BackBuoyant markets augur well for brokerages
Buoyant markets augur well for brokerages
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Since at least 70% of revenue for such firms comes from the broking business, stock market sentiment plays a big role in their overall performance. Along with the rally in share prices over the past eight months, traded volumes too have risen sharply.
According to a report by Prabhudas Lilladher Pvt. Ltd, the agency business of these three companies grew by 23% over the year-ago period and 15.7% sequentially. Agency business comprises broking, investment banking and financial products distribution. What’s more, margins have improved and profits have grown at a faster pace than revenues. During the September quarter, the three brokerages’ operating profit margin (OPM) grew in the region of 8-10% on a year-on-year basis. Sequentially, too, OPM expanded by 3-5%.
The Prabhudas Lilladher report points out that OPM of the brokerage companies stood at 47.5%, close to the highs the industry achieved in the second half of fiscal 2008.
It’s interesting to note that broking revenues of firms have grown at a faster pace compared with the growth in average daily volumes. In fact, in some cases, daily volumes have fallen and still broking revenues have risen. Brokerage houses are reorienting themselves to focus on value rather than volume, which is good news for their investors. For instance, compared with futures and options trading, the cash market is relatively better and fetches better returns for brokers.
The broking business is becoming more competitive, with new players entering the field. Most large broking firms have been taking steps to diversify and have added other revenue streams such as investment banking and distribution of financial products. But most of these ventures are at relatively nascent stages. For instance, for Motilal, Edelweiss and India Infoline, the investment banking business is still a negligible portion of the business at around 9%, 3% and 1%, respectively.
The momentum of the past two quarters is expected to be maintained in the next two quarters, although the right business mix will determine the extent to which profits will grow. Shares of brokerage firms have fallen between 66% and 75% from their peak in January, although financial parameters are steadily approaching what they were around at the peak of the bull run in end-2007. Besides, considering that current valuations are at an average of around 1.5 times book value, these stocks may have some room for an upside.
Write to us at marktomarket@livemint.com
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