIAN BROKERAGE INDUSTRY

Headwinds tailing off for brokerage houses; structural challenges remain
Executive Summary

March 2013

ICRA RESEARCH SERVICES

Buoyed by the global flows into the Indian market in the later part of CY2012, we witnessed strong traction in index movement both on the BSE and NSE. However the 9MFY12-13 continued to be weak for the Indian equity capital markets. In ICRAs estimation, the brokerage revenue pool has remained flat at ~Rs 105 billion for FY12-13 when compared with FY11-12 despite the strong growth in Options volumes as the Cash volumes and Futures continued to slide and were lower even in absolute number during this period as compared to the previous fiscal. In 9M FY12-13, while the burden of collapsed retail participation has completely weighed down the retail broking operations, the combination of regulatory changes such as capping of commission rates for domestic mutual funds as well as increasing and seemingly irreversible penetration of DMAs have been a heavy drag on its institutional broking piece. In ICRAs view, were these trends to continue, they could test the resilience of the industry and tri gger significant structural changes especially in the institutional broking segment. Capital market ancillary businesses too continued to remain moribund. Slow demand for margin funding also impacted interest income while increasing penetration of high frequency trading has led many medium to small sized broking houses to close arbitrage trading operations. While a few relatively large ticket public issuances kept brokerage houses interested, fee income from the advisory piece has remained lacklustre. The difficult economic conditions ensured that revenues from the investment banking operations for companies were a casualty. Fewer public issuances meant that distribution income remained weak, though was propped up by retail debt issuances. While PMS operations continued to provide steady run rate for some large brokerage houses, at industry level equity PMS AUMs have only declined. A brightening outlook for the commodities and currencies broking segment stands out against the dark tones of the beleaguered equity broking industry. While for the commodities segment, traded turnover declined nominally, ICRA has observed a more broad based increase in market participation and robust increase in customer addition aided by increased investor awareness. The currencies segment on the other hand too continued to gain traction. There are reasons for optimism as the dispiriting mood which pervaded the industry is now slowly giving way to newfound hope and optimism. Equity cash volumes have shown signs of improvement in Q3FY12-13 and beyond. Broader based retail participation is showing the early signs of returning to the markets. The cash volumes recorded for the month of January 2013 were the highest since February 2012. Equity options, largely understood to be the forte of the more savvy institutional investors are attracting a steady trickle of the higher end retail investors. The commodities and currencies segment are emerging as dependable avenues for diversification for brokers. The government stepping on the gas with regard to reforms initiative and declining interest rate scenario is doing much for improving investor sentiment. The month of January 2013 saw very strong FII inflows into the country. The disinvestment plans and planned public offerings may provide the much needed boost to investment banking and distribution operations. In H1FY12-13, ICRA has observed that total capital market related revenues for select top brokers who account for ~35% market share has remained almost flat in H1FY1213 (annualized) when compared to FY11-12. However, costs have declined more sharply by ~7-8% (annualized) over the same period leading to improvement in cost-

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income ratio and other profitability indicators. Early indicators for Q3FY12-13 indicate growth in the quarter revenue for 9MFY12-13 (annualized) has grown by 3-5% when compared to FY 11-12 and profitability has improved further. The Union Budget 2013, amongst other proposals, has reduced Securities Transaction Tax (STT) on equity futures contracts to 0.01% from 0.017%, introduced commodities transaction tax (CTT) on non-agriculture commodities futures trading and allowed participation of FIIs in the currencies derivative segment. In ICRA s view, while these proposals could provide a fillip to equity derivative volumes as well as currency derivative volumes, the imposition of the CTT could impact the gross returns of the arbitrageurs by 20-30% and consequently significantly impede the growth of the segment at least over the short term. Also, arbitrage activity could return to the equities segment or move to the currencies segment, which could help growth of these segments. However, in ICRAs view the underlying economic picture remains uncertain. In the absence of any strong global economic recovery, this phase of cautious optimism is largely contingent upon government delivery of the reforms programme. Any let up in execution could mean that this build up of hope could unravel very quickly. At the same time, ICRA has noted that the industry brokerage revenue pool has been stabilizing. Commodities and currencies have emerged as dependable sources of diversification and the brokers have re-aligned their business models vigorously to contain costs. Consequently , in ICRAs view, brokers are better tuned to face the challenges ahead. ICRA revises its outlook on the sector to Stable from Negative.

