Home Stock exchange Brokerage stocks soar with market boom as tailwind

Brokerage stocks soar with market boom as tailwind

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Brokerage stocks have benefited directly from the V-shaped rally and the rally in the stock markets that followed after the outbreak of the pandemic in March 2020. The shares of major listed brokerage houses have at least tripled since then, with newbie Angel Broking who is listed in October 2020, going back more than four times.

ICICI Securities, the largest listed brokerage by market capitalization, saw its operating margin increase from 53 percent in fiscal year 20 to 62 percent in fiscal year 21. 5paisa Capital, a brokerage firm at a discount, became profitable for the first time in FY21 since listing in November 2017.

Determining factors

Cutting interest rates and injecting money on an unprecedented scale to get economies back on their feet paved the way for easy money, which eventually found its way into the stock markets. Being a proxy game on market sentiment, brokerage stocks have experienced a trading boom.

Deepak Jasani, head of retail research, HDFC Securities, points to three other factors that have boosted brokerage stocks. First, the lack of better investment opportunities outside the markets due to low yields on fixed income securities; two, the allure of discount brokerage; and three, new age investors flocking to the stock market in droves.

According to CDSL and NSDL data, the number of demat accounts, which was 4.1 crore in March 2020, increased to 7 crore at the end of September 2021. crore in March 2020, increased to 68,525 crore in September 2021 Similarly, in derivatives, the average daily turnover increased from around 12 lakh crore to nearly 69 lakh crore during the corresponding period.

Easy integration with the entire online process and the availability of user-friendly and app-based trading platforms also played a role.

Take on challenges

It should be noted that the solid performance of listed brokerage players continued despite regulatory measures such as maximum margin rules and the new collateral mechanism mandated by SEBI. If these rules improve the robustness of the stock market ecosystem, we fear that turnover will be impacted. However, the gradual implementation of the new rules canceled out the negative effect.

Hemang Jani, Head of Equity Strategy (Brokerage and Distribution), Motilal Oswal Financial Services, also believes that the decrease in transaction volume due to the decrease in leverage induced by the new maximum margin rules has been more than offset by the entry of new investors.

The emergence of discount brokers during this period also did not appear to have an impact on full-service brokerage firms as their performance continued to improve. Brokerages operating on full-service models as well as hybrid models experienced rapid growth in sales and profits in FY21 compared to FY20 (see table).

“As long as the markets continue to perform well, investors may not care too much about costs. It can make a difference when markets move sideways for a long time or enter a bearish phase. However, traditional brokers have also changed their offerings and become more competitive, even on brokerage rates, ”explains Jasani.

Although it seems quite unreal now, the warming of the broader markets is a risk for brokerage firms. Besides correcting stock prices if the market turns bearish, a change in market sentiment can lower trading volumes, which also impacts their business. Therefore, caution is in order for investors in brokerage stocks at this point.

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