Ghalla Bhansali Stock Brokers Pvt. Ltd.

25th March, 2011

Breaking into Broking

Indiaisoneoftheoldeststockmarketsintheworldwithastrongpresence of domestic and local intermediation. Stock markets in India surged over a decade on back of a wide range of economic reforms, liberalization of financial markets buoyed by greater freedom and flexibility. These changes resulted in dramaticgrowthofthestockmarketsinIndiaaswellastheequitybrokingfirms. ThebrokingindustryisemergingasarapidlygrowingsegmentinIndianfinance, intermsofbusinessgrowth,distribution&networkandenterprisevalue. In the wake of global financial market turmoil, Indian stock markets remained subdued during FY09, clocking degrowth in overall volumes of 15% yoy. Revival in economic activity and improving Indian corporate performance has abetted capital market rally during FY10. The overall stock market volumes grewby61%inFY10. Brokerageyieldsofthecapitalmarketintermediariesunderpressure Stock market volumes have undergone significant change over FY0510. Stock market volumes are more skewed towards low brokerage yield F&O segment than cash and delivery segment (which is relatively higher brokerage yield segments), thus, tempering overall brokerage yields of most of the capital marketintermediaries.

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25th March, 2011 High competition has resulted in a steady compression of brokerage commissionsovertheyearsandintenselysince2008whenRelianceMoney,one of the newentrants with amassivephysical distributionnetwork, dropped it to extremelylowlevels.Forarelativelyyoungmarket,commissionsarelowerthan evenintheadvancedmarkets. Compressing commissions result in industry equity broking revenues to growslowerthanthetradingturnovergrowth.Profitabilityofthemajorplayers isalreadydownandhighoperatingcapitalrequirementshasputthesurvivalof smallbrokersatstake. Marketshareofleadingplayerslikelytomoderategoingforward Increased participation of foreign capital market intermediaries in India has intensifiedcompetitioninthebrokerageindustry. Someofthe majorcapital marketintermediarieshavelostmarketsharelargelyintheinstitutionalsegment. The top ten stock brokers share declined over FY09 in FY10, which now stands close to 28%; however, the industry remains largely fragmented. A lower than average growth rate of capital market intermediaries will result in reduction in the market share of capital market intermediaries to persist during FY1112. Besidesimpactingtheoverallmarketshare,itmayfurtherimpactpricingpower andprofitabilityofthestockbrokingcompanies. MarketshareofTop10brokers(inpercentage)

Businessessignificantlycorrelatedtocapitalmarkets Businessdiversificationnotwithstanding,allbusinessverticalsofthestock broking companies like the securities business, investment banking, private equity, asset management, venture capital etc are directly correlated to performanceofthecapitalmarkets.Intheeventofanyseveredownturnincapital market,stockbrokingcompaniesprofitabilitygetsimpactedadversely. www.ghallabhansali.com 2

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25th March, 2011 Overall capital market volumes are more tilted towards futures & options segments The overall stock market volumes over FY0409 witnessed a CAGR of ~43%. This was largely driven by increased volume in the Futures & Options (F&O)segment,whichhaswitnessedaCAGRof52%overFY0409.F&Osegment comprise of 74% of the total stock market volumes. F&O segment carries a relatively lower yield than cash segment and thus leads to a lower blended brokerageyield.
AvgDailyTurnover BSE(cash) %oftotalvolumes NSE(cash) %oftotalvolumes F&O(NSE) %oftotalvolumes Total %Chg FY04 20 13 43 29 84 57 147 FY05 21 12 45 27 101 61 167 13.4 FY06 32 11 63 22 193 67 288 72.6 FY07 39 9 78 19 298 72 415 44.2 FY08 63 9 138 19 519 72 720 73.4 FY09 46 8 115 19 452 74 609 15.4 FY10 56 6 166 17 762 77 984 61.6

