ICICI Securities December quarter numbers are a reflection of the damage that is inflicted by discount brokers.
The pain discount brokers have inflicted on mainline broking firms can be seen in the December quarter results of ICICI Securities. ICICI Securities is one of the pioneers in internet trading, but discount brokers have now beaten it at its own game.
The key variable to track when looking at a broking firm is the brokerage yield which has fallen sharply over the years, thanks mainly to the growth of discount brokers. Many established and well-managed brokerages such as Motilal Oswal, Kotak Securities, Edelweiss and IIFL saw the writing on the wall and moved from pure broking to wealth management, lending, asset management, and other financial services. The idea was to reduce the dependence from a declining margin business to one that has more stable cash flow.
However, ICICI Securities, which until its IPO in April 2018 was part of ICICI Bank, did not feel the need to move out of its conventional business. It stuck to its traditional business of broking, merchant/investment banking or distribution.
Unfortunately, the company has been hit on all three fronts during the December 2018 quarter. Its merchant/investment banking business is down 37 percent in the quarter, as there were only a few IPOs during the period. Its distribution business has been hit after upfront payments for mutual fund (MF) commission to distributors had been disallowed.
But the worrisome point is ICICI Securities’ main business is on a slide. The company is losing market share and fast. In one quarter its market share has fallen from 8.6 percent to 8.0 percent. Despite the higher volume, its revenue and more importantly its brokerage yield has come down.
While the higher contribution of day trading and low-yielding derivative trades are reasons for the fall in brokerage yield, the bigger reason is the adverse impact of discount brokers. ICICI Securities had an average daily turnover volume (ADTV) of Rs 10,100 crore in FY16 which has shot up to Rs 53,000 crore at present but during the same time, its brokerage yield collapsed from 2.65 basis points to its all-time low level of 0.70 basis points this quarter.
ICICI Securities continue to live in its past glory when it could provide broking service by seamlessly linking it with its banking and demat services. This is now done by every broker in the country at a fraction of the cost.
Discount brokers such as Zerodha have understood the game much better. These brokers do not spend money on branches but focus on leveraging technology. Keeping their cost low, they are able to pass on the benefit to clients. Zerodha, for instance, does not charge brokerage on delivery trades but charges a nominal amount on intraday trades which constitute a major chunk of the ADTV for any broker.
No wonder Zerodha is now the largest broker in the country. ICICI Securities can no longer afford to bask in its past glory after losing half its value since its IPO listing.
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