Technical Analysis

Brokerage stocks fly high with market boom as tailwind

Akhil Nallamuthu BL Research Bureau | Updated on October 24, 2021

A change in market sentiment can bring down trading volumes, impacting their biz too


Brokerage stocks have been a direct beneficiary of the V-shaped recovery and the subsequent rally in the stock markets after the outbreak of the pandemic in March 2020. Stocks of major listed brokerages have at least tripled since then, with debutant Angel Broking which listed in October 2020, moving up over four times.

ICICI Securities — the largest listed broker in terms of market capitalisation — saw its operating margin expand from 53 per cent in FY20 to 62 per cent in FY21. 5paisa Capital, a discount broker, turned profitable for first time in FY21 since listing in November 2017.

Driving factors

Reduction in interest rates and monetary infusion at an unprecedented scale to bring economies back on their feet set a ground for easy money, which eventually found its way into the equity markets. Being a proxy play on market sentiment, brokerage stocks saw business boom.

Deepak Jasani, Head, Retail Research, HDFC Securities, points to three other factors that have been driving broking stocks. One, the lack of better investment opportunities outside the markets due to low fixed income returns; two, the lure of discounted brokerage, and three, new age investors flocking to the stock market in large numbers.

According to CDSL and NSDL data, the number of demat accounts, which was at 4.1 crore in March 2020, increased to 7 crore by the end of September 2021. Average daily turnover in cash segment on the National Stock Exchange, which stood at ₹47,917 crore in March 2020, increased to ₹68,525 crore in September 2021. Similarly, in derivatives, average daily turnover shot up from about ₹12 lakh crore to nearly ₹69 lakh crore in the corresponding period.

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


Taking on challenges

What’s noteworthy is that the solid performance of listed brokerage players continued despite regulatory measures like the peak margin rules and new pledging mechanism mandated by SEBI. While these rules improve the robustness of the stock market ecosystem, there were worries of turnover being impacted. However, the implementation of the new rules in phased manner nullified the downside effect.

Hemang Jani, Head, Equity Strategy (Broking & Distribution), Motilal Oswal Financial Services, also believes that the drop in trading volume because of lower leverage induced by the new peak margin rules was more than compensated by the entry of new investors.

The emergence of discount brokers in this period too, did not seem to impact full-service brokerage houses, as their performances continued to improve. Brokerages operating on full service as well as hybrid models saw brisk sales and profit growth in FY21 over FY20 (see table).

“As long as markets continue to perform well, investors may not worry too much about costs. It may make a difference when the markets go sideways for a long period or goes into a bearish phase. However, traditional brokers have also changed their offerings and are becoming more competitive even on brokerage rates,” says Jasani.

While it seems all hunky-dory now, the heating up of the broader markets is a risk for the brokerage companies. Apart from the stock prices correcting if market turns bearish, a change in market sentiment can bring down the trading volumes, impacting their business too. Hence, caution is warranted for investors in brokerage stocks at this juncture.

Published on October 23, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like