RESEARCH SERVICES

Financial Sector Ratings

Contacts:
Karthik Srinivasan
+91 22 6114 3444

INDIAN BROKERAGE INDUSTRY karthiks@icraindia.com

Rohit Inamdar
+91 22 4545 847
Healthy outlook for the brokerage industry, riding on the capital markets rally rohit.inamdar@icraindia.com

Samriddhi Chowdhary
+91 22 6114 3462
samriddhi.chowdhary@icraindia.co
m

Kushal Modi
+91 22 6114 3428
kushal.modi@icraindia.com

What’s Inside Amaan Elahi

+91 22 6114 3442
Executive Summary ..........................................................................................................................................................................
amaan.elahi@icraindia.com 4
Equity Markets: Performance Update ..................................................................................................... Error! Bookmark not defined.
Resurgence in market after a slow FY2016 ......................................................................................................................................... Error! Bookmark not defined.
Market volumes increase in FY2017 .................................................................................................................................................... Error! Bookmark not defined.
Derivatives Segment: Healthy growth in ADTO with the market skewed in favour of index options ................................................. Error! Bookmark not defined.
Cash Segment: Increased activity in Q4FY2017 helps overcome the slow performance of the previous quarter .............................. Error! Bookmark not defined.
September
BROKERAGE INCOME: Industry brokerage income estimated to increase marginally to Rs. 180-190 billion for FY2017 .................. Error! Bookmark not defined. 2017
ICRA RESEARCH SERVICES
Commodity Markets: Performance Update ............................................................................................. Error! Bookmark not defined.
Commodity Markets: Commodity volumes decline post demonetisation .......................................................................................... Error! Bookmark not defined.

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 Table of Contents

Executive Summary .......................................................................................................................................................................... 4

Equity Markets: Performance Update ............................................................................................................................................... 6
Equity: Resurgence in the Market After a Slow FY2016 ..................................................................................................................................................................... 7
Equity: Market Volumes Increase in FY2017 ...................................................................................................................................................................................... 8
Derivatives Segment: Healthy Growth in ADTO; Market Skewed towards Index Options ................................................................................................................. 9
Cash Segment: Increased Activity in Q4FY2017 ............................................................................................................................................................................... 11
Brokerage Income: Industry Brokerage Income Estimated to Increase to Rs. 180-190 billion for FY2018 ...................................................................................... 12

Commodity Markets: Performance Update ..................................................................................................................................... 13

Commodity Markets: Volumes Decline Post Demonetisation.......................................................................................................................................................... 14

Currency Markets: Performance Update ......................................................................................................................................... 15

Currency: Volumes Remain Volatile in the Last Few Quarters ......................................................................................................................................................... 16

Other Industry Trends..................................................................................................................................................................... 17

Other Capital Market Related Business: Healthy Traction Supported by the IPO Momentum ........................................................................................................ 18
International Stock Exchanges Commence Operations .................................................................................................................................................................... 19
Resurgence in FII Inflow; Increasing Activity of DII Segment ............................................................................................................................................................ 20
Healthy Outlook for Mutual Funds as AUM nears Rs. 20 trillion Mark ............................................................................................................................................ 21
Enhanced Operational and Monitoring Guidelines to Bring in Discipline ........................................................................................................................................ 22
SEBI Approves Margin Trading for Stock Brokers ............................................................................................................................................................................. 24
SEBI’s Discussion Paper on Derivatives: Regulatory Frame-work to be Further Strengthened........................................................................................................ 26
Healthy Growth in Loan-Book Supported by the Uptrend in Capital Markets ................................................................................................................................. 28
Institutional Broking Segment: Volumes Rise Driven by the Cash Segment; Blended Yields Continue to Soften ............................................................................ 29
Retail Broking: Healthy Growth in Volumes though Yields show a Marginal Contraction; Online Channels Continue to Gain Traction ......................................... 30
Clients and Network: Franchisees Remain the Preferred Mode for Widening Networks ................................................................................................................ 31

IPO Financing Market ..................................................................................................................................................................... 32

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 Growing IPO Financing Market as Investors Seek Listing Gains ....................................................................................................................................................... 33
HNI Investors Exposed to Market Risk While Structuring and Lien Helps De-Risk Lenders.............................................................................................................. 34
IPO Financing Market to Continue to Witnesses Heady Traction in FY2018 .................................................................................................................................... 36
Annexure: Snapshot of IPO Performance from April 2016 ............................................................................................................................................................... 37

