The December quarter results of the leading exchanges show a rebound in their revenues after two quarters of sequential decline. However, on the back of a strong q-o-q growth in technology-related expenses, their margins remained muted compared to the quarter ended September 2012.
Going ahead, the market sentiment, with which the volumes are strongly correlated, could lead the trend in financials. Nonetheless, the profitability of exchanges is also expected to be influenced by a reduction in the securities transaction tax (STT) announced in the Union Budget and lower transaction fees, amid increased competition in the industry after the entry of MCX -SX.
The sequential revenue growth of both the BSE and the NSE followed the same trend during the last four quarters, reflecting an improvement in market activity in the latest quarter. The topline of both exchanges reported around 3% q-o-q growth in the three months to December.
However, compared to last year, the quarterly revenues at R125 crore and R193 crore, respectively, shrunk for a third consecutive quarter, albeit at a slower pace. Notably, during the period, volumes in the derivatives and cash segment experienced a boost as the benchmarks extended their gains on the hopes of reforms revival.
In the case of BSE, even as the corpus used for liquidity enhancement schemes, meant to revive the activity in the derivatives segment, declined in the last two quarters, it continued to weigh on its margins performance compared to its rival NSE.
While at the operating level, its margins during the last five quarters stayed competitive, owing to this exceptional expense, its net profit margin, on an average, was almost half of the NSE?s net margin during the period.
However, unlike the previous three quarters, the BSE earned a substantial portion of its earnings from exchange operations, instead of depositary segment. For the NSE, a similar bifurcation was not available.
The annualised profit for the period results in an earnings per share of R11.9 for the BSE compared to R135 for the NSE.
Some market participants also believe that the recent in reduction in STT, specifically a decrease in equity futures from 0.17% to 0.01%, could also aid market volumes if the sentiment remains positive.
?For arbitragers, especially from the proprietary trades that account for more than 50% participation in the derivatives segment, such a reduction could boost gross return from such trades by up to 2%,? said an analyst tracking the brokerage industry.
A reduction in transaction charges, on the other hand, is not seen impacting the profitability of exchanges to a great extent.
?Even if the transaction cost comes down, the broker passes it on to clients. Further, for end-users, specifically for institutional players, transaction cost play a smaller role than the impact cost,? said a trader.