Institutional equities business proves to be a drag on Motilal Oswal Financia's Oct-Dec topline

25 January 2024

The sequential performance of leading brokerage and financial services firm Motilal Oswal Financial Services Ltd in the December quarter was marred by a fall in broking business income from its institutional equities business segment, according to information disclosed by the management in its post-earnings investor call on Wednesday. Motilal Oswal Financial reported that its brokerage revenue fell 8% on quarter to 5.36 bln rupees in Oct-Dec.

The management of Motilal Oswal Financial told investors in the call that during the December quarter the retail broking business was flattish on a sequential basis but the institutional equities business saw "lower volumes." The firm's total brokerage revenue of 5.36 bln rupees made up for slightly above 50% of the total revenue.

The institutional equities segment of the broking operations of the firm provides extensive research on more than 250 companies covering 21 sectors, as per information in the company's post-earnings investor presentation. This segment currently caters to around 840 institutional clients.

Motilal Oswal Financial is a full service brokerage firm earning from fees charged to retail, corporate, and institutional investors on their trading in cash and derivatives segments of stock exchanges, commissions from mutual fund distribution, and non-broking charges in institutional deals. As of Dec 31, Motilal Oswal Financial had around 8,22,000 active clients on the NSE. The Motilal Oswal Group of which it is a part also operates in investment banking, asset management, wealth management, private equity, and housing finance businesses.

Compared to the year ago period Motilal Oswal Financial's revenue from broking business rose 23% but was significantly below the total revenue growth of 36%. The other major revenue-earner for the brokerage firm in its standalone operations is interest income which comes mainly from financing margin trading by equity traders and other sources.

In Oct-Dec, it recorded interest income of 3.54 bln rupees in Oct-Dec, 12% more than the previous quarter and 68% up from the year-ago quarter. It made up for 34% of the total revenue of the brokerage firm.

In its investor presentation Motilal Oswal Financial said that it was among the "top three brokers in terms of gross brokerage", and was aiming to further improve its market share in the fast growing market.

The flattish revenue growth on a sequential basis from retail broking in Oct-Dec was on the back of the average daily turnover in the stock exchanges rising by just 8%. Motilal Oswal Financial said its retail cash average daily turnover market share went up by 42 bps on quarter to 7.5%. It further said that its share in the futures and options premium for the last month of the December quarter was 8.7%.

ICICI Sec delisting hints at unbearable competitive pressure

ICICI Sec delisting hints at unbearable competitive pressure

Coming as a bolt out of the blue as it did, if brokerage ICICI Securities Ltd's announcement last week that it wants to delist its shares via a scheme of arrangement with its parent ICICI Bank Ltd is successful it will mark the end of an unfortunate tale. It will take the continuous spotlight on a listed large-sized corporate player, and top leader in its business, caught in the vortex of its own weight and nimble new-age competitors.

It will be become a classic example of a big listed company failing to deliver shareholder returns.

It is a stock market story that turned from the company aiming to enhance its market leadership position in the growing retail brokerage segment to "we have to start growing at the rate ahead of the market" as is what a senior management official told an analyst in the post Jan-Mar earnings investor call.

ICICI Securities is a subsidiary of ICICI Bank with 74.85% of its shares held by the parent bank as of Mar 31 and the remaining with public shareholders.

DIFFICULT START

The brokerage firm went public with an initial public offering, involving offer of sale by its promoter ICICI Bank, in Mar-Apr 2018. The start itself was ominous. Against a targeted IPO amount of 40.18 bln rupees the company got subscription of 34.8 bln rupees, or 13.4% less. The issue price was 520 rupees.

Then, on the day of listing in April that year shares opened for trading at 431.10 rupees, or 17.1% discount to the issue price. A month later it fell more, and was 29% below issue price at 369.15 rupees.