Financial Performance Update ........................................................................................................................................................ 39

Financial Performance Update for FY 2017 ...................................................................................................................................................................................... 40

Outlook .......................................................................................................................................................................................... 43
ICRA’s Outlook for FY2018 ................................................................................................................................................................................................................ 44

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INDIAN BROKERAGE INDUSTRY
September 2017

Executive Summary

 The domestic capital markets revived in FY2017, after a year of lackluster performance, supported by favouarble market sentiment, healthy foreign institutional
investment (FII) inflow, as well as growing domestic institutional investor (DII) participation in the market.
 Equity turnover at the exchanges registered a robust growth of ~35% in FY2017 supported by the revival in the capital markets and the base effect given the
subdued performance in FY2016, which was a period of de-growth. The Average Daily Turnover (ADTO) increased to Rs. 4.05 trillion in FY2017, from Rs. 3.01
trillion in FY2016. The impact of demonisation remained limited, with the growth in the market turnover slowing down in Q3 FY2017, to again pickup in the
following quarter.
 Both the decline in market volumes in FY2016 as well as their improvement in FY2017 was led by the derivatives or the futures and options (F&O) segment which
witnessed a 9% decline and a 36% growth in the two years respectively. The share of the derivative segment in the total market turnover increased further to
94%, from ~93% during the period FY2013 to FY2016. The total turnover for the derivatives segment increased to Rs. 944 trillion in FY2017 (ADTO of 3.81 trillion)
from Rs 693 trillion (ADTO of 2.80 trillion) in FY2016, registering a growth of 36%. The healthy traction continued in Q1 FY2018 with a total F&O turnover of Rs.
328 trillion.
 The options segment witnessed a growth of 38% in ADTO in FY2017, surpassing the growth in both futures (24%) and cash (21%) segment, with the markets
adjusting to the higher lot size requirement for derivative trading. The options growth rate remained healthy in Q1 FY2018, at 45% (over FY2017 level), as against
23% and 21% for futures and cash segment respectively. The options segment remains the most active in the derivatives market accounting for 84% of derivative
turnover in FY2017 (86% in Q1 FY 2018), with index options accounting for 77% of the derivatives turnover (79% in Q1 FY2018).
 The total cash turnover in FY2017 stood at Rs. 60.54 trillion, registering a growth of 22% over Rs. 49.71 trillion in FY2016. After a healthy start to the fiscal, cash
volumes dropped in Q3 FY2017 (turnover of 13 trillion in Q3 FY2017, 10% lower than Q2 FY2017) following the demonetisation drive of the GoI. However,
volumes picked up in Q4 FY2017. The large scale intra-promoter group transfer of equity shares across several listed entities in March 2017 pursuant to revision
in the tax regime further fuelled the transaction volumes.
 After a healthy performance in H1 FY2017, the commodities market registered a downward slide post demonetization, with the effect most pronounced in the
bullion segment. The commodity markets registered a turnover of Rs. 29.07 trillion (ADTO of Rs. 0.22 trillion) in H2 FY2017, as compared to volume of Rs. 18.52
trillion (ADTO of Rs. 0.28 trillion) in Q2FY2017. The turnover further reduced to Rs. 13.57 trillion (ADTO of Rs. 0.21 trillion) in Q1 FY2018. The strong performance
of the equity markets also resulted in a shift in investor preference towards equity and mutual funds as compared to commodities as asset classes.
 Currency trading volumes of brokerage houses remained volatile in the past nine quarters after growing sizably in Q4 FY2015. Currency volumes in Q4 FY2016
were ~11% higher than the volumes in Q4 FY2015; however, in Q4 FY2017, the volumes declined by ~17% from the volumes in Q4 FY2016. Due to
demonetisation, the volumes surged by 66% on a month-on-month basis in November 2016. Appreciation of the Rupee during Q4 FY2017 did not impact the
volumes which declined to Rs. 19.4 trillion from Rs. 21.4 trillion in Q3 FY2017. ADTO, which spiked to Rs. 0.35 trillion during Q3 FY2016 largely on account of
demonetisation, declined to Rs. 0.32 trillion during Q4 FY2017. During Q1 FY2018, volumes rebounded to Rs. 22.43 trillion with ADTO spiking to Rs. 0.37 trillion,
which is higher than the ADTO in the previous three quarters.

