Growth Triggers in Place for Broking Industry

Despite the pandemic-induced sharp correction in the equity markets, a new wave of investors swarmed the markets thereafter – scouting for value picks armed with growing awareness and determined to harness the virtues of equity investing. This phenomenon has not only carried on, but has also become a sustained habit for the new-age investors. The period between FY22 which saw a 48 per cent CAGR in demat accounts, is an evident testament of what is in store for the future. Technological advances have also supported increasing participation in equity markets. Financial technology (fintech) companies are increasingly playing a significant role in the growth of the capital markets.

This is backed by increased usage of smart phones and low-cost high-speed internet connection. Retail investors, especially millennials and Gen-Z, are increasingly getting drawn to intuitive and extremely powerful mobile trading apps. New-age brokers, who offer convenience, are fast acquiring a growing base of young, new-to-market clients. The broking industry, on the whole, is transitioning from a volume-based to an orderbased revenue model that offers services such as investment advisory and wealth management. The role of the broker has evolved from being facilitators of trading to one providing a holistic platform that not just provides the new-age investors with an opportunity to invest in stocks, but offers other products helping them create wealth over their lifetime.

Industry Overview

The Indian brokerage sector can be classified based on the nature of brokerage services, the type of parent company (banks or other) and the extent of business diversification. India has a mix of full-service brokerage firms and discount brokerage houses. Full-service brokerage firms offer a wide range of services like offline and online trading, demat accounts, investment advisory, research reports, relationship manager for personalised services, portfolio management services, insurance and other customised services. Discount brokerage houses, on the other hand, offer services at low and fixed brokerage fees, irrespective of size of order and provide such services via online platforms.

Aligned with the global trend, digitisation is disrupting the Indian stock broking industry. With their competitive pricing strategy, digital discount brokers are transforming the industry. Discount brokerage charges are usually miniscule which has attracted investors, especially those that are new to equity investing. A key factor driving the growth of the discount brokerage industry is India’s demographic profile, which comprises the largest working-age population in the world. Millennials i.e. those with a median age of 18 to 35 account for 36 per cent of the population and are projected to constitute 50 per cent of the country’s workforce by 2025. 

This segment of the population, being tech-savvy and priceconscious, has favoured discount brokers over traditional brokers because of the simplicity and fast-paced nature of services offered. Indian equities started the calendar year 2022 on a strong note, as global markets hit new highs, boosting domestic investors’ confidence. Despite headwinds from high inflation, manufacturing activity in India improved in April 2022 on the back of quicker increases in production, factory orders and international sales. The month of April marked 10 straight months of expansionary readings above 50, even as there is a gradual loss since the beginning of CY 2022. 

Robust corporate earnings, favourable liquidity in both international and local markets, increasing internet penetration and retail engagement have all contributed to a rise in equity market activity. During FY 2021-22, the average daily turnover in the cash market increased by 9.6 per cent year-onyear to ₹725 billion, compared to ₹663 billion in FY 2020-21. In FY 2021-22, the index option premium turnover increased by 122 per cent year-on-year to ₹58,423 billion. The stock options’ premium climbed by 79 per cent year-on-year to reach ₹10,388.3 billion in FY 2021-22.

According to ratings agency ICRA, the Indian brokerage industry is expected to have a record year in FY 2022-23 because of strong participation from individual investors and favourable systemic liquidity. As per the report by ICRA, the industry is expected to generate total revenue of ₹27,000-28,000 crore in FY 2021-22, representing a 28-33 per cent year-on-year increase. Moreover, with a projected industry total turnover of ₹28,500-29,000 crore in FY 2022-23, revenue growth is expected to moderate to 5-7 per cent, and will be dependent on capital market performance and maintaining similar yields as in prior years.

Rise of Retail Investors

Retail participation into Indian equities has jumped manifold over the last two years. New account openings reflect the growing interest by this rising set of fresh investors. The total number of demat accounts increased to 89.7 million as of March 2022 from 55.1 million in March 2021 and 40.8 million in March 2020. This translates into a net addition of 2.9 million accounts per month in the current fiscal, more than twice the average monthly addition in FY21. The surge in retail participation in the stock market, post the spread of the corona virus pandemic, has resulted in buoyant market trends over the past two years.

