Brokers profits remain under pressure in September quarter

Written by Ashley Coutinho | Ashley Coutinho | Mumbai | Updated: Oct 29 2011, 08:43am hrs
Profits at broking houses remained under pressure, falling anywhere between 18% and 75%, in the quarter ended September 30 as volatile markets, lacklustre participation from retail investors and low cash volumes impacted margins. It was a difficult time for the Indian markets which saw a steep erosion in share values as global markets reeled under the impact of the downgrade of US debt by Standard and Poors.

The sovereign debt woes of the euro zone also resulted in the sentiment remaining weak. The benchmark Sensex lost 12.7% in the three months between July and September with foreign institutional investors pulling out more than $2 billion in the first three weeks of August.

Edelweiss Financial Services reported a 60% decline in its net profit to R26.3 crore from R66.1 crore for the same period last year. Sequentially, the firms net profit saw a decline of about 21%. However, income from operations grew marginally by 1.6% to R381 crore from R375 crore in the year-ago period.

Motilal Oswals adjusted net profit declined 18% year-on-year to R26.2 crore from R31.8 crore, but rose 24% sequentially. Revenues declined 27% y-o-y to R114.3 crore from R157.6 crore. Profit margins of brokers have also shrunk owing to the shift towards low-yield options segment, which now contributes more than 60% to overall market volumes. For instance, blended yields of Motilal Oswal declined from 5.1 basis points (bps) in Q1FY12 to 4.6 bps in Q2FY12 on account of the rising proportion of options.

The past three quarters have been particularly dismal for brokerages as cash volumes on exchanges have fallen to record lows and retail participants have stayed away.

Retail investors seem to have lost complete interest in the stock market, said Manasije Mishra , chief executive officer, HSBC InvestDirect, adding that retail participation has plummeted nearly 50% in the past year.

The contribution of the cash segment to the total average daily turnover on the exchanges touched a historic low in March.

Edelweiss and Motilal are not the only ones to suffer significant margin erosion. Geojit BNP Paribas net profit declined 14.5% y-o-y to R6.05 crore from R7.08 crore. Consolidated revenues declined 11% to R63.5 crore from R71.3 crore for the same quarter of the previous fiscal.

Emkay Global Financial Services net profit for the quarter declined 76% to R1.13 crore from R4.83 crore in the same period previous fiscal.

Edelweiss blamed the dismal results on the significant slowdown in the capital markets. According to CJ George, managing director of Geojit BNP Paribas, the decline in stock market volume was a matter of concern but we expect a sharp recovery of volumes in the Indian stock markets once the global financial and commodities markets settle down.

Several brokerages are on a cost cutting drive, reducing manpower and closing down branches, taking the franchisee route instead. With uncertainty in global economies likely to persist, Indian equities are likely to remain volatile, which may impact brokerages as retail investors may continue to stay away.