FIIsregistrationdrops Thenumberofinvestorsregisteredasforeigninstitutionalinvestors(FIIs) hasdroppedsofarthisyearafterpeakinginNovember,coincidingwiththefall in share prices. This, of course, doesnt necessarily mean that this class of investorsisfleeingIndia.Thegrowinguseofalternativeinvestmentroutessuch asindexfundsandthecostsofcomplianceinvolvedinregisteringanFIIaccount couldlimitthenumberofforeignfunds. ThenumberofFIIsregisteredpeakedat1,741inNovemberandhasfallen to1,707inMarch.Aspateofnegativenewsflowrelatingtocorruption,concerns over inflation, rising interest rates and high crude oil prices has led to an FII outflowof$1.91billion(Rs8,595croretoday)sofarthisyear. www.ghallabhansali.com 3

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25th March, 2011 No.ofregisteredFIIs
Jan-07 Jan-08 Jan-09 Jan-10 Nov-10 Jan-11 As on 21 Mar 11 0 500 1000 1500 993 1219 1594 1707 1741 1720 1707 2000

Source: SEBI

Diversifyinginfeebasedrevenuestreamsismust Indian stock broking companies have diversified into fee based capital market related business like investment banking, private equity and asset management. Although overall stock market volumes have improved significantlyduringthelastdecade,marketshareoftop10brokershasslippedto 27% from a high of 92% in FY97. Most of the large broking houses with strong balance sheet, sizeable market share are now looking at expanding their market share in both institutional as well as retail segment. Capital market intermediaries who have significant presence in the institutional segment are lookingatexpandingintheretailsegmentandviceversa. Acquisition of Anagram capital (well known retail brokerage house) by Edelweiss Capital (prominent institutional brokerage house and investment banker) is an initiation of consolidations in the industry. In contrast to this, Reliancecapital,whichhasawellestablishedretailbrokingarmReliancemoney, hasacquiredaninstitutionalinvestmentadvisoryfirmQuantcapital.

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25th March, 2011 Investment in equities as a percentage of total household financial savings is decreasing Due to global financial market turmoil, investment in equities as a percentage of total investments of household has witnessed negative trend over periodoftimeascomparedtosmallsavinginstrumentslikeNSCsandpostoffice deposits, ULIPs etc. Secondly with the rising interest rates, major part of the publicsavingshasalsomovedtofixeddepositswithbanks. Financialsavingofthehouseholdsector(gross) (RsCrore) FinancialSaving(Gross) Financialsaving%ofGDP Currency %oftotalfinancialsavings Deposits %oftotalfinancialsavings ShareandDebentures %oftotalfinancialsavings Ofwhich i)PrivateCorporateBusiness %oftotalfinancialsavings ii)MutualFunds(OtherthanUTI) %oftotalfinancialsavings ClaimsonGovernment %oftotalfinancialsavings InsuranceFunds %oftotalfinancialsavings ProvidentandPensionFunds %oftotalfinancialsavings GDPatCurrentMarketPrices 200607 650412 15.8 66,274 10.2 3,19,385 49.1 58,598 9.0 23,755 3.7 34,709 5.3 19,198 3.0 1,14,851 17.7 72,106 11.1 200708(P) 715994 15.2 81,278 11.4 3,74,088 52.2 89,134 12.4 31,565 4.4 56,799 7.9 28,315 (4.0) 1,28,930 18.0 70,878 9.9 200809# 746865 14.0 93,056 12.5 436710 58.5 19,349 2.6 31,124 4.2 10,478 (1.4) 23,479 (3.1) 150337 20.1 70,891 9.5

