After record-high active client additions and average daily turnover (ADTO) in a pandemic-marred fiscal, brokerages will continue to see positive revenue growth in fiscal 2022. Nevertheless, the growth will be muted.

Crisil Ratings estimates broking revenue¹ to have grown by ~65-70% in fiscal 2021 as against ~7% in fiscal 2020, but market volatility and phased implementation of new margin regulations may act as a drag on incremental volume growth, resulting in marginal revenue growth in fiscal 2022.

The slowdown has already begun to tell: broking revenue de-grew by ~1-8% in the third quarter of fiscal 2021 on a sequential basis. This indicates that client additions are not translating into higher broking revenue of late.

Says Krishnan Sitaraman, Senior Director, Crisil Ratings, ‘‘Performance in the December quarter shows signs of fatigue creeping in, with most broking entities registering on-quarter de-growth in revenue (even after factoring in lower trading days in the quarter), despite continued record client additions. This is in contrast with ~18% sequential growth in the September quarter. With equity markets turning volatile since January 2021 and revised regulations with higher margin requirements kicking in, sustainability of trading volumes in fiscal 2022 may be a challenge, thereby impacting revenue.’’

These key regulatory changes are twofold: (i) upfront margin requirement in cash segment trading, effective September 1, 2020 (similar to the futures and options segment) and (ii) full margin requirement for intraday position to be implemented in phases (starting with 25% peak margin from December 1, 2020, to 100% from September 1, 2021). Both regulations focus on increased margin requirements, which essentially lowers the leverage available to investors, impacting trading volume. Hence, sustainability of new client additions along with its translation to trading volumes and revenue will remain key monitorable.

In the first nine months of fiscal 2021, brokerage houses across industry added ~52 lakh clients – as much as they did during the preceding four years, cumulatively. This took the active client base to 1.6 crore as of December 2020 (refer to Chart 1 in Annexure). Continued buoyancy in equities and new client additions also led to ADTO hitting decadal highs.

Several factors contributed to the influx of retail investors into equity markets in the current fiscal. These include: (i) user-friendly trading platforms (including on mobile) and schemes with very low brokerage; (ii) relatively low interest yield on savings and deposits; (iii) ample time availability during the lockdown/pandemic; and (iv) Pygmalion-esque effect linked to broad-based high returns in equities since March 2020.

Interestingly, discount brokers grabbed a significant market share of active clients. But they still lag bank-led brokers in terms of revenue market share.

Says Ajit Velonie, Director, Crisil Ratings, “Discount brokers have led from the front capturing more than 75% of incremental client acquisitions and now command ~45% market share in terms of active clients (refer to Chart 2 in Annexure). However, on the revenue front, they have some way to go with estimated share of ~30%. Bank-led brokers, with a relatively premium brokerage model, have leveraged their existing client base well and continue to maintain revenue market share at ~40% (refer to Chart 3 in Annexure) while many traditional brokers have lost ground.”

That’s because bulk of the new client additions by discount brokers are in the 20-30 years age group that have relatively lower disposable incomes. On the other hand, bank-led brokers have been able to hold on to their customer base, with many acquired through their parent banking channel. These customers not only trade frequently but also transact in higher ticket volumes. They also opt for additional services such as advisory, research reports, and relationship manager support and are willing to pay additional brokerage charges. Crisil Ratings estimates that the average revenue per user for bank-led brokerages was Rs 10,000-12,000 during the first half of fiscal 2021, while that for discount brokers was Rs 4,000-8,000.

In this milieu, profitability will continue to be driven by how well players manage their cost-to-income structure. A recent shift in focus towards creating/enhancing tech-based platforms resulted in a steady increase in cost-to-income ratio till fiscal 2020. And players who invested in enhancing digital presence have reaped the rewards, with the ratio estimated to have declined 10-15% in fiscal 2021. With revenue growth expected to be subdued next fiscal, their ability to manage the cost structure will be a key credit monitorable.

¹ Crisil estimates for a representative set of top 15 broking companies having asset size of Rs 300 crore and above