The S&P BSE Sensex index’s rally to an all-time high is giving Magnum Equity Broking Ltd.’s Nilesh Karani little reason to cheer.
The 45-year-old broker has shut more than 60 percent of Magnum Equity’s branches after client orders shrank to 10 percent of their level four years ago. His listed rivals, including Motilal Oswal Financial Services Ltd. and India Infoline Ltd., have lost 30 percent of their value on average in Mumbai trading this year, lagging behind the Sensex by the widest margin since at least 2008.
“The business is not at all viable,” Karani said in a phone interview. “Our staff is looking out for jobs.”
While the Sensex closed at a record high on Nov. 3, trading commissions are shrinking as the combined turnover on India’s two-largest equity bourses falls to the lowest levels since 2006. Brokerage profits will stay under pressure as individual investors withdraw funds, according to Future Generali India Life Insurance Co. HSBC Holdings Plc, Europe’s biggest bank, said last month it will close its retail stock-trading unit in India.
“The broking business is under stress and the outlook remains bleak,” Nirakar Pradhan, who manages about $580 million as the chief investment officer at Future Generali in Mumbai, said in a phone interview yesterday.
More than 500 stockbrokers ended operations in the six months through Sept. 30, while 112 firms dealing equity derivatives closed down during the period, according to data on the Securities and Exchange Board of India’s website. HSBC said Oct. 17 it will offer retail and commercial banking, wealth management and insurance services in the country.
Equity volumes are declining as an exodus of individual investors offsets more than $16.6 billion of net purchases by foreign money managers this year, the second-biggest inflows among 10 Asian markets tracked by Bloomberg after Japan. Local mutual funds withdrew a net $3.3 billion from equities in the period, data from the market regulator show.
The 200-day average value of shares traded on the National Stock Exchange of India Ltd. and BSE Ltd.’s bourse in Mumbai dropped to about $2.3 billion on Nov. 8, the lowest level since March 2006, according to data compiled by Bloomberg.
The number of retail investors in the local stock market has declined 60 percent during the past five years, according to the Association of National Exchanges Members of India, which represents 900 brokers on the two biggest exchanges.
Trading volumes are poised to bottom as the Sensex’s 4.4 percent advance this year lures back local traders, according to Networth Stock Broking Ltd. The gauge has beaten the MSCI Emerging Markets Index by 11 percentage points in 2013 and is the top performer among equity gauges in the four largest developing economies.
“It can’t get any worse than this,” Surya Narayan Nayak, the head of research at Networth, said by phone yesterday.
Supreeth Shankarghal, the Bangalore-based chief executive officer at Quant First Asset Advisors India, says investors are shifting to derivatives from shares to benefit from lower costs.
India’s securities transaction tax for equities is 0.1 percent, versus 0.017 percent for options and 0.01 percent for futures, according to the NSE’s website. The options turnover this year is 52 percent higher than the five-year average, according to data compiled by Bloomberg.
Motilal Oswal shares have retreated 40 percent this year, valuing the company at 0.8 times net assets, the data show. The Mumbai-based brokerage posted a 76 percent decline in profit in the September quarter. The stock fell 1.3 percent to 70 rupees.
“We are very much committed to our retail business and we are hiring people,” Sameer Kamath, the chief financial officer at Motilal Oswal, said in a phone interview on Nov. 5. “If the positive trend continues and the momentum is sustained, you can see retail participation coming in.”
India Infoline dropped 1.6 percent, extending this year’s loss to 31 percent. The stock trades at 0.9 times net assets, versus 2.5 times for the Sensex, data compiled by Bloomberg show. Net income in the September quarter rose 0.8 percent, the slowest pace since December 2012. Stock broking contributed to 12 percent of total revenue in the period from 37 percent in the three months ended June 2012, the data show.
The company is restructuring its retail broking business to focus on client advisory rather than trading commissions, R. Venkataraman, a managing director at the firm, said in an e-mail interview on Nov. 8.
Magnum Equity’s Karani says his company has branched out into real-estate and sports-retailing to weather the slump.
“My head is just above the water in so far as broking business profit is concerned,” he said. “We have diversified.”