4,129,173.0 4,723,400.0 5,321,753.0 www.ghallabhansali.com 5

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25th March, 2011 PoorperformanceofmostIPOsinlast2years Brokers also attribute the retail and HNI apathy to poor performance of most initial public offerings that have hit the market since September last year. Duringtheearlierbullrun,hugelistingdaygainswouldthenbereinvestedinthe secondarymarket.Butoverthepast2years,individualinvestorshavelostmore moneyinpublicissuesthantheyhavebeenabletomake. Sharepriceofleadingstockbrokingfirmsdeclineinpastfewmonths Shares of key broking firms are still quoting 2050% below their yearly highsseenbetweenJuneandOctoberlastyear,whenthemarketwassoaring. BrokingHouse EdelweissCap. Motil.Oswal.Fin. IndiaInfoline ReligareEnterp. IndiabullsSec. GeojitBNP JMFinancial Emk.GlobalFin. NetworthStock AdityaBirlaMon Conclusion: The broking industry is facing a dilemma owing to the lack of market growthandpressureonyieldssincethebusinessvolumemixistiltinginfavour of derivative options. Options trading, which accounts for nearly 50 per cent of equity derivatives, is a lowyield business for brokers. Currently, brokers are scaling down business since it is becoming hard to sustain costs. Large brokers aresurvivingonthebackofautomationinbusiness. Due to volatile market conditions, retail investors have been trading cautiously.Thecurrentyearwouldbechallenging,asthemarginsonbrokerage continuetobeonthelowerside,resultinginlowerprofitability. www.ghallabhansali.com 6 CMPAson25/03/2011 38.6 122.35 69.8 487.4 15.55 22.2 23.65 49.95 34.25 24.1 52WeekHighPrice 68.05 231.5 129.6 528.8 34.15 46 47.65 119.9 74 58.55 %Fall 43% 47% 46% 8% 54% 52% 50% 58% 54% 59%

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25th March, 2011 CompanyUpdates IndiaInfoline(IIFL)Ltd India Infoline (IIFL) is one of the leading brokerage houses in India offering a spectrum of investment related services to institutional and retails customers.Withawellestablishedretailbranchnetworkofover2000outletsand expansionintoinstitutionalequitybusiness. IIFLbroadlyoperatesinsixbusiness segments, through its subsidiaries which include stock broking, investment banking, asset management & wealth management, consumer finance, and insurance distribution. In the wake of global financial market turmoil stock marketvolumeswitnesseddegrowthduringFY09&FY10.
Particulars Sales OPM% PBDT PBT NP QuarterEnded Dec.2010 198.28 31.43 56.96 50.81 37.71 Dec.2009 188.29 46.86 88.8 80.14 52.13 %Var. 5 33 36 37 28 QuarterEnded Sep.2010 175.88 41.16 61.41 55.22 40.25 Sep.2009 177.5 36.79 61.63 53.37 35.43 %Var. 1 12 0 3 14

MotilalOswalFinancialServicesLtd Motilal Oswal Financial Services is one of the leading capital market intermediaries,offeringabouquetofservicestoinstitutionalandretailinvestors. Equity brokerage business contributes over 70% of its total revenue, while asset management business (including wealth management), and financing business forms the rest. MOFS has a well established network of 1300 branches and franchisee,throughwhichitservesavastcustomerbaseof6lacs. MOFSLs market share has declined to 2.9% in FY10 from 4.2% in FY09. Since, high yield cash segment is MOFSs key focus area, lower cash segment deliverybasedvolumeshasimpacteditsmarketshareduringFY10. Particulars Sales OPM% PBDT PBT NP QuarterEnded Dec.2010 18.46 92.52 16.18 16.18 10.91 Dec.2009 %Var. 15.49 94.51 12.95 12.95 8.82 19 2 25 25 24 8.51 83.55 7.28 7.28 5.21 QuarterEnded Sep.2010 Sep.2009 %Var. 11.97 93.15 20.61 20.61 17.39 29 10 65 65 70 7

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25th March, 2011 EdelweissCapital Ltd. EdelweissCapitalLtd(ECL)commenceditsbusinessin1995asaboutique investment bank and has diversified into providing financial services varying from investment banking, institutional equities, private client broking, asset management and investment advisory services, wealth management, insurance broking and wholesale financing to corporate, institutional and high net worth individualclients. With intent to enter into retail broking business, Edelweiss has recently acquired Anagram Capital, which has healthy branch network and client base. Thecompanyconductsitsoperationsalongwithitssubsidiariesandassociates.
Particulars Sales OPM% PBDT PBT NP QuarterEnded Dec.2010 159.11 88.48 26.31 25.83 22.79 Dec.2009 53.68 69.54 4.12 3.81 4.1 %Var. 196 27 539 578 456 103.14 75.61 9.22 8.96 6.96 QuarterEnded Sep.2010 Sep.2009 61.14 80.86 8.28 7.74 5.06 %Var. 69 7 11 16 38

