"Euphoria in the retail market as well as activities moderated, new client additions, NSE active clients, all of these numbers declined in the industry," said Vijay Chandok, MD of ICICI Securities. "Cash volumes were also in a downward trajectory throughout the year, and equity capital markets, the fundraising markets were all muted in FY23 as compared to FY22."
PTI
The profitability of stock broking firms came under pressure in the financial year that ended March 31, 2023, as moderation in retail participation, shrinking cash market volumes, tighter regulations, and rising employee costs weighed down businesses.
Six of the top eight broking and stock intermediatory firms that have declared FY2023 results so far saw their net profit decline between 13% and 36%.
Brokers said FY23 was a tough year for these firms after two consecutive years of sharp growth.
For instance, the revenue growth of ICICI Securities was flat in FY23 at Rs 3,416 crore, while net profit declined by 19% to Rs 1,118. Net profit of Kotak Securities declined by 14% in FY2023, whereas that of IIFL Securities and Axis Securities dropped 18% and 13%, respectively.
Consolidated net profit of Motilal Oswal Financial Services dipped 29% in FY2023 to Rs 933 crore while revenues declined 3% to Rs 4,110 crores.
“The euphoria in the retail market participation as well as activities moderated, new client additions, NSE active clients, all of these numbers declined in the industry,” said Vijay Chandok, MD & CEO of ICICI Securities. “Cash volumes were also in a downward trajectory throughout the year, and equity capital markets, the fundraising markets were all muted in FY2023 as compared to FY2022.”
The reason behind the cash market (Shares) volumes shrinking was the shift in market participants’ focus to options trading in the wake of tighter margin requirements. Traditional brokers earn more in the cash market segment than in the options segment.
The combined average daily cash market volumes (shares) on the NSE and BSE declined 20% year-on-year to Rs 57,566 crore in the FY2023 quarter from Rs 72,195 crore in FY2022. Meanwhile, the combined average daily options volumes jumped 120% to Rs 153 lakh crores in FY2023 from Rs 69.80 lakh crore in FY2022.
While broking firms face pressure on revenue, rising staff and compliance expenses are pushing up operational costs. Most broking firms' employee costs have surged in FY2023. Motilal Oswal Financial’s employee costs increased by 15%, while Geojit Financial and IIFL Securities saw a 15% and 11% rise in staff cost, respectively.
In the past two years, Securities and Exchange Board of India has introduced several norms to safeguard the interests of clients. One of the key measures has been to minimize brokers’ access to clients’ funds to avert misuse. These steps have impacted the profits of brokerages. Executives said the cost of funding has shot up following Sebi’s latest move to ban brokers from creating bank guarantees on clients’ funds or securities. The move will impact brokers' working capital requirements.
Two broking firms with strong online presence, Angel One and 5Paisa Capital, however, managed to buck the weak trend across the industry. Angel reported a 42% growth in net profits in FY2023. 5Paise’s net profit grew 211%.
A lower cost structure contributed to the growth in profitability.
"Our fintech story has played out well with operating leverage kicking in,” said Prabhakar Tiwari, chief growth officer of Angel One.
Prakarsh Gagdani, CEO of 5paisa Capital said his firm’s strategy of focusing on the quality of client acquisition, products, technology, and infrastructure has paid off well.
The woes of the broking industry have reflected in their stock prices. Shares of Motilal Oswal, Angel One, and IIFL Securities fell nearly 35% in the last year, while ICICI Securities stock declined 24% during this period.
PTI
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