Emerging Face Of Broking Industry

Way back in 1995, entrepreneur Nirmal Jain had set up India Infoline Limited, an entity dedicated to research activities related to happening in Indian stock markets and also India Inc. Gradually, Jain and his core team made foray into stock broking and the quantum of his turnover started witnessing a huge rise over the years along with generating thousands of employments. Jain also came up with the idea of franchise model to reach out across the length and breadth of the country and making India Infoline a household name when it came to broking activities. Now known as IIFL Holdings Limited 21 years since he had started his journey on the Dalal Street, Jain has been dealing in housing finance, gold loan, loans for buying commercial vehicles, selling various financial products. For him and his team, broking is just one of the over a dozen core business activities they have presently. The Lower Parel headquarter of IIFL Holdings these days have been buzzing with activities and a visitor can well overhear jargons and talks related to asset management, loans, gold mortgage more than words hurled on pure broking activities. Size of Jain’s company has been multiplied by many over last 10 years, number of employees has grown up substantially, reach and topline of IIFL Holdings also have been witnessing a sharp growth. IIFL Holdings is now one of the key players when it comes to private sector funding, finance and mortgage loans.


Few metres away from IIFL, at Indiabulls headquarters, scenario is almost similar to what one witnesses at IIFL. At the Elphinstone Road office of once known as a pure broking player, Motilal Oswal talks are regularly taking place on NBFC activities as diversification is taking place there too. During last five to seven years, suddenly Indian broking firms are caught in a new fever-NBFC fever has certainly gripped all of them in a market where penetration of NBFCs are still very poor. In the office of V Vaidyanathan, Executive Chairman of Capital First Limited things are no different after Capital First stopped going with its broking business and decided to make funding its core business. Among all these key broking firms, Capital First enjoys the benefit of moving first and fast when it comes to the business of financing. Centrum Capital, yet another pure play broking house, soon will be the newest player in this game of aggressive diversification taken up by the broking firms in the country. The list is getting longer every alternate day.

So what are the situations which forced these changes-shrinking income from brokerage, saturation in the transaction volume when it comes to stock trading, fierce competition, threats from smaller, newer mushrooming companies with lower cost on human resources and establishments, cyclical nature of the stock markets, newer and apparently safer financial products coming up as options for retail investors, among others.

Says President of IIFL, Prashant Prabhakaran, “IIFL till 2009-10 had around 90 per cent of its income coming from capital markets but today, it is just 10 per cent and income from NBFC activities is pegged at 90 per cent. In the NBFC segment, there are actually 10 individual segments which have opened up and we have been witnessing income from NBFC growing faster. All brokers who grew from 2003-2008 diversified but still kept broking as a part of their total bouquet of services but the industry went through a lot of change in 2011-12. Algorithmic trading became a significant portion of this market, today nearly around 16-17 per cent of the market is driven by Algos. Then you have discount brokers which became part and parcel of this industry. The transformation and changes happening for good.”

Sameer Kamath, Group CFO of Motilal Oswal also has been witnessing the change of air in his shop. “In 2013, we have realised all these businesses generated free cash flows and these businesses do not require capital back in the business. There was a situation that you have free cash in hand and no opportunities in these businesses leading to the low ROE on the companies’ financials. We focussed on segments such as affordable housing, loans worth ticket-size of Rs 10 lakhs, first home-buyers and therefore we formed our subsidiary Aspire Home Finance on the back of that philosophy. We have our own capital that is surplus cash flows to seed some of our asset management products. While we continue to run our broking activities, we will surely see more opportunities coming up in the context of NBFC activities.”

Angel Broking which had started its journey in 1987, however, preferred to go slow when it comes to diversification. Says Vinay Agarwal, Chief Executive Officer, “In our case, focus would remain to continue on retail investors. We are also kind of planning and thinking to launch low-ticket home loans etc at a later stage.”

 

All of them believe in one thing for sure-things started changing fast since 2008-09 and most of the players realised, they need to diversify and bring in newer products to manage their already accumulated huge manpower, establishment costs and also to hike profitability. The NBFC space was ready but during those days, there had been hardly any takers. So they found a virgin territory to exploit and the beeline started from there and was still continuing. “Having an in-house NBFC is definitely a must in today’s date. All of us are expanding our NBFC base at an aggressive pace,” says Nikhil Khandelwal, MD of Systematix Shares & Stocks. Sandeep Nayak, CEO of Centrum Broking believes, “We are going to launch immediately the housing finance business which is focused at tier-2 markets. We are not going to lend in Mumbai and Delhi but we will be focussed in places like Vadodara, Indore etc. In the tier-2 cities of India where probably we will get a higher pricing and we are also starting a NBFC to look at SME sector which is under-serviced in this country.” Centrum Capital, listed in BSE is certainly going to witness a surge considering the company’s plans to get into the NBFC and housing finance sectors.

 

The bigger question here comes whether these top broking firms have then lowered their focus on the core business and concentred on NBFC-they all say no to it. And what happens when the NBFC space is joined by too many players. Prabhakaran of IIFL says, “Broking continues for us. But NBFC activities will also remain in focus. The NBFC business per se is still an under-serviced industry in India. You still have gaps for NBFCs to go in and fill in. For instance, when IIFL entered into the gold loan space, there were only two large players. We noticed a huge gap which we could fill immediately as these two players were largely southern India based . Similarly, there is space available across country for others in the NBFC segment. NBFC does not mean lending money to individuals only but also there is a SME line that is available.” Nayak of Centrum also believes similar as he says, “The opportunities exist because today if you see one of the key constituents of the financial sector which is the PSBs which command a big share of the market is having to go slow because of its own asset quality problems and that allows us the luxury of being able to get into the market and capture our share of the market because one of your large segment competitors have had their problems to deal with. So there is a huge amount of potential in this segment which has to be tapped by private sector banks and NBFCs.” Rajeev Ranjan Singh, VP of Karvy Stock Broking has been witnessing this changing face of Indian broking firms very closely. He says, “These all are in line with client expectations of all need-based services from a single advisor. Diversifying products also help the company to retain their clients instead of clients buying NBFC services from the competitors.”

