Brokerage stocks under fire - Shrinking turnover spells trouble
BL Research Bureau
Nearly a month after the crash of January 2008, many small town brokers and even metro based brokers with retail operations in B and C class cities have still to open up for business. This when there are massive whispered amounts of client level defaults at big brokers like Motilal and Kotak..which will either go for litigation to recover or plain and simply written off.
Stocks of brokerage houses have been bearing the brunt of the selling pressure in the recent correction. This is despite most brokerages staging an impressive third quarter performance.
Stock prices of most broking companies, on an average, have fallen by about 41 per cent in the last one-month vis-À-vis a 20 per cent fall in Sensex.
The fall, however, has been more pronounced (about 30-44 per cent) for companies with pure broking exposure such as Religare, Geojit Financial Services, Emkay Share and Stock Brokers and India Infoline. The fall in prices of banks such as ICICI Bank and Kotak Mahindra with broking exposure got arrested at about 20-33 per cent.
With their revenues pegged directly to the fortunes of the equity markets, companies in the broking space may be up for tough times ahead, with dwindling intra-day volumes and a general loss in risk-appetite among retail investors. Fading investor interest in the IPO market may also add to their woes.
Volumes shrink
The average daily turnover in the cash segment in the NSE has fallen by about 30 per cent from its peak levels. After recording volumes of about Rs 20,709 crore in October 2007, the average per day turnover has shrunk to about Rs 14,393 crore in February. This fall in volumes spell trouble for broking outfits since most of them had in the last one-year reduced commissions hoping to attract increased participation from clients.
While the bigger ones such as Kotak Mahindra, ICICI Bank and HDFC Bank, with unlisted broking entities and other core business activities may survive this market onslaught, broking houses with complete dependence on retail participation may find the going tough.
Performance of companies such as Edelweiss and Motilal Oswal Financial Services with exposure to investment banking operations may also remain sedate, given the fading sheen of the primary market.
Margins and risk
With stock markets increasingly testing newer support levels, brokers' default risk on loans against shares may also increase. This may put to test the efficacy of most brokers' risk control measures
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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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