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Fi nanci al Sector Rati ngs

Contacts:
Karthik Srinivasan
+91 22 3047 0028
karthiks@icraindia.com

Vibha Batra
+91 124 4545 302
vibha@icraindia.com

Viral Shah
+91 22 3047 0035
viral.shah@icraindia.com

Harsh Vardhan Babel
+91 22 3047 0040
harsh.babel@icraindia.com




ICRA RESEARCH SERVICES



ICRA RATING FEATURE





INDIAN BROKERAGE INDUSTRY

Headwinds tailing off for the brokerage houses; structural challenges remain


March 2013


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Executive Summary


Buoyed by the global flows into the Indian market in the later part of CY2012, we witnessed strong traction in index movement both on the BSE and NSE. However the
9MFY12-13 continued to be weak for the Indian equity capital markets. In ICRAs estimation, the brokerage revenue pool has remained flat at ~Rs 105 billion for FY12-13
when compared with FY11-12 despite the strong growth in Options volumes as the Cash volumes and Futures continued to slide and were lower even in absolute number
during this period as compared to the previous fiscal.

In 9M FY12-13, while the burden of collapsed retail participation has completely weighed down the retail broking operations, the combination of regulatory changes such
as capping of commission rates for domestic mutual funds as well as increasing and seemingly irreversible penetration of DMAs have been a heavy drag on its institutional
broking piece. In ICRAs view, were these trends to continue, they could test the resilience of the industry and trigger significant structural changes especially in the
institutional broking segment.

Capital market ancillary businesses too continued to remain moribund. Slow demand for margin funding also impacted interest income while increasing penetration of high
frequency trading has led many medium to small sized broking houses to close arbitrage trading operations. While a few relatively large ticket public issuances kept
brokerage houses interested, fee income from the advisory piece has remained lacklustre. The difficult economic conditions ensured that revenues from the investment
banking operations for companies were a casualty. Fewer public issuances meant that distribution income remained weak, though was propped up by retail debt
issuances. While PMS operations continued to provide steady run rate for some large brokerage houses, at industry level equity PMS AUMs have only declined.

A brightening outlook for the commodities and currencies broking segment stands out against the dark tones of the beleaguered equity broking industry. While for the
commodities segment, traded turnover declined nominally, ICRA has observed a more broad based increase in market participation and robust increase in customer
addition aided by increased investor awareness. The currencies segment on the other hand too continued to gain traction.

There are reasons for optimism as the dispiriting mood which pervaded the industry is now slowly giving way to newfound hope and optimism. Equity cash volumes have
shown signs of improvement in Q3FY12-13 and beyond. Broader based retail participation is showing the early signs of returning to the markets. The cash volumes
recorded for the month of January 2013 were the highest since February 2012. Equity options, largely understood to be the forte of the more savvy institutional investors
are attracting a steady trickle of the higher end retail investors. The commodities and currencies segment are emerging as dependable avenues for diversification for
brokers. The government stepping on the gas with regard to reforms initiative and declining interest rate scenario is doing much for improving investor sentiment. The
month of January 2013 saw very strong FII inflows into the country. The disinvestment plans and planned public offerings may provide the much needed boost to
investment banking and distribution operations.

In H1FY12-13, ICRA has observed that total capital market related revenues for select top brokers who account for ~35% market share has remained almost flat in H1FY12-
13 (annualized) when compared to FY11-12. However, costs have declined more sharply by ~7-8% (annualized) over the same period leading to improvement in cost-



INDIAN BROKERAGE INDUSTRY

Headwinds tailing off for brokerage houses; structural challenges remain March 2013








ICRA RESEARCH SERVICES

ICRA LIMITED P a g e | 3
income ratio and other profitability indicators. Early indicators for Q3FY12-13 indicate growth in the quarter revenue for 9MFY12-13 (annualized) has grown by 3-5%
when compared to FY 11-12 and profitability has improved further.

The Union Budget 2013, amongst other proposals, has reduced Securities Transaction Tax (STT) on equity futures contracts to 0.01% from 0.017%, introduced
commodities transaction tax (CTT) on non-agriculture commodities futures trading and allowed participation of FIIs in the currencies derivative segment. In ICRAs view,
while these proposals could provide a fillip to equity derivative volumes as well as currency derivative volumes, the imposition of the CTT could impact the gross returns of
the arbitrageurs by 20-30% and consequently significantly impede the growth of the segment at least over the short term. Also, arbitrage activity could return to the
equities segment or move to the currencies segment, which could help growth of these segments.

However, in ICRAs view the underlying economic picture remains uncertain. In the absence of any strong global economic recovery, this phase of cautious optimism is
largely contingent upon government delivery of the reforms programme. Any let up in execution could mean that this build up of hope could unravel very quickly.
At the same time, ICRA has noted that the industry brokerage revenue pool has been stabilizing. Commodities and currencies have emerged as dependable sources of
diversification and the brokers have re-aligned their business models vigorously to contain costs. Consequently, in ICRAs view, brokers are better tuned to face the
challenges ahead. ICRA revises its outlook on the sector to Stable from Negative.


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The report includes an update on the

I. Equity markets update in 9MFY12-13.6
a. Trends in cash, futures and options volumes
b. Trends in trading activity by investor class
c. Trends in transaction size and number on the exchanges
d. Trends in trading activity on the BSE and NSE and impact of entry of MCX-SX
e. ICRAs estimation of the equity brokerage revenue pool

II. Commodities markets update in 9MFY12-13...11
a. Trends in exchange traded volumes
b. Trends in spot exchange activity
c. Trends in exchange wise traded volumes market share
d. Impact of possible regulatory diktats on the commodities markets
e. ICRAs estimation of the commodities brokerage revenue pool
f. Analysis of operating risks in commodities trading

III. Currencies markets update in 9MFY12-13....15
a. Trends in exchange traded volumes
b. Trends in exchange wise traded volumes market share
c. ICRAs estimation of the currencies brokerage revenue pool

IV. Other capital markets related businesses..16
a. Key trends investment banking operations and outlook
b. Key trends in capital market lending operations
c. Key trends in other capital markets businesses
d. Key trends in non-capital markets related forays and ICRAs outlook

V. Key Industry trends in 9MFY12-13.19
a. Key trends to watch out for in the institutional broking space
Impact of capping of brokerage commissions for domestic institutional investors
Impact of increased penetration of Direct Market Access (DMAa)
ICRAs views on industry consolidation

b. Key trends to watch out for in the retail broking space
Trends in customer addition
Other initiatives taken by brokers to re-invigorate activity levels
Trends in online trading
Trends of options trading


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VI. Performance update for H1FY12-13 for 15 top brokers ..23
a. Trends in capital markets related revenue
b. Trends in operating costs
c. Analysis of profitability and profitability linked ratios
d. Initial impressions for 9MFY12-13 performance

VII. ICRAs outlook for the Brokerage Sector for FY13-1424


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Please contact ICRA to get a copy of the report


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PUNE
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Pune-411 020
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E-mail: amit.khare@icraindia.com
GURGAON
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E-mail: vivek@icraindia.com

AHMEDABAD
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Ahmedabad- 380006
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Fax:+91-79- 2648 4924
E-mail: animesh@icraindia.com

BANGALORE
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Level 2, 12-14, 1 & 2, Murphy Road,
Bangalore - 560 008
Tel: +91-80-43326400,
Fax: +91-80-43326409
E-mail: jayantac@icraindia.com


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