 

But then what happens to the smaller broking firms and discount brokers-will they also in near future opt for diversification and eventually jump into the NBFC and related spaces. Or will lower and almost no brokerage charged on their clients remain their USPs-we asked Nikhil Kamath, Co-Founder of Zerodha and this is what he says, “discount brokers can no longer just compete on price. The race is heating up on the technology and services which each of these brokers offer . This is where the next round of consolidation is more likely as users move towards better technology solutions.” He makes it clear that discount brokers and smaller players will stick to pure broking business as of now and spend more on technology related services to their clients. Chirag Modi of CM Investments, says, “Small broking firms to pay attention on various other services also linked with financial market such as distribution of mutual fund products, life and general insurance policies and PMS services.” Modi’s broking firm has been expanding aggressively across India having main focus on tier-2 and tier-3 cities. Khandelwal of Systematix has a different opinion however. He says, “No financial service businesses, big or small can survive without diversification as the Indian broking sector is overcrowded and little or no differentiations exist in the regular broking business. Indian investor community does not value research highly as in the western countries which leads to companies looking for other allied business to make profits.” Agarwal of Angel Broking says, “Small broking houses are surrendering their licences and becoming our franchisees. The reasons for the same are huge investment needed in technology, giving out innovative products, compliance cost, requirement from customers for good products, advisory etc. In fact, if opportunities come in our way, we are open to acquire retail broking business and thus grow further in future.”

Looking at the way discount brokers like Zerodha or CM Investments, SAS Online making it big in these days when their big brothers like IIFL, Centrum, Indiabulls, Motilal Oswal are focussing a lot on NBFC activities, will the future be in the hands of discount brokers-the big question arises here. Zerodha’s Kamath says, “Cost is the biggest advantage when it comes to discount brokers, especially for traders who trade more frequently, discount brokers should generally be the way to go.” Modi of CM Investments say , “Smaller broking firms have their edges over the bigger players when it comes to handling frequent traders, most of whom are based in smaller cities and towns in Gujarat. So we do not see any chances of smaller players being eaten up by the bigger fishes. Everyone has his or her own choice-so even investors choose their brokers according to their needs, money to spend on brokerage etc.”

IIFL’s Prabhakaran has his own take on this. He says, “Zerodha is going to occupy a space as it is the largest player in that particular space even as with money other players also are coming into that space. There will be enough coming up and building up their credentials of giving you platform , no advice but lowest rate possible.” Being at the helm of IIFL Holdings broking business, Prabhakaran strongly believes technological advancement and spending on technology are the two factors which may decide the fate of broking houses in India, bigger and smaller. “All that I am telling you about is working technology with my internet and my mobile platforms. We have heightened our technology services and so you may find our mobile platform being the best in the country when it comes to trading, research and education on stocks and stock markets. And every version you see changing, you will end up finding a new feature getting added into the system thus giving you advantages regularly.” Kamat of Motilal Oswal says, “Technology awareness is picking up fast-mobile trading platforms, trade through various apps etc. were not available during the last bull run but things have changed now. If you have to do business in future, you must evolve according to the needs of the clients and technology too.” Kedarnath Udiyavar, President of Intellect Design says, “Most of the processed in broking industry will be automated. We have algorithmic trading, we have HFT where the algo is running in the system and they are making decisions and selling high depending on the market analytics. But when it comes to broking , somebody has to decide the trade especially when it comes to institutional investment, more and more algo trading will be used. I would say most of the process will get automated.”

 

Bigger players including IIFL, Indiabulls, Motilal Oswal, Karvy these days have been spending a significant chunk of money on technological upgradation of their products only to ensure clients are regularly updated with regular technological upgradation . “Besides giving our clients a robust trading platform, we understand that it is not possible for clients to stay rooted to their systems. That is why we have invested heavily in development of mobile apps where we keep on updating the features,” says Singh of Karvy. Agarwal of Angel says, “The cities where we don’t have branches and those who want to open account directly and using technology, we are now able to do that. We are opening clients’ account using digital KYC process and this is really picking up.”

So what is going to be the future, we ask. Kamath of Motilal Oswal says, “Direct equity participation is so far less in this country. The participation is only increasing through equity funds and other mutual fund products. I think financial products from the equity and other such allied products which can help channelise savings into meaningful rather than dead assets.” Karvy’s Singh believes with little differentiation in their products many Indian companies are facing substantial competitive stress with the concept of discount brokerages; flat brokerage and various other offers which have been eating up the market share of all brokers and have affected each broker differently. “In addition to declining margins, option trading is increasing in terms of proportion of overall trade. Also recent market conditions have impacted investors’ sentiments towards certain extent. So many brokers see mergers and acquisitions as means for enhancing revenue and saving cost,” added he. CEO of Centrum Broking also believes the space is evolving and there are lots of disruptions happening in this segment. “I would imagine the use of technology within this space is going to be a hygienic factor and companies which are able to integrate that very well into their existing systems, will be the winners of tomorrow,” said Nayak.

All said and done-it is clear now, pure broking space in India is going to witness further consolidation where the best among the discount brokers are going to survive and the top ones among the all-frill broking firms to have the same fate. For rest, things may remain disruptive and dampening unless they start investing heavily on technological upgradation processes, diversifications and offering their clients a larger product pool. The space here onwards is going to be further interesting to watch out for all of us.