Stocks of listed brokerages have soared in 2014, most of them having doubled, on hopes of a revival in the business cycle, and the latest earnings numbers appear to substantiate such optimism.
Listed broking firms reported strong y-o-y earnings growth for the quarter ended June 2014 at a time when the cash market activity touched a near-five-year high, show exchange data. On the back of a recovery in the high-yielding cash market, four of the five listed brokerages that have announced their quarterly numbers so far reported a more than 30% y-o-y growth in consolidated profit.
A segment-wise break-up of numbers shows pre-tax profit from broking and
activity witnessed a sharp
y-o-y growth of 53% and
35%, respectively, for
players like Motilal Oswal Financial Services and IIFL Holdings. Their consolidated earnings during the period grew 73% and 50% to R32.5 crore and R97.4 crore, respectively the sharpest among the sample.
During the quarter, the combined average cash market volumes of the BSE and the NSE stood at R22,708 crore, the highest since the three months to September 2009.
Markets experts say that with rising market participation from retail investors and an uptick in delivery turnover, the broking industry may finally be looking at a turnaround after a five-year-long tough phase.
In a recent research note, Espirito Santo Securities said brokers share of participation in the high-yielding cash volumes declined from 30% in FY08 to below 10% in the fourth quarter of FY14. On the other hand, their share of trading in options, which offer the the lowest yield within the derivatives segment, increased from 10% in FY08 to 75% in Q4FY14.
As per estimates by Ambit Capital, broking yields on cash delivery volumes are, on an average, about 20 bps, compared to 25 bps on derivatives and cash intra-day volumes. Yields on retail brokerages are estimated to be at about 25-40 bps compared to 10 bps for institutional.
A sharp rally in these stocks notwithstanding, analysts still see a substantial upside for their valuations to expand further. For example, Ambit, which holds a buy rating on Motilal Oswal, argues that the stock may continue to trade at premium valuations, given a robust earnings outlook for the broking house over the next three fiscals.
Amid a recovery in capital market-led activities, lending operations (funding activities), as a business segment, continued to contribute more to the consolidated numbers of the listed broking houses. These operations accounted for 50-80% of the total revenues of leading brokerage houses, including JM Financial, IIFL Holdings and Edelweiss Financial Services.