Discount Brokers Face Reality Check After Pandemic Highs
Client addition slowed for two of the three listed low-cost broking firms and trading volumes fell in the quarter ended March.
After a retail-frenzy fuelled stellar run, India’s discount brokers are having a reality check.
Client addition slowed for two of the three listed low-cost broking firms and trading volumes fell in the quarter ended March.
That marks the first pullback from retail investors in two years. Retail ownership of shares had hit a 14-year high in December, according to NSE data. Client addition in the past two years was aided by the shift to work from home, increased savings, a bull market, and initial public offerings.
But equity markets have seen a drawdown from records. Russia’s invasion of Ukraine roiled markets in the quarter ended March, amplifying the selloff by foreign investors worried about Fed rate hikes. And the uncertainty continues.
"In almost every bull market, it looks like the broking industry can grow forever, but it cannot—there are significant risks," tweeted Nithin Kamath, founder and chief executive officer of India's largest discount broker Zerodha.
Kamath noted that almost all revenue for the broking industry comes from active traders and most tend to become inactive when they don't earn. "If the markets take a turn for the worse, the user growth drops, leading to a reduction in active traders and hence revenue. And brokerage firms can do nothing."
The gross average monthly inflows into stock stood at Rs 4.89 lakh crore for the quarter compared with the full-fiscal average of Rs 5.68 lakh crore, according to NSE data. Daily average turnover was 6% lower than the average for FY22.
Among listed discount brokers, only Angel One Ltd. managed to add clients, defying the uncertainty. ICICI Securities Ltd. and 5Paisa Capital Ltd. saw a dip.
Angel One and 5Paisa saw their cost-to-income ratio, or expenses on every rupee worth of income, improve. A lower ratio indicates economies of scale and a more mature business model.
Angel One's broking revenue—fees and commission and interest income from investments—rose 15% over the previous quarter. It fell for ICICI Securities.
5Paisa, a relatively smaller player, reported sequential revenue growth and improvement in cost-to-income ratio, despite the ratio being high.
A higher derivative market share is considered more favourable since the future and options segment contributes to 98% of total retail industry average daily turnover.
Angel Broking has the highest blended market share among all listed players. Its derivative market share rose over the previous quarter. ICICI Securities, however, saw a marginal slip in the derivative market share.