Record addition of demat accounts by individual investors has driven rally in brokerage stocks this year. Angel Broking, which debuted at a 10% discount to its IPO price in October 2020, has jumped 280% so far in 2021.
, , , Geojit Financial, , and Aditya Birla Money have gained 30-80%.
“Till the market cycle is strong they will continue to attract attention of investors, but one should be careful about giving extraordinary valuation to these companies as they are dependent on market participation and volumes,” said Vinit Sambre, head of equities at DSP Investment Managers.
“In strong cycles, they may seem reasonably valued, but on reversal of market conditions these stocks can have sharper drawdowns and earnings volatility can be high,” said Sambre.
The number of demat accounts in India has risen to a record six crore as on June 30, from about four crore in February 2020. The surge began in March last year when individual investors started venturing directly into the stock market amid shutdowns on account of Covid and underperformance of equity mutual fund schemes. Brokerages have been direct beneficiaries of this retail investor rush. Given that pure broking is not a major earnings source for most of them, experts said these brokerage firms also benefited from cross-selling of products to these investors. IPOs of tech companies and other non-traditional sectors are also boosting retail interest.
Brokerage Stocks Riding the Wave
“The rally in the broking stocks is a reflection of the structural uptrend which is visible in India currently owing to asset allocation moving away from traditional physical assets and fixed income instruments towards equity as an asset class,” said Aniruddha Sarkar, CIO, Quest Investment Advisors.
“With practically every brokerage house now offering zero brokerage platforms, they are operating with the objective to onboard a larger customer base who can then be cross sold other financial products.”
It is not just broking firms that have caught the market attention but have also poured money in ‘proxy investments’ into the stock market. India’s only listed depository CDSL has gained 172% and only listed exchange BSE has shot up by 92%.
Technology advancement has also worked favourably for brokerages. In an interview with ET recently, HDFC Securities’ CEO Dhiraj Relli said 92% of the brokerage’s customers are using digital channels for transacting and as high as 85-86% revenue comes from digital channels only.
These benefits reflect in the earnings performance of these brokerages. ICICI Securities reported a 97% rise in profit for the financial year ended March 2021 to ?1,067.7 crore, Motilal Oswal reported a 579% jump in profit for the same period to ?1,245 crore while Angel Broking reported a 260% profit surge. Angel Broking’s June quarter profit tripled from the year ago level.