ReligareEnterprisesLtd. RELs businesses are broadly associated across three key verticals, the Retail,InstitutionalandWealthspectrums,cateringtoadiverseandwidebaseof clients. REL offers a multitude of investment options and a diverse bouquet of financialserviceswithitspanIndiareachinmorethan1550locationsacrossmore than460citiesandtowns.RELalsocurrentlyoperatesfrom10countriesglobally following its acquisition of Londons oldest brokerage & investment firm, Hichens,Harrison&Co.plc. For Q3December10 Religare Enterp. Even as sales simmered, margins evaporated. There was a fall of 6882 bps from 88.33% to 19.51%. Pressure on marginswasstrongenoughtosendOPonadownwardpath.
Particulars Sales OPM% PBDT PBT NP QuarterEnded Dec.2010 39.05 19.51 6 4.96 0.36 Dec.2009 9.6 88.33 0.24 0.7 4.41 %Var. 307 78 2400 LP LP QuarterEnded Sep.2010 16.16 25.8 11.05 12.06 12.29 Sep.2009 6.78 10.62 7.3 6.32 2.29 %Var. 138 343 PL PL PL

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25th March, 2011 MittalChheda mittald@ghallabhansali.com Disclaimer:
This document has been prepared by Ghalla Bhansali Stock Brokers Pvt. Limited (Ghalla Bhansali). This documentdoesnotconstituteanofferorsolicitationforthepurchaseorsaleofanyfinancialinstrumentoras anofficialconfirmationofanytransaction.Theinformationcontainedhereinisfrompubliclyavailabledata orothersourcesbelievedtobereliable,butwedonotrepresentthatitisaccurateorcompleteanditshould not be relied on as such. Ghalla Bhansali or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the informationcontainedinthisreport.Thisdocumentisprovidedforassistanceonlyandisnotintendedtobe andmustnotalonebetakenasthebasisforaninvestmentdecision.Theuserassumestheentireriskofany use made of this information. Each recipient of this document should make such investigation as it deems necessarytoarriveatanindependentevaluationofaninvestmentinthesecuritiesofcompaniesreferredto in this document (including the merits and risks involved), and should consult his own advisors to determinethemeritsandrisksofsuchinvestment.Theinvestmentdiscussedorviewsexpressedmaynotbe suitableforallinvestors.Thisinformationisstrictlyconfidentialandisbeingfurnishedtoyousolelyforyour information.Thisinformationshouldnotbereproducedorredistributedorpassedondirectlyorindirectly inanyformtoanyotherpersonorpublished,copied,inwholeorinpart,foranypurpose.Thisreportisnot directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or locatedinanylocality,state,countryorotherjurisdiction,wheresuchdistribution,publication,availability or use would be contrary to law, regulation or which would subject Ghalla Bhansali and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this documentincertainjurisdictionsmayberestrictedbylaw,andpersonsinwhosepossessionthisdocument comes, should inform themselves about and observe, any such restrictions. The information given in this documentisasofthedateofthisreportandtherecanbenoassurancethatfutureresultsoreventswillbe consistent with this information. This information is subject to change without any prior notice. Ghalla Bhansalireservestherighttomakemodificationsandalterationstothisstatementasmayberequiredfrom time to time. However, Ghalla Bhansali is under no obligation to update or keep the information current. Nevertheless, Ghalla Bhansali is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Ghalla Bhansali nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this documentareprovidedsolelytoenhancethetransparencyandshouldnotbetreatedasendorsementofthe views expressed in the report. Ghalla Bhansali Stock Brokers Pvt. Limited generally prohibits its analysts, personsreportingtoanalystsandtheirfamilymembersfrommaintainingafinancialinterestinthesecurities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is orwill be,directly or indirectlyrelatedtospecificrecommendationsorviewsexpressedinthisreport.

Information Sources: Business Standard The Hindu businesse line Mics. www.ghallabhansali.com 9