With a pure broking revenue pool of >INR85bn, discount brokers, the "no-frills" challengers of the broking industry, are poised for a 10-percentage point (pps) increase in revenue market share (RMS) to 37% by FY25 on the back of their massive share of wallet in the increasingly relevant millennial population and rising mix of app-based trading. Given the current industry structure (low entry barriers, rising costs of compliance, and high competitive intensity), our analysis suggests that a bulk of the RMS gains would accrue from traditional brokers, especially the long tail of standalone brokers. We construct and introduce our proprietary wallet share quotient (HSIE-WSQ) to demonstrate that discount brokers have a decent 26% share of this wallet and have established a firm right-to-win (RTW) with this segment of consumers. Basis the results from our in-house survey and discussions with practitioners, we outline 13 vectors across four categories to construct our proprietary HSIE-RTW Quotient, a framework to help identify dominant franchises with an indisputable right-to-win. Finally, we outline a couple of potential endgames that are likely to shape the discount broking industry over the next 4-5 years.
Revenue pool to grow 2x by FY25; discount brokers slated for 37% RMS: Amidst a doubling of the overall broking revenue pool (INR230bn), discount broking revenues (pure broking) are expected to grow 2.8x to INR85bn by FY25 on the back of rising demat penetration (FYTD monthly demat adds at 6x vs. FY20), calibrated consolidation of pricing power, continued buoyancy in capital markets and the advent of highly-convenient app-based trading. Our analysis implies a 37% RMS for discount brokers within the overall pure broking revenue pool from an estimated RMS of 27% in FY21.
Discount brokers dominate share of millennials' wallet: Given the rising significance of millennials (~400mn, 34% of India's adult population and nearly 50% of working population), it is crucial for capital market firms to understand their investment habits. We estimate that millennials currently contribute ~14% of the total equity wallet. We construct and introduce our proprietary wallet share quotient (HSIE-WSQ) to demonstrate that discount brokers have a dominant 61% share of this wallet and have established a firm Right-To-Win (RTW) within this segment of consumers. However, as millennial incomes and aspirations grow over the next decade, over 10mn NTM (new to market) clients will be up for grabs for bank-led brokers.
Constructing the HSIE-RTW Quotient: Basis our discussions with global as well as domestic industry practitioners and consultants and our proprietary survey results (N > 50), we list 13 vectors to construct the HSIE-RTW (right-to-win) Quotient, a framework to identify the secret sauce for a dominant discount broking franchise. These vectors are classified under four pillars: (a) user interface (UI / UX); (b) platform responsibility index; (c) quality of customer franchise; and (d) product/service breadth for potential upsell.
Investment implications: Despite a work-in-progress tech interface, we identify ICICI Securities (ISEC) as the "franchise to beat" on the back of its early efforts on the open-architecture client acquisition funnel. We maintain ADD with a TP of INR975 (24x Sep'23 EPS). On the other hand, Angel Broking (NOT RATED) appears to have solved for the user interface but now needs to graduate towards building a quality customer franchise.