Broking houses hit pay dirt in FY06
Though the equity markets are on a roller-coaster ride now, broking firms have benefited hugely from the FY06 surge.
All the companies considered have doubled profits over the previous corresponding period. The primary driver for earnings was the surge in trading volumes during FY06, which saw the Indian equity markets test new highs.
For instance, Kotak securities saw a total volume increase in the range of 125% over the previous corresponding year. Cash volumes on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) were up in excess of 50% over the FY05 figures. Rising volumes and a rampant scale up in client accounts were the major drivers of performance for broking firms.
These firms have also focused on higher margin segments like online broking and cash based delivery volumes. They are also trying to diversify revenue streams to even out earnings volatility. This has seen them expand into areas like commodity trading, consumer finance, lending against securities and mutual fund and insurance distribution.
For instance, of India Infoline’s revenues of Rs 218 crore, about 10% were from insurance fees and 2% from commodities trading. Overall non-equity based revenues accounted for about 33% of the pie. Kapil Krishnan, CFO, India Infoline says the company hopes to mitigate the volatility that accompanies market cycles by increasing the share of non-equity revenues as well as by larger client additions through an expanded network.
For IndiaBulls, broking-based revenues accounted for about 43% of total revenues. Gagan Banga, executive director, IndiaBulls says, “The focus has been building multiple business to mitigate cyclicality in earnings”. IndiaBulls is betting big on mortgage and consumer finance and expects it to account for 35% of total revenues by FY07.
Geojit seems to be following the same track with commodities and distribution activities accounting for 12% and 15% of revenues. Geojit is also positive about overseas ventures. It has two ventures in Dubai and Qatar and plans to expand into Saudi Arabia. CJ George, chairman, Geojit says overseas operations are expected to account for a significant portion of the firm’s revenue mix.
He expects over 20% growth in the company’s commodity trading and fee-based streams. IL&FS Investment is trying to diversify by focusing on debt syndication for corporates, margin financing & lending against securities and merchant banking. Currently, it has a 50% mix of broking and non-broking based revenues, which include distribution and merchant banking.
IL&FS investsmart is setting up an NBFC arm for margin and securities financing business. Sandeep Presswala, COO(retail business) IL&FS Investsmart says expansion could help increase earnings stability. Brokerage firms expect a consolidation of volumes among the top five brokers.