Brokerage stocks came under pressure today ahead of ICICI Securities’ (I-Sec) initial public offering, which opens on Thursday.

Stocks of companies such as Emkay Global Financial Services, Geojit Financial Services, Edelweiss Financial Services, Motilal Oswal Financial Services and IIFL Holdings closed down 1-3 per cent. The stock of JM Financial however, ended up 1.8 per cent.

ICICI Securities is the largest equity broker in India by brokerage revenue and active customers. Broking formed around 64 per cent of the company’s revenues in the nine months ended December 2017. However, its business is not directly comparable with the above players as the former is mostly digital-oriented, while the latter are more branch-based, pointed out analysts.

Though the said companies have diversified their revenues over a period of time and many also get business from product distribution, investment banking, asset management and/or lending, including mortgage, the share of brokerage business in their overall revenues is still significant. Hence, the impact of weak market conditions on their business or stock prices cannot be ruled out.

While Nifty 50 and NSE 500 indices are down 3.6 per cent and 5.7 per cent, respectively, in 2018 till date, NSE Midcap and NSE Smallcap indices have tanked 10.5 per cent and 12.4 per cent, respectively, in the same period.

The reasons are not only domestic (including imposition of long-term capital gains tax, deterioration of macroeconomic environment), but also global (including trade wars, rate hike in the US).

Time correction too at play

Analysts expect brokerage stocks, which have jumped 48-139 per cent in the last one year, to continue to remain under pressure in the medium term not only because of likely churning post-listing of ICICI Securities but also due to time correction (brokerage stocks and markets rallied in 2017 but corporate earnings recovery has not been meaningful).

Analysts also expect a tepid debut for ICICI Securities despite many positives, thanks to high valuation of 35 times annualised half-yearly earnings for FY18.

“Given the high valuations, investors can subscribe to the issue from a long-term perspective.

“It must be noted that since the issue is being offered at expensive valuation, listing gains may be capped,” said Payal Pandya, analyst at Centrum Wealth Research.

Group firms disappoint

In the past too, ICICI Bank’s subsidiaries have not let investors make money, either on debut or even later. For example, ICICI Lombard and ICICI Prudential listed at around 1.5 per cent discount to their issue prices on September 27, 2017, and September 29, 2016, respectively.

While ICICI Lombard had ended up 3 per cent higher on listing day, ICICI Prudential plunged 10.8 per cent on debut.

Even today, the stocks have given returns of only 10.5 per cent and 14 per cent, respectively, ever since their listing.