This by itself was a setback to investors who were allotted shares in the IPO. The fall was not on account of bearish market conditions at at that time. A week before ICICI Securities got listed the shares of Bandhan Bank Ltd had got listed at a premium of 29.3% over its IPO issue price. A month later it moved up further and was 34.6% higher than the issue price.

WEIGHED DOWN HEAVILY

Nearly a year later, at the end of 2018-19 (Apr-Mar), shares of ICICI Securities were still in the doldrums, 53% below the issue price. Investors in the IPO of the company had to wait till February 2020 to merely get their principal back after close to two years. But that window was also short lived since the shares slipped below the issue price again in that month and stayed there for five more months. No doubt, it was an ardous journey for the IPO investors of ICICI Securities.

A good stock market has prices of companies' shares tracking their earnings performance whether they are based on earnings estimates of 1-3 years ahead or current earnings. If price movement moves in conjunction with current year earnings it will be logical.

No wonder then that in the case of ICICI Securities its weak comparative earnings performance in the couple of years following its IPO also kept its shares lodged below the issue price. But the extent was magnified.

In 2018-19, for instance, the brokerage's revenue declined 7%, and operating profit and net profit fell 11% each. The shares were down 53% from the issue price when the year ended.

But when earnings improved the catch up in share price was missing. In 2019-20, ICICI Securities' revenue for the year was up marginally by 0.1%, operating profit was up 6%, and net profit was up 11%. The effect: shares of the company ended that year 14% higher than a year ago.

The following year too saw the brokerage's shares underperform its earnings. In 2020-21, when the stock market had seen a surge in new trading accounts and demat accounts following the nationwide lockdowns in Mar-Jul 2020, ICICI Securities' revenue also rose significantly by 52%, and its operating profit jumped 87% while net profit nearly doubled.

But to the dismay of the investors, when that year ended the shares were up by only 38% on year to 382.80 rupees and was still below the IPO issue price.

It was not just ICICI Securities which was bearing the brunt. The stock market was not being kind to the traditional large brokerage firms. Motilal Oswal Financial Services Ltd, a peer of ICICI Securities, faced the same phenomenon. Its shares were up by just 25% on year at the end of 2020-21, even though its revenue jumped 73% and net profit surged 3.8 times.

The same story was repeated last year when the entire brokerage industry's earnings were hit on account of fall in trading volume in cash market and subdued market conditions. At the end of 2022-23, shares of ICICI Securities were down 31% on year while that of Motilal Oswal were nearly 30% lower. But these decline rates were much more than the hit on their earnings.

ICICI Securities' revenue declined 1% to 34.15 bln rupees and net profit fell 19% to 11.12 bln rupees in 2022-23. Likewise, Motilal Oswal Financial Services' revenue went up by just 3% to 26.14 bln rupees and net profit fell 20% to 5.69 bln rupees.

NEW-AGE COMPETITION

It appeared that investors in the market were showing some discomfort with traditional large brokerage firms which had their shares listed on the stock exchanges.

This was also evident from the earnings performance of a new-age listed competitor and a peer to ICICI Securities and Motilal Oswal Financial. Angel One Ltd's revenue rose 33% in 2022-23 while its net profit jumped 43%.

Angel One, RSKV Securities which operates under the brand name of Upstox, and Zerodha are among the new-age competitors to traditional brokerages. And their growth rates, in terms of number of clients, have been impressive. This is seen from the data from NSE's website on active unique client code numbers of brokers.

In the 2-year period from Sep 2020 to Sep 2022, the first half of which had seen a surge in new trading account opening by largely new investors, ICICI Securities' cash market clients jumped 2.58 times to 2.15 mln. Its derivatives clients rose 64% during that period to 136,259. Another traditional brokerage, Kotak Securities, recorded a near doubling of cash market client number to 870,000, and a jump of 2.85 times in derivatives client number to 97,000.