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  Resource mobilization in equity markets, through a mix of channels like public issuances (including IPO follow-on public offering or FPO, and rights issues),
qualified institutional placement (QIP) and preferential placement, remained healthy in FY2017, with a total quantum of Rs. 887 billion raised during the year
from 561 offerings. The aggregate resource mobilsation, however, was lower than the record level of Rs. 984 billion in FY2016. While public issuances remain
healthy, with 8% growth in the funds raised during FY2017, the aggregate amount raised declined on account of dip in preferential placement and QIP which
reported a de-growth of 42%, albeit on a small scale, and 12% respectively. During FY2017, Rs. 359 billion was raised through a mix of IPOs and rights issue (Rs.
333 billion in FY2016). A key characteristic of the primary market was the performance of the IPO issuances during the year with a gradual diversification in the
sectoral mix of entities accessing capital markets.
 Despite their increasing focus of the broader credit markets on consumer-finance businesses, the capital market lending space (which is largely retail) for ICRA
sample of brokers picked up in FY2017, post a subdued performance in the previous fiscal. With the recent change in SEBI guidelines allowing brokers to offer
margin funding facility with lower margins than those mandated by RBI to NBFCs, ICRA expects margin funding book to further increase during FY2018.
 Buoyed by the healthy response to the IPOs, there has been a surge in interest in IPOs to capitalize on the listing gains. This is evidenced by the high participation
of the non-institutional investor (NII) category; The median subscription level for the NII category stood at 83 times for the IPOs in FY2017, as against 2 times for
FY2016. This in turn has created a market for providing funding to the HNI investors for investing in the IPOs. Pegged at Rs. 600 to Rs. 650 billion, the IPO funding
market is expected to remain active in the current fiscal as well with a number of prominent IPOs lined up.
 With a large number of clients opting to conduct transactions online, the relevance of brick and mortar stores has partly reduced. Furthermore, ever since their
emergence in the Indian brokerage landscape, discount brokerage houses (DBH) have forced the older players to re-think the mechanics of their existing models
repeatedly. Most industry players have consolidated their networks and prefer to have fewer branches per city. There nevertheless remain a large number of
customer interactions through branches, and the branches also impart a level of psychological comfort to customers.
 ICRA expects the broking industry revenue pool to increase to Rs. 180 billion to Rs. 190 billion in FY2018, registering a 15-20% y-o-y growth on the back of
healthy volume growth coupled with rise in cash volumes. The volume growth is expected to be about 20-25% in FY2018, supported by positive investor
sentiment and a benign capital market outlook. The IPO pipeline for FY2018 is expected to encourage retail participation and activity levels on the exchanges.
Growing retail segment would lend support to the overall blended yields in light of competitive pressure.
 The recent margin trading guidelines by SEBI is expected to have an encouraging effect on cash volumes. Given the higher yields in the cash segment, this would
augur well for the brokerage houses. Margin trading would also help support the income profile and shore up the profitability of full-service brokerage houses
given the price based competition from discount brokerage houses. While the brokerage houses were allowed to offer margin trading earlier as well, the strict
guidelines made the product uncompetitive as compared to the facilities offered by NBFCs. Margin funding, thus, was conducted out of the NBFC arms of the
brokerage houses. The revised guidelines make margin funding a viable product for brokerage houses.
 Supported by the resurgence in capital markets, the total revenues for the sample pool of brokerage houses analysed by ICRA (referred to as ICRA pool) reported
a healthy growth of 22% in FY2017. While the revenue stream continues to be dominated by brokerage revenues, attributing to 87% of total revenues, the
depository income and distribution income reported a healthy growth in FY2017. With brokers increasingly favouring expansion through franchisees rather than
branches, cost structure and operational efficiencies have improved which is likely to protect brokerage houses during challenging times. Accordingly the net
profit of the ICRA pool of brokerage houses has reported a 56% growth in FY2017 to Rs 10 billion. Going forward, a further improvement in the profitability of
brokers is expected in FY2018 driven by higher revenues due to uptick in the equity markets, higher interest income and control on expenses provided the
brokers are able to maintain their credit costs in margin lending business.

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