During FY 2020 and FY 2021, retail participants have invested a total of ₹1.9 billion in the NSE’s capital market segment (secondary market only) of which ₹1.4 billion has been invested in 2021 alone. Individual investor participation in equity cash segment has seen a sharp rise, with the share of individual investors in the total turnover at NSE increasing from 33 per cent in FY16 to 40.7 per cent in FY22. Over the last 16 years, India has witnessed four major cycles. During each of the cycles, the headline indices – Nifty 50 and Nifty Mid-Cap 150 – have delivered negative returns.

These have ranged between minus 9 per cent to minus 36 per cent for Nifty 50 and minus 3 per cent to minus 49 per cent for Nifty Mid-Cap 150. Despite this, India’s demat account base has grown at over 16 per cent CAGR during the same period. During each year of negative returns, instead of witnessing a contraction, total trade volumes on NSE, i.e. the number of cash trades and number of future and options contracts, have seen a steady growth of between 2 per cent to 27 per cent. This clearly indicates that despite volatility and market corrections, investors have stayed put in the market and even taken advantage of market corrections, thereby showing increased maturity. 

The Performance Picture

FY 2022 was a landmark year for the Indian capital markets with record number of demat accounts being opened and a significant surge in equity and derivative volumes led by historic volatility arising out of the pandemic, lower interest rate regime in the market and aided by work-from-home environment. Majority of the listed players in the broking industry reported robust financial Quarterly Results with continued high-momentum in growth. On a year-to-date basis the top performing broking companies have delivered close to 115 per cent. Choice International, Monarch Networth Capital and Arihant Capital Markets have turned out to be the top multi-bagger broking companies in the past one year with Choice International topping the list of gainers from the broking industry. 

Sector Outlook

The broking industry is at the cusp of enormous growth with negligible penetration in Tier II, III and beyond geographies where about 65 per cent of the country’s population resides. With these geographies accessible largely through digital means, a significantly large market share will be up for grabs between the top digital players in the sector. The fledging digital ecosystem continues to play a pivotal role in creating suitable tailwinds for the expanding retail participation in the equity markets fuelled by the strong aspiration of the young tech-savvy population. Disclosures by prominent listed broking entities over the last few quarters point to an increasing share of younger age groups (less than 30 years) among new clients acquired. 

Simplified and highly intuitive user interface on digital platforms is driving the growth of active users. Also, the eventual adoption of 5G eventually across India is bound to further accelerate this change. India’s Tier II, III and beyond cities are driving the change in investing behaviour with their massive app downloads and fuelling India’s mobile-first economy. This segment demonstrates a promising opportunity for broking companies. However, despite this implosion we are still far below our global peers in terms of per capita penetration. India significantly lags behind its global peers in the share of population investing in equities either directly or through mutual funds.

It may again be noted that only 6.4 per cent Indians have a demat account as compared to 14 per cent in China and 55 per cent in the US. These statistics clearly demonstrate the huge untapped growth opportunity for the Indian broking industry in general and the digital brokers in particular. With a fifth of the world’s youth population, India is well-poised to witness strong and sustainable long-term growth of retail investors. Meanwhile, as the financial services sector becomes increasingly digital-oriented, like any other digitally transformed sector or industry, it becomes vulnerable to breaches in cyber security and data privacy. Regulatory overhauls can also take a toll on the sector, especially the discount broking segment which functions on low margins and a wide base of clientele.

Any sudden change in regulatory norms which results in a rise in operating costs could pose operational challenges. As the fine line between fintech and financial services blurs and competition increases, even traditional full-service brokerages are also finding ways to become price competitive and have subscription plans and digital investment options. With better connectivity and greater usage of smart phones, even in smaller towns and villages, alongside growing awareness among investors and increased financial literacy, the culture of equity investing is likely to further burgeon. Within this milieu, the prominence of brokers with seamless digital capabilities, focus on core operations and fundamentally strong balance-sheets will rise as they cater to the expanding equity investing community, which will be driven by independent, costconscious millennials who prefer online services that are fast, economical and efficient.