Projected Income Statements

For projecting the sales revenue, we have assumed 1000 trades would happening daily
which gives us 250,000 trades in a year ( considering 250 working days per year). We have
assumed additional 25,000 trades happening during the monthly Futures & Options expiry
and during the annual budget days due to increased volatility during these trading sessions.
We would be charging Rs 15/trade and initially, the cost per trade would be Rs 8. We have
estimated the cost per trade by analyzing the following:
1. The operating expenses of similar companies listed in India eg. ICICI Securities,
Edelweiss Financial Services, Motilal Oswal, Emkay Global Financial Services.
2. Comparing the brokerage sharing percentages between the brokerage house and
the franchisee taker of the brokerage firm i.e the sub-broker.
The estimated cost per trade would not exceed Rs 8 for the initial volume of transactions
and would fall subsequently to Rs 4/trade over the next five years with an increasing volume
of trades. For the second year, we have assumed revenue growth of 40% for the second
year and 30% for the next three years.
Utilities expenses were assumed to be Rs 40,000/month. Additional miscellaneous expense
of Rs 20,000/ year was considered for the first two years since the prices of such utilities
were expected to be constant for the next two years. After two years, we expect the
expenditure on utilities will grow by 8% every two years due to inflation and increased
consumption. The sales and administration expenses were assumed to be 25% and 20% of
sales for the first two years respectively. It is further expected to be 15% of sales for the
next three years. The loss in the first year will be carried forward in the next financial year
so as to reduce the tax liability.

Risk Analysis:
We have identified the following three risks that could have a negative impact on our
business:
1. New regulations from the market regulators affecting the trade volumes adversely.
Few incidents had forced the regulators to take harsh decisions which had reduced
the trade volumes in the short run. For example the Harshad Mehta Scam and the
recent findings in the Karvy Financial Services demotivates traders and would make
the regulators to bring in new norm which would reduce the trade volumes.
2. Economic Slowdown: We have seen in the past as well that during the economic
slowdown periods investment activities are adversely affected.
3. Operational risk due to Risk Management System(RMS) failure: The RMS of a broker
is one of its key assets to ensure proper trading operations. It is responsible to
ensure that the required margins as per the market regulator’s mandate is available
before sending any order to the stock exchange. The failure of the RMS might led to
disastrous situations.
Working Capital Analysis:
Neagtive Working Capital: This industry has a negative working capital; which essentially
means that we would be able to do business with our customer’s capital rather than
arranging capital in advance to pay our payables. The RMS ensures that the clients have the
money in their account before executing any trade. In case of any shortfall in the required
margins the order is not sent to the stock exchange and the client is notified to either
reduce the order quantity or fund their trading account so as to execute the trade further.
After a client closes a particular position on their securities the respective amount is
credited to their trading account. Once a client places a request for payout in their bank
account it usually takes 1-2 working days. The money lies with the brokers during this
period. Since it is a service of broking and over 99% of the trades happen electronically
these businesses have very low inventory on their balance sheet. Since the money is
available from the client in advanced to execute the trades and the necessary charges are
deducted directly from the client's account these businesses have low trade receivables on
their balance sheet. We have seen these trends in the financial statements of the majority
of the stockbrokers. We have also seen a considerable amount of trade payables in the
balance sheet of these companies.