ICRA report: Indian Brokerage Industry revenues expected to touch Rs23,000 cr in FY21
Moneylife Digital Team 24 September 2020
Investment information firm ICRA (Investment Information and Credit Rating Agency of India Limited) estimates that with increasing retail investor activity and a surge in trading volumes, the Indian brokerage industry's aggregate revenues are expected to hit Rs23,000 cr in the current financial year FY21, registering a YoY (year-on-year) growth of 10-12%.
The domestic capital markets have unexpectedly surged in the current financial year in stark contrast to the overall economic outlook. Despite broking yields continuing to be under pressure, given the competitive dynamics as well as product mix (increase in non-delivery volumes as well as the increase in share of index options), the healthy growth in turnover could more than offset the impact on broking income, feels ICRA. 
According to Ms. Samriddhi Chowdhary, Vice President & Co- Head - Financial Sector Ratings, ICRA, “The option of work from home coupled with limited investment opportunities given the challenging economic environment and attractive valuations following the correction in March 2020 have helped drive investor interest to capital markets”. 
As per SEBI (Securities and Exchange Board of India), the total number of demat accounts increased from 408 lakh in March 2020 to 432 lakh as of June 2020. As per information from NSE (National Stock Exchange), the top 20 brokerage houses together attributed to about 77% of total active clients as of June 2020 (75% as of March 20 & 70% as of March 19). Discount brokerage houses, however, garnered a predominant share of the new accounts supported by their technology-driven business model.
As per ICRA note, going forward, the untapped potential for new client additions in the industry, particularly retail segment is large, supported by favourable demographic, rising financial literacy and increasing smartphone/internet penetration. At the same time, the trend of consolidation is expected to continue with smaller broking players ceding market share to more established broking entities.
According to ICRA, the aggregate brokerage industry income stood at Rs21,000 crore in FY20, recording a growth of 8% over Rs19,500 crore in FY19. 
Many brokerage houses have ventured into other businesses like consumer funding, mortgage lending, commercial real estate lending, etc. The share of other income too has increased in recent years supported by the margin funding business. 
As per ICRA’s estimate, the proportion of gross broking income in total revenues of its sample moderated to 61% in FY2020 from the earlier level of 75% observed in FY2016. The cost structure and operational efficiencies of brokerage houses have improved over the past few years with more focus on expansion through franchisees rather than branches. This is likely to act as cushion during challenging times. 
The report states that "The outlook for the brokerage industry is cautiously stable. While the industry is expected to clock a healthy growth at an aggregate basis, brokerage companies are also expected to face greater operational and funding challenges which could have bearing on their performance, particularly for small to mid-sized brokerage companies”.
The profitability for the brokerage industry is likely to be sustained by the growing retail share coupled with an increase in interest income through margin funding, provided the credit cost remains under check and distribution of financial products, despite the pricing pressure and contracting yields, says ICRA.
The report also hinted that brokerage companies might have to contend with increasing operational challenges requiring greater focus and spend on technology to ensure uninterrupted operations as well to meet regulatory compliance requirements (given the heightened monitoring and reporting requirement).
An analysis of margin funding book of ten broking companies shows that the aggregate margin funding halved to Rs4,600 crore as of March 2020 from its peak level of over Rs10,000 crore during the fiscal. The margin funding business has recovered in the current FY, supported by the uptick in trading volumes and with increase in valuation, with the margin funding book increasing to Rs6,100 crore as of June 2020, a growth of over 30% over March 2020.
Brokerage companies with established information technology infrastructure along with adequate processes and controls are expected to perform better. The recent guidelines regarding the raising of funds as well as the usage of client securities by broker entities are expected to increase the funding requirement for brokers to maintain adequate margins at exchanges.
In addition the standardisation of cash segment margin will most likely limit the ability of brokers to offer additional value proposition like flexible payment terms, credit to its clients. Brokerage companies having their own assets (hard assets or securities) and stronger balance-sheets will be better placed while raising funds.
The note cautions that while growth momentum is expected to continue, operational and funding challenges could have bearing on performance, particularly for small to mid-sized brokerage companies. Earlier this week, 20-year full service stock broking firm Sharekhan announced its foray into digital-led discount broking with a new platform – Espresso. Espresso works will take brokerage fees for intra-day trading only if the user makes a profit.
3 years ago
I see contract note it is the government which makes more money than the broker through service tax, securities transaction tax and stamp duty.
Free Helpline
Legal Credit