Brokerage firms - On mission mode to save investors, and themselves

Motilal Oswal Securities has been able to bring some 12,500 clients back to investing. These clients had gone inactive after losing money on the bearish bourses. The company set up a centralised re-activation desk with trained stock brokers to handhold such clients, give the right advice, to win back their faith and confidence in the market. The success of this programme has led to Motilal Oswal doubling the hires for this team over the next two months.

Vijay Kumar Goel, CEO, Broking and Distribution at Motilal, says that the company is spending big on advertisement and promotion campaign to educate clients. The company has launched an initiative, 'Mission: Save the Investor', aimed at educating investors to buy fundamentally sound stocks. As part of this mission, experts from Motilal Oswal will conduct more than 400 capital market inclusion workshops across the country.

Hit by diving investor sentiment, stock broking firms are heavily investing in restoring confidence. For instance, Edelweiss Financial Services has introduced financial planning as a new line of business with a focus on advisory products.

“The idea is to provide a holistic picture to individuals on their assets and portfolio and give them advice on how to manage those,” says Nitin Jain, Head, Capital Markets, Individual Client Group. Edelweiss is focusing more on cross-selling products across all asset classes to all customers.

FALLING VOLUMES

Besides product diversification and playing the advisor, stock broking firms are also working on cost minimisation, re-inventing business models, focusing on technology optimisation, and upgradation of employee knowledge and skill to survive in the current slowdown. Falling trading volumes has led to brokerage commissions shrinking to as low as 0.10 per cent from 2 per cent. With the fixed cost of running a brokerage remaining the same, P&L accounts of brokerages are turning wobbly.

Retail investors, who burnt their fingers in equity trading, had moved to currency and commodity futures over the last couple of years. But introduction of the commodity transaction tax saw commodity future volumes drop by 40 per cent this calendar. Currency futures turnover is down by a third following the RBI’s move to control speculation in the rupee. This has affected brokerages’ revenue stream.

“Earlier, in our community, stock broking used to command high respect. Now, it is difficult for a stock broker to even find a bride as parents are afraid to let their daughter marry a broker due to sagging fortunes,” says Ramesh Chordia, a stock dealer in Chennai. “Mid- and small-cap stocks were decimated, and most of them are available at an affordable rate. But I have not received any single enquiry from investors. That is the condition of the market, as small retail investors are afraid to enter the market,” he rued.

COST-CUTTING

The falling fortunes also mean job cuts and declining increments for broker. Nearly 70 per cent of a brokerage firm’s expenditure is on manpower. Suresh Parmar, Associate Vice-President, Institutional Equity, KJMC Capital Market Services, says mid-size brokerages have reduced increments 10-20 per cent and employee strength cut by a third over the last three years. Parmar says the current situation is a far cry from three years back. “Then, we were royally pampered with free breakfast, lunch, fancy evening snacks and were even paid overtime for working late. Everything has stopped now.” Employee incentives such as trips to Singapore and Bangkok, too, have become a thing of the past.

But several broking houses have risen to the challenge and come up with their own unique responses to ride out the storm. “Now, the focus is on monthly portfolios and restricting our research coverage to top 30-40 companies and not look at mid-caps unlike three years ago,” says B. Gopkumar, Head of Broking, Kotak Securities.

ONLINE Platform

Brokerages are turning to technological innovations to achieve cost efficiencies and improve productivity. Minimising employee travel spends by opting for video conferences has helped brokerages like Edelweiss streamline costs.

“Our plan to move broking platform to mobile and online is working to our favour given the smartphone and internet penetration among our customers,” says Jain. Shifting to the online platform has helped Edelweiss cut costs on setting up physical office branches.

Expansion plans are being deferred with strict cost controls and product and platform diversification taking centrestage.

“In the last two to three years, no one is aggressively expanding their business except on the Internet. Our strategy of moving product distribution on Internet has helped us garner almost 50 per cent of our trading volumes online in the last three years,” says C. J. George, MD, Geojit BNP Paribas Financial Services

The silver lining, however, has been that unlike the panic responses to the slowdown crisis of 2008, broking houses have learnt their lessons and have eased into a more measured and calibrated approach. “In 2008, the crisis came as a sudden shock of crash landing rather than over a gradual three year period like this time. This time it was a slow and steady decline and people are being more cautious. They have already reduced the fat and are in a more realistic situation,” says George.

Recovery bleak

Brokerages paint a bleak near-term future but hope for economic recovery and improvement in business sentiment pinned on interest rate cycle turn and stability on the currency front. Though some believe the worst may be over with bottoming out of brokerage margins and peaking out of high interest rate, upcoming elections throw up a tricky situation. All eyes would be on rupee stabilisation along with RBI’s stance on interest rates.

Edelweiss’ Jain says: “Though steps have been taken to shore up the rupee, it is not a good sign of economic growth and poses possibility of shock to the economy with GDP growth settling at five per cent this year. Poor economic growth is not good for the brokerage industry.” Like any other business or economic activity, this industry, too, depends on liquidity and sentiment improvement. But with liquidity being sucked out in the past few months and with policy still unclear in the backdrop of the elections just ahead, the next six to 12 months will be tricky.

The key stimulus for a revival of the industry will be interest rates coming down. “Unless high interest rates come down, investors will continue to remain averse to risky asset class such as equities and to invest in fixed-income instruments,” says BNP Paribas’ George.

> manisha.jha@thehindu.co.in

> badrinarayanan.ks@thehindu.co.in

(With inputs from Lokeshwarri S.K., BL Research Bureau)

This is the fourth part of a series on how companies in various sectors are coping with the slowdown

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