What broke the rally of brokerages? | Value Research Top brokerages witnessed a significant decline in profitability in FY23. Find out why.

What broke the rally of brokerages?

Top brokerages witnessed a significant decline in profitability in FY23. Find out why.

What broke the rally of brokerages?

The unprecedented growth in retail investing post-pandemic had many convinced that brokerages would ride high for some time to come. However, with seven out of eight major brokerages posting a degrowth in their profit after tax in FY23, it is safe to say the party has finally come to a halt.

Profitability woes of FY23

Barring one, all companies witnessed a dip in profit after tax in FY23

Company Change in revenue (%) Change in profit after tax (%)
Angel One 29.2 42.4
Axis Securities 9.4 -12.5
Kotak Securities -1.1 -13.6
IIFL Securities 9.7 -18.3
ICICI Securities -0.6 -19.2
HDFC Securities -4.8 -21.4
Motilal Oswal -2.9 -28.9
Geojit Financial -12.2 -35.5

Here's why brokerages are suddenly finding it difficult to keep their profits up.

The bull run is over
The bull market that began post the pandemic as the economy bounced back enticed many to make their investing debut. Unsurprisingly, there was a rise in new demat accounts, with FY22 witnessing a 141 per cent jump in demat account openings. As more demat account means more trading, and hence, more moolah for brokerages, the topline of brokerages received a significant boost.

However, as is always the case, the growth spurt in retail investing started waning as soon as the market plateaued in FY23 (one-year Sensex return in FY23 was 0.8 per cent). Unsurprisingly, this had a significant impact on the earnings of brokerages.

Higher competitive intensity
As the number of retail investors grew post the pandemic, so did the competition to capture this growing market.

The higher competition inadvertently ate away the market share of many players.

Market share of active clients

Only Angel One has gained market share among top brokers

Company Market share in FY20 (%) Market share in FY23 (%)
Angel One 5.3 13.1
ICICI Securities 10 7.1
HDFC Securities 6.7 3.3
Kotak Securities 5.3 2.8
Motilal Oswal 3.5 2.5
IIFL Securities 2 1.5
Axis Securities 2.5 1
Geojit Financial 1.5 0.7

As you can see, apart from Angel One , the market share of all major brokerages shrank between FY20 to FY23.

Sudden rise in margin trading
Many of the new investors who entered the market post the pandemic belonged to the age group of 20 to 30 and had a higher risk appetite. In fact, there was a 25 per cent jump in retail investors between the age of 20 to 30 from FY19 to FY22.

This influx of investors with a higher risk appetite led to a decline in cash trading (buying and selling of equities) and amped up margin trading (buying and selling of derivatives). The combined cash segment turnover of all the brokerages fell about 19 per cent in FY23. In contrast, combined turnover from the derivatives segment grew 119 per cent in FY23.

Among the listed brokerages, many earn a significant portion of their revenue from the cash segment. Thus, their topline took a beating. In fact, the only beneficiary of this trend was Angel One, as the derivatives segment is its primary revenue generator.

A lesson to be learnt
We cannot say what the future holds for brokerages. However, the present state of the brokerage industry is a reminder that every industry goes through upcycles and downcycles. Hence, you shouldn't bet on a business purely based on how the industry is performing at a given moment. The focus should be on identifying companies that can survive any downcycle and capitalise on the upcycles.

Also read: Indian exports have a history of comebacks

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