Money Guru | There is a case for consolidation of small brokers, but not now
Given market volatility, which has given to low equity volumes, business for broking houses has suffered in the past couple of years. Dinesh Thakkar, founding chairman and managing director, Angel Broking Ltd, a broking firm that serves at least 850,000 customers across India, talks about how it is a challenge for small broking companies and is consolidation a possible way out for the industry in the near future. Speaking for his company, he says they would be keen on acquisitions once the valuations improve and small brokers are ready to consolidate.
Cash volume in the brokerage industry is very low and small brokers are struggling for volume. Is this purely a result of the market downtrend?
If you look at markets in the last four-five years, there has been no positive return which means there are no repeat transactions. Investors have primarily made returns from real estate, gold and fixed income and have shied away from equity. Volume is there only in futures and options (F&O), which shows that medium- to long-term money is going to some other asset class and only short-term trading money is coming to equities. Small brokers lack expertise in F&O and are facing crunch time as investors are not returning for trades.
Since markets move in cycles, is broking a sustainable business model for small brokers? Is there a case for consolidation or should they shut shop?
Dinesh Thakkar, founding chairman and managing director, Angel Broking
There is still growth left in the Indian economy and valuations are favourable. Consider that with nominal gross domestic product (GDP) growth at 13% in the next 6-12 months, investors can look for positive returns of 12-13%. This will give enough business opportunity to brokers for surviving and maintaining profitability. They will get a customer growth of around 8-10% and investors’ existing portfolios will grow at 13-14%.
Having said that, I think there is a case of consolidation. This can make the business more cost-effective. We have to evaluate better costs for serving a customer. Economies of scale work and as business grows costs come down. A larger brokerage house can give good valuation to smaller brokers for whom the next step can logically be to consider consolidation. But there are phases; first, small brokers have to survive till the market improves as they get better valuations for their business. Larger brokers will also benefit from reducing costs to serve their customers. But all this will take time and won’t happen immediately.
Given that volatility has increased across asset classes, do you have any specific strategy? What is your main focus in terms of revenue stream?
Fortunately for us, we developed expertise in F&O and are able to educate our clientele. We try to educate both retail investors and commodity traders on how to use hedging strategies in this market. By doing this, we were able to compensate for our losses in the cash market. Now we see currency derivatives picking. Gradually, we have been able to offer a basket of products to our customers and also guide them on how to use derivatives along with their existing portfolios.
Do you encourage retail investors in derivatives?
We offer derivatives to everyone. Of our total customer base of around 850,000, 50-60% trade in derivatives. We conduct seminars and workshops to educate people on how to use it for hedging.
It’s not always about converting an existing customer but rather looking for customers in the market where there are volumes.
What is more important is that time and again we have to change our sales and marketing strategies. Now our sales force is getting customers who are more into exports and have currency exposure for currency derivatives.
Equity is a long-term asset and a business broking relies on short-term trades; fundamentally they are two different things. How do you marry the two?
Our resource planning is done separately for separate segments. We know equity can give long-term return of around 15% per annum, we have resources for that segment as we want to try and get maximum market share from this investor segment (less than 1% Indians invest in equities). At the same time, trading activity will increase or decrease by 25-30%, so whatever resources we have in that segment we maintain it. It is not fungible. We don’t spend more on trading and sometimes on investing. For example, now that cash volumes are low, we don’t spend less on fundamental research. We want a good investor base and want traders.
What is the next step for you in this industry?
There is a strong case for consolidation and we are keen on acquisitions. But in the current environment, smaller companies don’t think they would be out of business in the next few years. Also, valuation in current market is not attractive. When valuations improve, revenue per customer is also higher and for higher volumes and customer base we don’t mind paying more. Expanding into the retail investor base and acquiring smaller brokers is what we want to do but at the moment it is difficult to agree on valuations.
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