These growth numbers, however, trailed that of the new-age brokerage firms. Zerodha's cash market client number jumped 4.3 times to 5.18 mln as of Sep 2022 from Sep 2020 and derivatives client number to 4.5 times to 1.69 mln. Similarly Upstox's number of cash market clients surged 7.1 times to 3.35 mln while its derivatives client number jumped 5.1 times to 441,000.

THE FINALE

For ICICI Securities delisting appears to the endgame. If it is successful in getting its shares delisted will investors feel left out in the lurch or relieved that it's all over?

To add to the complexities, the brokerage has chosen an unusual route under Securities and Exchange Board of India's delisting regulations. SEBI's delisting norms provide for "a subsidiary company getting delisted through a scheme of arrangement wherein the listed holding company and the subsidiary company are in the same line of business."

ICICI Securities will have to establish to the stock exchanges and SEBI that ICICI Bank and it are in the same line of business.

In the meanwhile, as per ICICI Securities' proposed scheme of arrangement its shareholders will be allotted 67 equity shares of ICICI Bank for every 100 equity shares of the company. At recent market price, 100 shares of ICICI Securities is worth 60,885 rupees while 67 shares of ICICI Bank is worth 64,280 rupees.

Maybe, just maybe, the patient investor in ICICI Securities will be better off holding ICICI Bank shares instead. But then he didn't get into ICICI Securities to get an exposure on the banking sector, now did he?

life in journalism: when government stiffles coverage

Journalists often face major hurdles in reporting events and happenings and these hurdles are either put by government entities or private entities.

In Tamil Nadu, right now, journalists are facing stiffling restrictions on their attempts to cover the anti-nuclear protests in Idinthakarai, a fishing village, near which a big nuclear plant has been set up.

(the image to the right has been taken from http://www.countercurrents.org/vtp270311.htm)

Here are more details from a report I got in my mailbox:

http://kractivist.wordpress.com/2012/03/22/national-media-prevented-from-covering-anti-nuclear-protest-in-tamil-nadu/

Reporters Without Borders condemns police obstruction of national print and broadcast media today in Idinthakarai, a fishing village in the southern state of Tamil Nadu, where the authorities are trying to remove entrenched anti-nuclear protesters from their camp beside the Koodankulam nuclear power station.

“It is always disturbing to see the authorities establish a perimeter and deny access to the media, even temporarily, for reasons other than their security,” Reporters Without Borders said. “Installing police barricades and ordering the police not to let the media through is unacceptable. We urge the Tamil Nadu government to modify the orders and allow journalists full access.

“The authorities must not try to use security as pretext for restricting media coverage of a peaceful anti-nuclear demonstration that contributes to the debate on a subject of public interest. A continuing media presence will also help to dispel any concern about the way the police could be treating the demonstrators.”

Police prevented journalists with NDTV, Times Now, Times of India and other national media from entering the fishing village at 7 a.m. today.

After initially saying they had orders from their high command to deny access to all journalists, the police manning the barricades allowed print and video reporters through. But, according to the Madras Press Club, they continued to deny access to TV mobile broadcasting trucks on the grounds that live reports would just exacerbate the situation.

However, when reached by telephone by reporters outside the village, the head of the Tamil Nadu police denied giving any such orders and, according to the latest information obtained by Reporters Without Borders, TV trucks were finally allowed into the village.

The Tamil Nadu government launched its operation against the Koodankulam protesters at the start of the week. Led by the People’s Movement against Nuclear Energy (PMANE), the protesters have been camped for more five months beside the power station, which is supposed to start operating soon.

Demonstrators have been denied access to the protest site, including by sea, since 19 March. They say that journalists have also been denied access since 19 March and that some journalists have been forced to leave the protest site.

Freedom of information has deteriorated significantly of late in India, which was ranked 131st out of 179 countries in the 2011-2012 Reporters Without Borders press freedom index.

life in journalism: telling it to the media like it is

I have written a post on this blog, many months back, about how media should not indulge in giving awards to anyone. I believe the best recognition a genuine person or entitiy can receive is by regular coverage of the work being done by that person or entiy.

