Mumbai: Alchemy Share and Stock Brokers Pvt. Ltd shut its institutional equity sales desk on Monday to focus on the more lucrative asset management and wealth management businesses.
Many other brokerages are firing people or are considering the option in their equity division, as they grapple with low trading volumes and rising wage costs.
Alchemy Share employed 38 people and the brokerage is planning to relocate 70-80% of the affected staff to other departments.
“The issue is about growth,” said Lashit Sanghvi, co-founder and non-executive director of Alchemy Share. “We want to focus on our other businesses such as private equity and wealth management. Seventy-eighty per cent of the people on the institutional trading desk will hopefully find a place.”
With the revival of the stock market looking distant, hopes for pay hikes and bonuses are slowly giving way to fear of job losses and shutdowns at local brokerages. Trading volumes have sunk to a more than two-year low at a time when costs including salaries have risen for these companies.
Total traded volume for June so far is Rs14,325.26 crore with five trading sessions remaining in the month. In the previous month, volume hit a 26-month low of Rs17,068.71 crore.
“If this situation (of low volumes) continues for another three-four months, there will be blood,” said the director of one of India’s largest retail broking houses, who did not wish to be named. Volumes last dropped to such levels in February 2009, when the global financial crisis had hit Indian stock markets. The Bombay Stock Exchange benchmark Sensex had then plunged to 9,000 from a high of 20,873 it touched the previous month.
Low volumes may force weak brokerages to shut down, while the bigger brokerages may have to cut costs, according to Vikas Khemani, co-head of institutional equities at Edelweiss Capital Ltd. “Less serious houses will be forced to scale down or shut down and bigger players will have to trim their high-cost structures,” said Khemani. “This will result in consolidation in the industry.”
The number of people employed at Motilal Oswal Securities Ltd’s trading desk has halved in the past few months, according to an employee of the brokerage, who did not want to be identified. Chairman Motilal Oswal denied that the company had fired people.
On an average, brokerages charge 40 paise on delivery-based equity trades and 5-7 paise for intra-day trades in cash and derivatives and 10-15 paise for institutional trades. The decline in equity trading volumes has reduced one of the principal revenue stream for the brokerages. At the same time, salaries, technology costs and rentals have soared, squeezing margins.
“Salaries, mainly in the institutional side, have gone up as much as 30% from 2008 levels, while there is very less trading activity and broking margins are under pressure,” said the chief executive of a foreign bank,which recently set up a broking division in India. He declined to be named.
In 2008, when the first ripple of the financial crisis hit India, the Sensex was around the 20,000 level and the average traded volume was around Rs28,531.8 crore. Three years hence, the index is about 9% lower from that level, but volumes have plunged 40%.
“There is an absolute absence of participation from retail investors,who usually contribute a third of traded volumes,” said Vijay L. Bhambwani,a technical analyst and chief executive of Bsplindia.com. “It looks like volumes are going to remain low for another four-five months.”
And with lower volumes, the mood in dealing rooms across brokerages is growing tense as talks of salary cuts, workforce reduction and shutdown of low-revenue generating divisions are surfacing.
“There is downsizing happening in branches of some brokerages, mainly in the suburbs. The first ones to be shown the door will be freshers and junior staff,” said a dealer, who works for one of India’s leading retail broking house and was shifted a few days ago from the equity desk to the currency desk as order flows continued to fall.
Profit and sales at most broking houses have declined. Emkay Global Financial Services Ltd’sloss widened to Rs2.69 crore in the quarter ended March from Rs13 lakh in the year earlier.
Indiabulls Securities Ltd swung to a loss of Rs5.01 crore compared with a profit of Rs2.83 crore last year. JM Financial Ltd’s profit declined 79%, while sales more than halved. “Generally for brokerages, human cost is 30-40% of the top line (revenue),” said Prakash Kacholia, managing director of Emkay Global Financial Services.
Geojit BNP Paribas Financial Services Ltd’s net profit for the March quarter fell 73% and sales dropped 25%. “The domestic brokerage industry is currently suffering negative jaws (a situation where expenses grow faster than income), with people and technology costs rising at double digit rates, while revenues shrinking at double digit rates,” said Tarun Kataria, chief executive officer of Religare Capital Markets Ltd.