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The report includes an update on the

I. Equity markets update in 9MFY12-13.6 a. Trends in cash, futures and options volumes b. Trends in trading activity by investor class c. Trends in transaction size and number on the exchanges d. Trends in trading activity on the BSE and NSE and impact of entry of MCX-SX e. ICRAs estimation of the equity brokerage revenue pool Commodities markets update in 9MFY12-13...11 a. Trends in exchange traded volumes b. Trends in spot exchange activity c. Trends in exchange wise traded volumes market share d. Impact of possible regulatory diktats on the commodities markets e. ICRAs estimation of the commodities brokerage revenue pool f. Analysis of operating risks in commodities trading Currencies markets update in 9MFY12-13....15 a. Trends in exchange traded volumes b. Trends in exchange wise traded volumes market share c. ICRAs estimation of the currencies brokerage revenue pool Other capital markets related businesses..16 a. Key trends investment banking operations and outlook b. Key trends in capital market lending operations c. Key trends in other capital markets businesses d. Key trends in non-capital markets related forays and ICRAs outlook Key Industry trends in 9MFY12-13.19 a. Key trends to watch out for in the institutional broking space Impact of capping of brokerage commissions for domestic institutional investors Impact of increased penetration of Direct Market Access (DMAa) ICRAs views on industry consolidation b. Key trends to watch out for in the retail broking space Trends in customer addition Other initiatives taken by brokers to re-invigorate activity levels Trends in online trading Trends of options trading

II.

III.

IV.

V.

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VI.

Performance update for H1FY12-13 for 15 top brokers ..23 a. Trends in capital markets related revenue b. Trends in operating costs c. Analysis of profitability and profitability linked ratios d. Initial impressions for 9MFY12-13 performance ICRAs outlook for the Brokerage Sector for FY13-1424

VII.

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Please contact ICRA to get a copy of the report

CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +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 Ph : +91-22-30470000, 24331046/53/62/74/86/87 Fax : +91-22-2433 1390 E-mail: shivakumar@icraindia.com GURGAON Mr. Vivek Mathur Mobile: 9871221122 Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +91-124-4545300, 4545800 Fax; +91-124-4545350 E-mail: vivek@icraindia.com

CHENNAI Mr. Jayanta Chatterjee Mobile: 9845022459 Mr. Leander Rayen Mobile: 9952615551 5th Floor, Karumuttu Centre, 498 Anna Salai, Nandanam, Chennai 600035 Tel: +91-44-45964300 Fax: +91-44-24343663 E-mail: jayantac@icraindia.com leander.rayen@icraindia.com 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: vinita.baid@icraindia.com 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: animesh@icraindia.com

HYDERABAD Mr. M.S.K. Aditya Mobile: 9963253777 301, CONCOURSE, 3rd Floor, No. 7-1-58, Ameerpet, Hyderabad 500 016. Tel: +91-40-23735061, 23737251 Fax: +91-40- 2373 5152 E-mail: adityamsk@icraindia.com

PUNE Mr. Amit Khare Mobile: 9763200633 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: amit.khare@icraindia.com 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: jayantac@icraindia.com

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ICRA Limited An Associate of Moody's Investors Service CORPORATE OFFICE Building No. 8, 2 Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350 Email: info@icraindia.com, Website: www.icra.in
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REGISTERED OFFICE th 1105, Kailash Building, 11 Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50; Fax: +91 11 23357014 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, 2013 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. 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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