Brokerages profit, revenues to take a hit in FY25: CareEdge

Net profit of brokerages to hit by 400 basis points on account of various regulatory changes announced in the last few months said, a report by CareEdge Ratings.

Per CareEdge Ratings’ latest research on stockbrokers, the industry’s revenues are likely to grow at a slower pace of 13 per cent in FY25.

“These changes have not only impacted trading volumes and profitability but also the revenue streams. The industry’s ability to adapt to these changes remains crucial for maintaining stability and growth,” it further said.

Several regulatory measures have been introduced in the past six to nine months, targeting excessive retail participation in the derivatives market. Among them are substantial increases in security transaction tax (STT) rates, changes in market infrastructure institutions charges and new rules directly affecting F&O trading activities.

Key changes

Notable changes were announced during the July 2024 Budget, where STT rates were raised for options and futures orders. Additionally, MIIs revised their charges, effectively reducing brokers’ revenues by 10-20 per cent due to the elimination of transaction or turnover charge rebates. Further regulatory changes, including increased contract sizes, margin hikes, and alterations in the treatment of options expiry, have contributed to a sharp decline in F&O turnover, with volumes plummeting from ₹11,410 lakh crore in October 2024 to ₹6,044 lakh crore in December 2024.

In terms of overall market activity, while F&O volumes have dropped, cash segment volumes have remained relatively stable, with some recovery observed in December 2024.

In the near term, CareEdge Ratings expects the cash segment volumes to stabilise at around ₹21-22 lakh crore per month.

After achieving a 29 per cent growth rate over the past three years, revenue growth will slow to 13 per cent in FY25. The first half of FY25 witnessed industry revenues of around ₹23,500 crore, which are expected to decline to around ₹20,500 crore in the second half, it further said.

While the impact of MII changes has directly reduced revenue streams, net profits, in absolute terms, are expected to remain in line with FY24 levels despite a decline in the net margins, the rating agency said. Industry-wide, PAT margins are likely to contract in FY25 to 32 per cent from 36 per cent in FY24, as counter-measures taken by brokers, such as repricing products and expanding margin trading facilities, may not fully offset the impact of regulatory changes.

Diversifying to MTF

In response to these challenges, stockbrokers have started diversifying their revenue sources, CareEdge said. “One key strategy is increasing focus on margin trade facility (MTF), which has become an attractive alternative to the slowing F&O segment. MTF allows investors to leverage their investments and has witnessed sharp growth since FY22, with the MTF book growing at a CAGR of 70 per cent and reaching ₹57,000 crore in FY24,” it further said.

Further, the share of fees and commissions (from traditional broking services) in total revenues of stockbrokers has gradually decreased, from 75.4 per cent in FY22 to 63.5 per cent in FY24, and the share of MTF interest in total revenues has grown from 8.1 per cent in FY22 to 10.4 per cent by September 2024.

CareEdge Ratings expects MTF’s share to rise to 12 per cent in H2FY25, underscoring the growing importance of MTF as a revenue stream amid tightening conditions in the F&O market.