Brokerage industry to return to moderate but stable performance after dream run

The domestic capital markets have been on a strong upswing in the last two years despite the early impact of the pandemic that hit market sentiments. This was boosted by healthy participation of retail investors and domestic institutions besides a large number of initial public offerings that expanded the pool of opportunities for investors.

As a result, the average daily turnover (ADTO) in the capital market increased at a compound annual growth rate of 123% in the past two fiscal years to Rs 71.7 lakh crore in the year ended March 31, 2022, and the broking industry reported a record performance last year.

While the net operating income (NOI) of a sample of broking entities almost doubled during this period, the profitability (profit after tax after excluding mark-to-market gains/NOI) increased to 38% in FY2022 from 25% in FY2020, according to rating and research agency ICRA.

However, investor sentiment dampened in recent months amidst geopolitical tensions and the adverse macroeconomic outlook, which led to a moderation in the capital markets with a decline in the transaction volumes of high-yielding segments.

As a result, the broking industry witnessed a moderation in its performance with a 10% quarter-on-quarter decline in the NOI while the profitability moderated to 34% in Q1 FY23 from 38% in FY22.

Additionally, the net fair value losses on the investment book, owing to market corrections, remained a drag on the overall profitability.

Further, the incremental retail participation tapered in the current fiscal with the pace of addition of new clients moderating from the peak witnessed in the last fiscal.

Additionally, foreign institutional investors (FIIs) remained net sellers in H1 CY2022, though the industry witnessed early signs of reversal of this trend in August, post the sustained net outflows during October 2021 to July2022.

The overall retail participation and transaction volumes are expected to remain healthy compared to the pre-Covid-19 pandemic levels. On the back of this, the outlook for the brokerage industry is stable, though its revenue trajectory and profitability are expected to moderate from the FY22 levels.