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Discount broking industry is getting overcrowded: Prakarsh Gagdani, 5paisa

Retail investors have been a dominant force in the market, as evidenced by the growing number of demat accounts over the past few months. PRAKARSH GAGDANI, chief executive officer, 5paisa.com – one of the first and the largest discount broking firms in the country – tells Puneet Wadhwa in an interview that this is the first time that the retail participation has been pushed to 65-70 per cent of the exchange turnover, helped by a sustained 15-month rally in stocks and flurry of good quality IPOs. Edited excerpts: Traditional broking firms have faced stiff competition from thei.....
Retail investors have been a dominant force in the market, as evidenced by the growing number of demat accounts over the past few months. PRAKARSH GAGDANI, chief executive officer, 5paisa.com – one of the first and the largest discount broking firms in the country – tells Puneet Wadhwa in an interview that this is the first time that the retail participation has been pushed to 65-70 per cent of the exchange turnover, helped by a sustained 15-month rally in stocks and flurry of good quality IPOs. Edited excerpts:

Traditional broking firms have faced stiff competition from their discount broking peers. Do you see this intensifying going ahead?

There has been a tectonic shift in the broking industry in the last 18 months where not only the new discount broking players are taking away the larger market share, but also the incumbent full-service brokers are shifting to the discount services. It appears that there are many more in the offing. The competition has already intensified. Five large discount brokers have already garnered 70-75 per cent of the market share and the others are trying to have their pie. Broking has always been a very competitive business and it will continue to be so.

Has the discount broking industry segment getting over-crowded now? Impact on margins and profitability going ahead?

Discount broking industry is getting overcrowded. In any digital ecosystem, typically two – three top players take away the major market share. The margins may remain subdued depending on business strategy. If a broking company is in a growth phase and customer acquisition is the main cost, then obviously the margins will be impacted, but that will be compensated by growth in both customer acquisition and revenues over time. The beauty of digital business is that one starts getting operating leverage once the threshold level is crossed. Since the industry is right now in the booming phase, the threshold may be round-the-corner.

How has 5paisa.com's customer base grown in the past one year? How many would be first-time investors? Is the investor base getting younger?

5paisa added almost 8 lakh new customers, which was almost 200 per cent growth as compared to fiscal 2020-21 (FY21). Almost 75-80 per cent of our customers are under 35 years in age, largely first-time investors and come from tier-2 and tier-3 cities. With the onset of Covid, there has been a tectonic shift in the retail participation towards the capital market. Though it started off in 2017 with Mutual Funds (MFs) as entry point, 2020 became the year of debt and equity investments, including initial public offers (IPOs). The acquisition numbers have only been growing every quarter and I see them growing more in the foreseeable future.

How is the retail participation different from the bull-runs seen earlier?

During the bull-market, retail participation typically hovers around 55 per cent of the exchange turnover and falls to 40 per cent levels during bear market. This is the first time that we have seen that the retail participation is pushed 65-70 per cent of the exchange turnover, helped by a sustained 15-month rally in stocks and flurry of good quality IPOs. Higher retail participation is always good for the industry as it provides the depth for the stock market to grow. However, if there is volatility and a market correction, the retail participation may dip. Customer inflow, including the first time investors will continue to be healthy if not dominant.

Is there a method to the increased retail participation in the stock market or are they just lapping up most paper that hits the Street?

There have been a few investment patterns that we see. One is obviously healthy participation in the primary market. Most IPOs that have come are of good quality companies; so it is difficult to say if the customers lapped up every paper that hit the Street. The second trend is the increasing participation of retail investors in the derivatives segment. With technology being in the forefront in the last few years, there has been a shift in the people’s approach to the capital market. They now prefer investments through Application Programming Interfaces (APIs), Algo trading and approaching the derivative market with the option strategy. With hedge margin, the entry barrier has reduced, which is why a lot of tech-savvy people and younger generations are now trading in derivatives, option strategies and trying algos. That apart, we see a healthy broad-based participation by retail investors in the large-, and mid-cap segment.

Do you expect the IPO frenzy to continue in the months ahead?

IPOs typically hit the market when the liquidity is good – and it is good right now. Retail investors and banks are flooded with liquidity. A lot of high networth individuals (HNI) and MF money are also chasing stocks. Given this, the participation in the IPOs and companies tapping the primary market will continue for a while. The IPO frenzy will continue and the retail participation will be healthy.


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