The broking industry has an NSE active client base of 9.8 million as of January 2020 and has grown at a CAGR of 15 percent over FY14-19 versus an outstanding client base at 27 million, grown at a CAGR of 10 percent over FY14-19.

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The differential in growth rates is on account of a higher active client rate for discount brokers, such as Zerodha, at 80-90 percent versus 25-30 percent for traditional brokers.

Despite the rise of discount brokers, bank-backed broking companies have been able to defend their turf, with a 27-29 percent market share of active clients as on January 2020, maintained since FY14, Elara Securities said in a report.

While it is not all a shift of customer base to discount brokers, it is an influx of newer clients post demonetization and digital drive in India since FY17, where smaller brokers have found it difficult to keep up with the changing needs of clients, the report added.

Elara Securities expects the trend to continue to be in favor of large brokers, given their ability to keep up with changing dynamics.

Further, revenue growth for the top 7 brokers accounting for 35 percent of NSE active client has increased at a CAGR of 16 percent over FY14-19 on the back of 30 percent increase in volumes which implies pricing pressure.

With rates not expected to come off further as changing regulations are working in favor of large brokers in terms of client acquisition and pricing, the report sees FY20 as the bottom for revenue growth for the sector assuming market volume remains buoyant.

Despite the growing size of the broking industry, the regulator has not increased the minimum Networth requirement for trading and clearing membership (TM and CM) in the capital market and futures and options (F&O) segment, which currently stands at Rs 3 crore.

“The Networth for the large brokers remains high and comfortable and gives them an edge. The changing regulations while do not directly increase the requirement, but is pro large brokers as they have stronger balance sheet,” the report said.

Among large broking companies, Elara Securities initiated coverage of ICICI Securities with a ‘Buy’ rating and a target price of Rs 610 based on abnormal earnings growth (AEG) model which implies a P/E of 26x.

“We see moat in the business, reflective in its wide distribution, brand name, strong balance sheet and diversified revenue streams coupled with strong execution. We expect growth to resume over FY21-22, with a revenue CAGR of 12 percent over FY20-22E, which with a tight leash on operating expenses would result in earnings CAGR of 21 percent over the same period,” the brokerage said.

High free cash flow generation, with a steady payout of 60 percent plus, strong balance sheet and parent backing should provide additional comfort to shareholders, it added.

Changing regulations have resulted in 35 percent of active client base up for grabs, which clubbed with deepening sub-broker network and strategic shift to open architecture in client acquisition are working to benefit ICICI Securities, it said.