Shares of brokerage firms have risen among the most from the lows in March this year. While the market has risen by about 80% from its lows, brokerage stocks have risen between 115% and 279%. Most of these stocks also fell heavily in the spate of profit-booking on Monday.
While these shares have benefited from the momentum in the stock markets, there is a fundamental reason as well for their rise. Along with the surge in share prices, trading volumes too have risen sharply and hence these companies can be expected to gain in terms of higher commissions. According to a report dated 5 June by Citigroup Research, India’s average daily turnover is now 43% higher than the average for fiscal year 2008-09 and 20% above the average for fiscal 2007-08.
The report also notes that there has been a shift in the trading pattern, with the share of derivatives increasing. Besides, proprietary volumes have risen while retail participation has reduced. All this means that average commissions will be lower, although on an absolute basis income from commissions will be still be higher because of the higher turnover.
For instance, Citigroup Inc. has raised the earnings estimates for Edelweiss Capital Ltd and Motilal Oswal Financial Services Ltd by about 60% for the current and the next fiscal year. Some of these firms also have an investment banking division and the pick-up in primary market activity augurs well.
Citigroup Inc.has raised the earnings estimates for Edelweiss Capital Ltd and Motilal Oswal Financial Services Ltd by about 60% for the current and the next fiscal year. Ahmed Raza Khan / Mint
It’s important to note, however, that both in terms of volumes and turnover to market capitalization ratio, trading activity currently is at an all-time peak, and hence there’s room for correction from current levels. Besides, considering that brokerage stocks have risen very sharply in the past three months, further upside may be limited.
The sharp fall in brokerage stocks on Monday also supports the view that prices of some of these stocks have reached levels where profit-booking makes more sense.
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