The Hindu Business Line : Brokerage stocks under fire

Stocks of brokerage houses have been bearing the brunt of the selling pressure in the recent correction. This is despite most brokerages staging an impressive third quarter performance.

Stock prices of most broking companies, on an average, have fallen by about 41 per cent in the last one-month vis-À-vis a 20 per cent fall in Sensex. The fall, however, has been more pronounced (about 30-44 per cent) for companies with pure broking exposure such as Religare, Geojit Financial Services, Emkay Share and Stock Brokers and India Infoline. The fall in prices of banks such as ICICI Bank and Kotak Mahindra with broking exposure got arrested at about 20-33 per cent.

With their revenues pegged directly to the fortunes of the equity markets, companies in the broking space may be up for tough times ahead, with dwindling intra-day volumes and a general loss in risk-appetite among retail investors. Fading investor interest in the IPO market may also add to their woes.

Volumes shrink

The average daily turnover in the cash segment in the NSE has fallen by about 30 per cent from its peak levels. After recording volumes of about Rs 20,709 crore in October 2007, the average per day turnover has shrunk to about Rs 14,393 crore in February. This fall in volumes spell trouble for broking outfits since most of them had in the last one-year reduced commissions hoping to attract increased participation from clients. While the bigger ones such as Kotak Mahindra, ICICI Bank and HDFC Bank, with unlisted broking entities and other core business activities may survive this market onslaught, broking houses with complete dependence on retail participation may find the going tough. Performance of companies such as Edelweiss and Motilal Oswal Financial Services with exposure to investment banking operations may also remain sedate, given the fading sheen of the primary market.

Margins and risk

With stock markets increasingly testing newer support levels, brokers’ default risk on loans against shares may also increase. This may put to test the efficacy of most brokers’ risk control measures.

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