With the brokerage industry in India undergoing transition to new cost saving methods, is it wise to invest in publicy listed brokerage companies?

With the brokerage industry in India undergoing transition to new cost saving methods, automation and direct investments, is it wise to invest in publicy listed brokerage companies?

eg Edelweiss, Motilal Oswal etc

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Hey readers,

While investing in companies as Edelweiss, Motilal Oswal the misconception is that you are investing in a brokerage business, in fact, there are various other vertices that investors usually miss out on.
The research is a very basic and not a mind-blowing one but I believe its important in decision making and a brief sense of the trend of the industry.

Motilal Oswal -

If you go through the below screenshot you’ll notice that Motilal was anchoring its major revenue from pure brokerage a few years back. The trend from FY16 shows that they are concentrating more on the verticles and horizontal of the financial services business.

For the simple reason being other verticles command more margins over a pure brokerage one.
Brokerage is a small pool compared to the ocean financial services business has to offer.

The future of any business is giving the consumer a holistic approach, being an end to end provider of all financial services under a single roof. This will help companies gain more market share which will domino into higher revenue/profits. (profits being variable as to how well a company can manage its operations, cash flows etc)

Below is the screenshot of a statement from Motilal Oswal annual report

Coming to Edelweiss-


If you go through the below screenshots you can notice the capital business is growing at a higher pace than the other ventures.

A statement from Edelweiss 2018 annual report

No company should ever stick to pure brokerage, if it does it is inevitably limiting itself to the vast opportunities of revenue that can be generated.

Most of the big players are slashing their brokerage prices(Axis direct and angle broking being the latest ones), the logic being by charging lower brokerages the client is on board and then starts the concept of cross-selling which garners more margins when the customer uses the partner products.

Example zerodha -
Started as brokerage business moved into mutual funds, invested in startups that helped the business inevitably and now venturing into NBFC, soon may become a one-stop solution for financial services by becoming a bank.

An HBR (Harvard business review) report states acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.

Hence it would be a logical step selling more to the current ones rather than go hunting for new ones.

A one-stop solution trend has been catching the pace in the current industry, players, as we chat in China, are providing various services in a single app.

Paytm”s vision is to be the go-to segment for financial services or in laymen terms amazon of financial services.

Rather than investing only in channel based companies (specific to the financial services industry) investments in broad-based companies who disrupt the supply chain should be lookout by investors.