Nifty99000 100%

Sensex99000 100%


Investors preferring tech-driven brokerage firms

Author: The Finapolis Network/Thursday, April 29, 2021/Categories: Exclusive

Rate this article:
No rating
Investors preferring tech-driven brokerage firms

Mumbai: Client addition in terms of number of investors registered with brokerage firms, rose significantly by 67 per cent on YoY thanks to the entry of new age brokers using latest technology applications to make trading easier and wiser for new entrants. The Indian capital market also witnessed rising number of new to market customers from tier-2 and tier-3 cities. Further, the pandemic situation is also propelling salaried people and self-employed to get into the capital market as new investors are looking for supplementary income in the wake of lockdown.
According to a research note from ICICI, digitalisation, mobile trading apps and relative underperformance of mutual funds (MF) indirectly attracted interest in direct investment in capital markets.
Recent data, based on city wise distribution of turnover in cash segment in BSE and NSE, suggest increasing pie of Tier-2 and below cities in past two years. In BSE, contribution of Tier-2 and below cities in cash turnover has increased from 30 per cent in FY18 to 40 per cent in FY20 while in NSE, it has risen from 14 per cent to 17 per cent, as reported by IANS.
Though there is no direct aggregate data available on number of customers region wise, but management commentary of various brokerage houses suggests that investors interest among other regions in India has been increasing; specially among young population with broad age group in 25-35 years. Also a majority of new client addition has been coming from Tier-2 and Tier-3 cities, the report said.
The report said that ADTO (Average Daily Turnover) has shown increasing trend since the past months, especially during the lockdown period, which was a result of buoyancy in equity markets and increasing retail participation.
However, it would be key to watch how the trend behaves in coming months as margin requirement rises in step wise manner as per Sebi's new regulation. ADTO in February 2020 has reached Rs 45.9 lakh crore, which has doubled in last six months. Robust client addition and market volatility are key factors for surging volumes largely led by options.
Discount brokers like Zerodha, Upstox, 5Paisa and newly joined Angel Broking have been major beneficiaries, especially over past one year in terms of incremental client acquisition. Market share for Zerodha has increased from 13 per cent a year ago to 19 per cent as on January 2021. Similarly, RKSV Sec (Upstox) has increased its market share from 5 per cent a year ago to 11.3 per cent.
This has led many traditional brokerages like Sharekhan, Kotak Sec, etc., to come up with their own discount plans.
Overall market ADTO has increased over 2x from Rs 14.4 lakh crore in Q3FY20 to Rs 31.1 lakh crore in Q3FY21, and has shown increasing trends sequentially.
Client addition also has been on similar lines with active clients increasing 67 per cent YoY to 1.63 crore; with substantial participation from New to Market customers from tier-2 and below cities, the report said.
Reasons attributable to such robust accretion could be awareness & acceptance of equities as investment class by millennials, relative underperformance of large number of mutual fund schemes and low yields in fixed income asset.
Discount brokers continued to gain majority of incremental clientele as well as ADTO. Consequently, traditional brokers have started offering competitive fixed brokerage plans, thereby, blurring earlierlines of difference between peers. Bank-led brokers including Kotak Securities, and Axis Securities have started offering low brokerage plans while traditional non-bank led brokers like Angel Broking and Sharekhan have also joined the bandwagon, the report said.

Brokers' revenue growth to continue but moderate
After witnessing a record-high active client addition and average daily turnover (ADTO) in a pandemic-marred financial year (FY21), brokerage firms forecast a muted growth in FY22 when compared with the previous fiscal. However, the positive trend in investor numbers would continue, said a senior analyst at a Mumbai-based brokerage firm. 
Krishnan Sitaraman, senior director, Crisil Ratings, said: "Performance in the December quarter shows signs of fatigue creeping in, with most broking entities registering on-quarter de-growth in revenue (even after factoring in lower trading days in the quarter), despite continued record client additions. This is in contrast with l18 per cent sequential growth in the September quarter. With equity markets turning volatile since January 2021 and revised regulations with higher margin requirements kicking in, sustainability of trading volumes in fiscal 2022 may be a challenge, thereby impacting revenue."
Ajit Velonie, Director, Crisil Ratings, adds: "Discount brokers have led from the front capturing more than 75% of incremental client acquisitions and now command 45 per cent market share in terms of active clients (refer to Chart 2 in Annexure). However, on the revenue front, they have some way to go with estimated share of 30 per cent. Bank-led brokers, with a relatively premium brokerage model, have leveraged their existing client base well and continue to maintain revenue market share at 40 per cent while many traditional brokers have lost ground."
Crisil Ratings estimates broking revenue to have grown by 65-70 per cent in fiscal 2021 as against seven per cent in fiscal 2020, but market volatility and phased implementation of new margin regulations may act as a drag on incremental volume growth, resulting in marginal revenue growth in fiscal 2022.
The slowdown has already begun to tell: broking revenue de-grew by 1-8 per cent in the third quarter of fiscal 2021 on a sequential basis. This indicates that client additions are not translating into higher broking revenue of late.
These key regulatory changes are twofold: upfront margin requirement in cash segment trading, effective September 1, 2020 (similar to the futures and options segment) and (full margin requirement for intraday position to be implemented in phases (starting with 25 per cent peak margin from December 1, 2020, to 100 per cent from September 1, 2021).
Both regulations focus on increased margin requirements, which essentially lowers the leverage available to investors, impacting trading volume. Hence, sustainability of new client additions along with its translation to trading volumes and revenue will remain key monitorable, Crisil said.
In the first nine months of fiscal 2021, brokerage houses across industry added 52 lakh clients - as much as they did during the preceding four years, cumulatively. This took the active client base to 1.6 crore as of December 2020.
Continued buoyancy in equities and new client additions also led to ADTO hitting decadal highs.
Several factors contributed to the influx of retail investors into equity markets in the current fiscal. According to the ratings agency, these include: user-friendly trading platforms (including on mobile) and schemes with very low brokerage; relatively low interest yield on savings and deposits; ample time availability during the lockdown/pandemic; and Pygmalion-esque effect linked to broad-based high returns in equities since March 2020.
Interestingly, discount brokers grabbed a significant market share of active clients. But they still lag bank-led brokers in terms of revenue market share.
That's because bulk of the new client additions by discount brokers are in the 20-30 years age group that have relatively lower disposable incomes. On the other hand, bank-led brokers have been able to hold on to their customer base, with many acquired through their parent banking channel. These customers not only trade frequently but also transact in higher ticket volumes. They also opt for additional services such as advisory, research reports, and relationship manager support and are willing to pay additional brokerage charges.
In this milieu, profitability will continue to be driven by how well players manage their cost-to-income structure, Crisil said. A recent shift in focus towards creating/enhancing tech-based platforms resulted in a steady increase in cost-to-income ratio till fiscal 2020. And players who invested in enhancing digital presence have reaped the rewards, with the ratio estimated to have declined 10-15 per cent in fiscal 2021. With revenue growth expected to be subdued next fiscal, their ability to manage the cost structure will be a key credit monitorable.


Number of views (1796)/Comments (0)

Leave a comment

Add comment



Ask the Finapolis.

I'm not a robot
Dharmendra Satpathy
Col. Sanjeev Govila (retd)
Hum Fauji Investments
The Finapolis' expert answers your queries on investments, taxation and personal finance. Want advice? Submit your Question above



The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

Subscribe For Free

Get the e-paper free