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Diversification helps brokers tide volatility

Despite the volatility in the equity market, shares of brokerage firms that have diversified their business model have rallied handsomely in the past year. Shares of Motilal Oswal Financial Services, Edelweiss Financial Services and IIFL Holdings have all doubled in the past one year against the Sensex´s 23 per cent gain.
These firms have benefited from the thematic rally in stocks of nonbanking financial companies (NBFCs) for most of last year.
For these entities, broking activities are no longer the mainstay as they have diversified into lending, private wealth management, asset management and even insurance.
For instance, the contribution of the capital markets business for IIFL in the overall profit pie (profit before tax or PBT) fell to 13 per cent in FY16 from 21 per cent in FY15, and further to eight per cent in the nine months ended December 2016.
For Motilal Oswal Financial Services, revenues from the capital market business declined to 38 per cent in Q3 FY17 from 46 per centayear ago. On the other hand, revenues from housing finance grew to 33 per cent from 21 per cent in the same period.

“Our strategy to transform the business model is showing results, as our revenues and profits are now wellbalanced between asset management, housing finance and capital markets businesses,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.

In the broking business, the company maintained its market share in the highyield cash segment as it continued to add retail clients atahealthy run rate. Asset mobilisation continued atavery strong pace.

The expansion of the housing finance network and the loan book is going according to plan, Oswal adds.

Shares of brokers such as Geojit BNP Paribas and Emkay Global Financial Services, which are not as diversified, have risen 35 per cent and 23 per cent respectively.

Brokers, in general, have been hit hard by dwindling cash market volumes, which used to provideasizeable portion of their revenues before the global financial crisis in 2008.

The rise of discount brokers have also put pressure on margins.

Most discount brokers chargeaflat fee of Rs.20 per trade.

Fullservice brokers charge between 10 -30 paisa for delivery trades, while they charge 1 -2 paisa for the F&Osegment, per Rs.100 of trade.

“Only those brokers who can offerabouquet of services under one roof, which includes credible research and advisory, wealth management as well as maintainastrong lending book, will survive,” saidGChokkalingam, founder, Equinomics Research and Advisory.
Business Standard New Delhi,20th February 2017

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