Profits of domestic brokerages fell substantially in the quarter ended March 31, thanks to subdued participation of retail investors and continued increase in the share of the low-margin options segment in the overall market volume.
Motilal Oswal Financial Services, Geojit BNP Paribas Financial Services and Indiabulls Securities - the three broking firms to have announced their quarterly numbers so far, have seen a drop in revenue and profit.
For the March quarter, Mumbai-based Motilal Oswal's profit fell 52 per cent to Rs 24.3 crore, compared to the year-ago period. Revenue declined 24 per cent to Rs 126 crore (Rs 1.26 billion).
Kochi-based Geojit BNP Paribas reported 61 per cent decline in profit, while Indiabulls Securities saw profit decline nearly 44 per cent.
"Cash volumes have fallen because of subdued retail participation. Also, the share of low-yielding options segment has increased in the overall market volume. This has impacted profitability," said Motilal Oswal, chairman and managing director at Motilal Oswal Financial Services.
The share of options in the equity market turnover increased to 72.68 per cent, as against 54.67 per cent in the year-ago period, according to data compiled by the BS Research Bureau.
"Cash volumes declined 20 per cent compared to the third quarter. Also, there were no deals on the investment banking side. These factors have hurt the profitability of brokerages," said Santosh Singh, analyst at Espirito Santo Securities.
"Some domestic broking firms are losing market share due to increased competition. Even in the cash segment, foreign brokerages are getting most of the FII business," he added.
The share of options in the overall market turnover has jumped over the last three years. In January 2009, options constituted 31.57 per cent of the total turnover, while the cash segment made up for 25.14 per cent.
Since then, the share of options has risen to 66.03 per cent in March, while that of cash segment has declined to 10.15 per cent, according to the BS Research Bureau.
The brokerage in the options segment is as low as Rs 10-20 per contract lot. Effectively, this means a broking firm earns a commission of 1 paisa or even less per Rs 100 of turnover in the options segment, while it can earn 25-50 paisa per Rs 100 of turnover in the cash segment.
