Broking firms typically cheer a rising market. That lures new investors into stocks, while already invested folks might book profits and churn scrips, all leading to increased volumes and more business for brokerages. Such is received wisdom.
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But the recent run-up in Indian stocks might not bring a windfall for broking houses. The fourth quarter earnings of Geojit BNP Paribas Financial Services Ltd come as a warning. The company reported a 5.3% year-on-year (y-o-y) decline in sales to Rs 58.56 crore.
That’s neither surprising, nor is it unique to Geojit BNP Paribas. For quite some time now, intense competition in this segment has seen brokerage commissions falling.
Volumes in the cash market-which is more lucrative for brokerages—are declining, while trading in option contracts is increasing. For the latter category, the broking commission is charged only on the option premium.
Broking firm results have reflected this trend for quite some time now. For the nine months ended December, seven of the 11 listed broking firms covered by the Capitaline database have reported a fall in profits over a year ago.
True, some brokerages have diversified into investment banking, asset management, insurance and so on. But Geojit BNP mostly depends on traditional broking services, margin funding, and insurance and mutual fund distribution. Broking revenue made up 75-80% of its operating income in the previous quarters. That proportion continued in the quarter ended March as well, company executives said.
The decline in sales is just one part of the story. With increasing competition, operational costs have risen as well. Employee costs rose 7.4% y-o-y to Rs 19 crore and administrative expenses rose 13.5% to Rs 17 crore. That, coupled with a Rs 2 crore drop in investment or other income, crimped Geojit BNP Paribas’ profit. Profit after tax fell 61% y-o-y.
Consequently, Geojit BNP Paribas’ stock tanked 6.6% on a day the broader market gained 2%. While some firms have rallied along with the broader market in the past couple of weeks, most brokerage stocks have underperformed the BSE-100 Index of the Bombay Stock Exchange for more than a year now.
Broking firms like to sell the long-term India growth story to foreign investors. While that may be true for their business as well, the near-term outlook for this particular segment is not rosy.
Graphic by Sandeep Bhatnagar/Mint
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