In a latest incident, a media TV channel, CNN-IBN, nominated, for an award on human rights, to a Kashmir-based activists group. The group has not only rejected the award but given a sharp hearing to CNN-IBN that it would be better for the media to cover its activities in their reportage and not indulge in frivolous awards. 

Here is what the Kashmir-based group has stated in a statement:

http://kafila.org/2011/12/11/parveena-ahangar-rejects-cnn-ibns-nomination-for-indian-of-the-year-2011/#more-10877

his press release has been issued by the PARVEENA AHANGAR-led ASSOCIATION OF PARENTS FOR DISAPPEARED PERSONS

Srinagar, December 10, 2011:  On this ‘International Human Rights Day’, December 10, 2011, the APDP (Association of Parents of Disappeared Persons), Srinagar, wishes to state that there is something obscene and perverse in the manner the CNN-IBN has nominated our organization for the ‘Indian of the Year 2011’ award. Sometimes, human rights can be violated by merely mocking those who struggle for human rights.

The channel and its associates are promoting this ‘award’ in all their publicity material as a recognition for “architects and ambassadors of Brand India”. The APDP would like to forthwith REJECT and condemn this gratuitous nomination of our organization for this award which smacks of being yet another attempt by corporate Indian media to cover-up and neutralize the crimes of the Indian state in Kashmir.

We believe there is something sinister in the way our organisation, which has been relentlessly struggling for core human values like freedom, dignity and justice in the Valley in the face of brutal state repression – largely condoned by the corporate media – has been drafted into the eclectic ‘menu card’ of shortlisted nominees just to buy some credibility to the ‘award’. The CNN-IBN or its associates certainly did not consult us before including our name on the nominees list.

The nomination states, ‘The award recognizes the Indian(s) whose contribution to the country in a calendar year has strengthened the foundation of our society and has helped build Brand India in the process. The pinnacle of Indian achievement….’

Applied in the context of our organization, this is patently absurd. The APDP’s struggle for justice and accountability has never been about “building Brand India” but about questioning and challenging Brand India and its trampling over the rights and lives of the people of Kashmir. We refuse to allow ourselves to be co-opted into that brutal system and demean our struggle for ‘rights’ by being foisted upon with some self-styled award. Particularly, when it seems obvious that our name is on your list merely as a ‘decoration’ to help prop up your credibility.

The award citation describes APDP as an organization ‘relentlessly highlighting the issue of missing persons in Kashmir, and forcing the government and rights groups to acknowledge and act’.

Describing the cases of enforced disappearances in Kashmir as that of ‘missing persons’ and claiming that due to efforts of APDP the government and its agencies have acted and acknowledged the issue of enforced disappearances in Kashmir, is both misinformed and misleading.

We wish to place on record that there has been no formal response from the government agencies or institutions on the issue of enforced disappearances in Kashmir. The APDP have identified the perpetrators of the crimes, and there are thousands of cases pending in the Srinagar High Court seeking sanction for prosecution of the accused. However, draconian laws like the AFSPA (Armed Forces Special Powers Act) in Kashmir continue to provide them complete impunity. To claim that the government and its agencies have responded to these gross acts of human rights violations and has ‘acted’ or punished the guilty is a blatant falsehood.

This nomination is a farce. Such nominations take away from the struggle that we as the Association of Parents of Disappeared Persons have been fighting for past two decades. It also makes a mockery of the trauma and sufferings of the Kashmiri people.

The only real ‘award’ the news channel can bestow upon us is consistent and honest reportage of the heinous crimes committed by the armed forces in Kashmir and highlight the struggles and sacrifices of the people of Kashmir for justice and freedom.

We demand that CNN-IBN forthwith remove our name from their nominee’s list.

PARVEENA AHANGAR
Spokesperson,
Association of Parents of Disappeared Persons (APDP)