Broking industry likely to achieve all time high revenues and net profits in FY24: ICRA

The broking industry is expected to achieve all time high revenues and net profits in FY24, driven by a revival in investor sentiment, according to a report by rating agency ICRA. The analysis of 29 prominent brokerage companies in H1FY24 showed a significant 20 percent annualised growth in net operating income, supported by improved market activity.

The aggregate profitability of the sample set also improved, with a 24 percent annualised increase in net profit and a return on equity of 27 percent in H1 FY2024. The report indicates that revenues and net profits are expected to expand by 18 22 percent and 22 25 percent YoY, respectively, in FY24.

Furthermore, the ICRA report pointed out that the secondary market returns have recovered in the current fiscal with major benchmark indices registering new highs after the tepid performance in FY2023. "While this was supported by the sustained participation of domestic investors, foreign institutional investors too turned net buyers in 10MFY24 after being net sellers in the last two fiscals.

While Indian markets continue to trade at a premium, the possibility of foreign portfolio investor inflows further boosting secondary market returns, in light of the indications of rate cuts by major central banks in the near to medium term, cannot be ruled out," noted the agency. According to Deep Inder Singh, Vice President – Financial Sector Ratings, ICRA, “The active National Stock Exchange (NSE) client base, which was moderating since March 2022, expanded in recent months amid revival in primary market activity and improving secondary market returns.

Investor exuberance is also visible in the record equity assets under management and systematic investment plan counts registered by the mutual fund industry in the current fiscal. With the healthy initial public offering pipeline, the retail participation trajectory is expected to remain intact in the near term." Also, with the improvement in investor sentiment, the cash segment average daily turnover rebounded to Rs.

0.73 lakh crore in H1 FY2024, up 27 percent from the FY23 levels, it informed. Additionally, the margin trade funding (MTF) segment registered new highs in the current fiscal, growing by 98 percent from March 2023 to 51,000 crore on December 28, 2023. The participation of retail investors also remained strong in the futures & options segment, driven by the launch of new index options, miniaturization of contracts/lot sizes, and separate weekly expiries for each index option, said ICRA.

Meanwhile, during FY20 to FY23, the number of contracts traded increased by about nine times. Moreover, the number of contracts traded expanded by 2.4 times, on a YoY basis, in H1 FY2024, it added. While the participation of retail investors can be impacted in the short term by adverse developments, ICRA believes that the modest share of wallet of the equity segment in household savings indicates untapped potential for sustainable growth for the broking industry over the longer term.

Providing more insight, Singh added, “Supported by the buoyant market conditions in Q2 FY2024, the annualised average revenue per user of 12 of the 17 leading brokers in H1 FY2024 is estimated to have exceeded the industry’s best ever performance till date, which was in FY2022." Given the substantial new client additions in the past few fiscals, discount brokerage houses continue to hold a leadership position, in terms of market share of active NSE clients, at 65 percent in November 2023 compared to 18 percent in March 2019.

The market share of non bank full service brokers and bank based brokers stood at 21 percent and 14 percent, respectively, in November 2023, stated the report. Although the borrowings by brokerage entities were historically low, the report noted an increase in financial leverage for brokerage entities in recent fiscals due to the material scale up of the MTF and increased working capital requirements due to regulatory changes for the securities broking industry.

The aggregate leverage of bank brokers increased to 1.9 times as of September 30, 2023, from 0.4 times as of March 31, 2020. Meanwhile, during this period, the aggregate gearing of non bank full service brokers increased to 1.1 times from 0.4 times. Discount brokers, with a limited presence in MTF, reported marginal dependence on borrowings.

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