3 brokerage stocks you can bet on now

Retail investors are getting back into the stock market with a vengeance and there are several reasons for this. Investor disillusionment with low returns from mutual funds is one. The other is people have time to dabble in day trading and trading in futures and options (F&O) as they are working from home. Even those who lost their jobs in the economic upheaval are trying to earn money from trading activities. Whatever the reasons, the increased interest in the stock market has been good news for brokers. Irrespective of whether investors make or lose money, the brokers are earning their brokerages on all transactions.Most brokers have reported good numbers in the first quarter of 2020-21 (see table). Though the new regulatory regime that stipulates providing upfront margins may impact volumes a bit, experts feel the trend of volume growth will continue in the coming quarters as well. “The trend of investors shifting from physical assets to financial assets is expected to continue. Since the equity participation of Indian investor is still very low, all segments related to equity market should do well in coming years due to market expansion,” says Sachin Relekar, CIO – Equity, LIC Mutual Fund. 77688600 77688603Some investors are also shifting from traditional investments to equities due to low interest rates. “Interest in equity market has increased because of very low interest rate regime and lack of other investment avenues. This is benefitting non lending players from the BFSI sector like stockbrokers, asset managers, etc,” says Devang Mehta, Head – Equity Advisory, Centrum Wealth Management.Another everlasting theme—strong players getting stronger in any fragmented industry—is playing out here too. For example, ICICI Securities has gained further market share in the first quarter. “Small stockbrokers are finding it difficult to survive due to increased competition. While big full service players are providing a plethora of services to attract investors, big discount brokers are offering very low rates for trading,” says Mehta. This consolidation is another reason why it makes sense to invest in leading players like ICICI Securities, Motilal Oswal Financial Services and Geojit Financial Services, among others.Leading stockbrokers are also benefitting because of their ability to adapt to the new normal quickly. “Any business with reach and technological adoption will do better in the current situation. Growth will be high for stockbrokers because they have gone online and their ability to complete KYC of new clients using online video platforms is helping,” says Relekar.While brokers are expected to do well, a part of this is already reflecting in their price and we have shortlisted only stocks where potential gains can still be realised. ICICI SecuritiesDespite the muted performance by the distribution business, where revenues fell 30% y-o-y, ICICI Securities has reported 41% revenue growth in the first quarter. This is thanks to the solid performance of its brokerage business—revenues up by 62% y-o-y—and investment banking business— revenues up by 34% y-o-y. In addition to lower mutual fund sales, distribution of non-mutual fund products also fell due to lockdowns. With lockdown restrictions now easing, distribution of non-mutual fund products is expected to pick up gradually over the next few quarters.Investment banking companies are also doing well because the prevailing buoyancy in both equity and debt markets is resulting in issue of new papers. With a healthy pipeline of investment banking business, this segment of ICICI Securities is expected to do well in the coming quarters. Since a lot of trading activity is happening on leverage, increased trading volumes are helping brokers to earn higher interest income. For example, ICICI Securities reported a 31% y-o-y jump in its net interest income (NII) from this division. The cost cutting efforts by ICICI Securities is also yielding fruit. “We expect the cost /income ratio to decline 440bp to 52% between 2019-20 and 2022-23 and this should result in 19% PAT CAGR during same time,” says a recent Motilal Oswal report.Geojit Fin ServicesInvestors should not expect last quarter’s staggering net profit growth—660%—going forward. Though the net profit growth during the last quarter was due to a smaller base, Geojit Financial Services is expected to do well in coming quarters as well. First, it should benefit immensely from the increase in trading volume because of its retail focus. Second, its customer stickiness is high due to its geographical focus—most of its business comes from Kerala, Tamil Nadu and the Middle East. The scope for growth, in term of new clients, is also high because its focus is on middle class and and upper middle class clients and not HNIs and UHNIs. The trading volume shifting from the derivative market to the cash market should also help retail players like Geojit. “In the current scenario witnessing higher volume in cash segment, Geojit Financial Services remains a clear beneficiary given its largest proportion of cash business. We expect earnings to grow at 24% CAGR during 2020-22,” says a recent ICICI Direct report.Motilal OswalWith an 88% y-o-y jump in cash volumes and 24% y-o-y increase in number of active clients, the broking division of Motilal Oswal Financial Services has reported good numbers in the first quarter. However, pressure is visible on the assets and wealth management side. Though the adjusted net profit from the AMC business fell 33% y-o-y in the last quarter, it is showing some traction despite a challenging environment. Motilal Oswal Financial Services is a good long term bet due to its diversified business model. Prudent owner- promoters, led by Motilal Oswal and Raamdeo Agrawal, is another positive driver for the stock.Also read: 3 out of 10 investors quit mutual funds to move to stocks: Should you also ditch your MFs?(Graphics by Abdul Shafiq/ET Prime)

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