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Broking
Indian brokerages are continuing their slide in profitability. We expect flat
topline both YoY and QoQ. However, profits may decline by 47.5% YoY and
1.5% QoQ.
ƒ Revenue growth stable as volumes remain high but IB slows down...
Trend of declining cash turnover continues in Q2FY12 also with only
9.5% of total volumes being in cash against 10.6% in Q1FY12E.
However, total average daily volume has risen 8% sequentially driven
by 9% growth in the derivatives segment. Due to a steep cut in the
market, activity in small & midcaps remains low whereby BSE cash has
seen a 14% dip in volumes QoQ after a 9% decline seen in Q1FY12
already. Options segment continues to dominate volumes.
As a result, overall brokerage income may remain stable but IB fees will
take a hit due to lesser M&A, IPO, etc. while market volatility continues
to persist for a while now. Q2FY11 was a very healthy quarter for IB fees
making YoY income growth look a bit weak. Financing income may see
a flattish to marginal increase as interest rates increased but margin
funding and LAS books are expected to experience a run down in this
quarter.
ƒ Costs remain high, bottomline continues to shrink…
We expect costs to remain high in line with Q1FY12 leading to a dip in
margins. Cost cutting impact may be seen from Q3FY12 onwards.
Brokerages like Motilal (MOSL) have maintained their margins due to
franchise model but have seen their topline and bottomline both
shrinking significantly. However, for Edelweiss and IIFL, costs have
remained relatively fixed and they have the financing book to support
topline growth. However, their PAT also shrank along with depressed
margins. We remain cautious on the sector and recommend avoiding
these stocks
: Company specific view
Edelweiss
Capital
Market share to be maintained. However, stagnant topline with high operating costs
maintained will lead to the bottomline declining 58% YoY and 17% QoQ. Insurance
business expansion will keep costs high
India Infoline Revenues to grow 10% YoY and 4.7% QoQ as financing income (major part mortgage
book) can increase 54% YoY and 6% QoQ. Loan book is expected to see unwinding in
LAS book. Profits will see marginal growth QoQ
Motilal Oswal Revenue dips in line with market mix. Bottomline is expected to rise 8% QoQ as it has
franchise model whereby opex adjusts with falling revenues
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Source: ICICIdirect.com Research
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