With margins getting skewed in the broking business, Reliance Securities last year saw turnaround after nearly a decade of existence. In this regard Mahesh Nayak of Business Today met with B Gopkumar, Executive Director & CEO of Reliance Securities, to understand how the company managed to come out of losses in a highly competitive industry, what are his plans to grow in the business where surviving on a single product offering is becoming a challenge, the role of technology in building scale and the overall outlook for the broking and equity market in 2018.
1. What have been the couple of big changes which we have seen in the past five years in the broking industry and why? What has the impact been of these changes on the industry and your business?
We've witnessed a big shift in the broking category over the last few years. Broking business models are evolving with focus on providing customization at customer level. Category is evolving from one size fits all to catering customer segments in a highly specialized way; be it through advanced and intuitive web platforms to instant and intelligent trading through mobility. Customisation at customer level has become a key to remain relevant in this competitive space.
Today, customers are being served by 3 sets of service providers. One, banks who tap into their own customers, providing them end-to-end solutions. Second are the discount brokers who latch on to the price sensitive clients and then you having the value-based brokers. There is a huge opportunity in diversification where one can distribute all products to clients across various segments from HNIs to retail.
Reliance Securities is comparatively a new entrant to the broking industry. We are just a 10-year-old organization. This gives us a large challenge to build platforms and products across the entire spectrum to attract customers and give them a differentiated service. We could have done this by a complete digital transformation, which we started effecting since the past one-and-half years. We have launched a mobile application; a web-based platform based on Big Data and has also made the customer Onboarding entirely digital. The next step obviously is to help customers avail investments products like Mutual Funds & Insurance digitally as well.
2. Can pure stock broking business survive in today's environment and how? If pure broking business can survive why is Reliance Securities diversifying and not focusing purely on the broking business?
Broking category is highly competitive. It'll be challenging for any brokerage house to survive standalone on a single product offering. Expanding the product portfolio with right mix of investments products like Mutual Funds & Insurance will greatly help businesses in providing holistic investment solutions to customers under one roof. Technology will play a big role in building up scale for providing the investment offerings at a mass level.
3. What is the value that the company has added that its broking volumes in the last two-three years have jumped six times? How do you plan to manage and sustained such growth?
Digitisation and technology have played a big role in transforming the business. Customer onboarding is completely digital now -- 95% of our accounts opened digitally, and customers are able to trade on the same day. While 60% of customers trade online, mobile contributes to 15% of our topline. Our mobile market share has increased from 5% to 13.5%. Improved broking yields through segment-based pricing, integration of broking and distribution on a single platform and continued focus on digital initiatives including deploying a fully online digital acquisition model, will be the key drivers of our future growth.
4. Do you think you can compete with the discount broking companies in terms fees and why?
Over the past 18 months, we have evolved into an integrated financial products aggregator. Being brand agnostic has been working well for us and we hope to capitalise on the same going forward. Broking is a part of a larger bouquet of services that we are providing as of now and within that, the value that we are providing in terms of technologically backed and thoroughly researched investment options across various asset classes is what we expect will keep us ahead of the curve in terms of competing with pure discount brokers. Clients today are a scientifically evolved lot. Any innovation based on scientific decision making is bound to make them see value in what is being offered and that is exactly what we are doing. We strongly believe that value added services for customers to make their investment decisions will pay off premium for the same.
5. With margins getting skewed in the distribution business particularly mutual fund how is the company managing to grow its revenue and profit?
This is partially true. Though margins are getting skewed, the market, especially if you talk about mutual fund distribution, has expanded exponentially. This has happened particularly after demonetisation where a large number of retail investors have taken the mutual fund route to enter equity markets. More important is the fact that the mass affluent wealth business per se is all about scale and digital intervention helps to bring down the cost of customer acquisition thereby helping businesses to operate at much lower costs & build scale in a shortest possible time.
6. Is the product basket complete or do you see more product offering to the customers from Reliance Securities? Which are those new areas of business and why are you venturing into those businesses?
We have a good product mix that we are offering our customers presently. This includes over 22,000 investment & savings products including Mutual Funds, Stocks, Insurance, PMS, Corporate FDs & Bonds amongst others. We will soon be adding lending products to our portfolio. We intend to add products suiting to customers' persona, a few of which are already in different stages of evolution. ETFs are one segment where we see a huge opportunity. This will help our customers avail offerings across asset classes as per their requirements.
7. Is it easy for a new player to venture into the broking business and why?
Competition is quintessential for any sector to thrive and the opportunity in the broking space for newer players as well as existing ones to expand does exist. However, it is important to keep in mind that innovation is the key. Creating differentiators in terms of product offerings and not merely playing on the price points is very important. The entry barriers in this business, particularly with regards to factors such as capital adequacy norms are very low as compared to other sectors such as banking & NBFCs. Hence, I believe given an opportunity of vast market potential, there's always a room for new entrants in the category.
8. Last year how has Reliance Securities managed to turn profitable in its operations? Which were the businesses that the company focused on to turn profitable and which are the businesses that the company exited and why?
The primary reason for our success last year was a complete focus on cash market delivery volumes. We have ensured client additions driven by a 'Mobile-First' strategy. We will continue to improve our processes as digital innovations in client acquisition and servicing have led to great cost savings. With Customer First approach, we were able to customise products at client level which helped us achieve both volume and scale in the business.
9. Which business is the biggest revenue contributor to the company?
80% of our business comes from the broking while distribution brings in the balance. Our focus is to improve both RoI & RoE with an endeavour to get the revenue mix at 60:40 for Broking and Distribution businesses respectively in the months to come. This is sought to be achieved by improving the distribution in the mass affluent space through both Digital & branch model. With 650+ Sales force in the mass affluent business; we are the largest in distribution space amongst the category.
10. With the Sensex at 34,000 what in your view does this mean for the broking industry, the markets and the investors?
A new high in equity markets is generally followed by heightened trading and investment interest among retail clients, which generally augurs well for the broking business. Equity markets optically are valued richly at this time due to sluggish earnings growth in the past. Therefore, recovery in earnings growth is very crucial for equity markets to sustain these levels and valuations. There will be fair amount of interest by retail investors to enter markets through either Mutual Funds or direct equities route. We see an upside in the Cash delivery volumes coming primarily from Midcap & Small cap stocks resulting in businesses to do very well.
11. What should investors be doing at this point?
New equity investors, who have time horizon of more than 18-24 months should be making gradual entry into equity markets through either Mutual Funds or direct investment into high quality companies and should increase exposure in phased manner with every correction. Existing equity investors should continue their regular investment in equity markets. Regular investment in equities tend to save investors from too much undesired volatility, probability of which is quite reasonable given the high valuation in markets. First time investors can look at entering markets through a MFSIP route while seasoned can capitalise on ETFs.
12. What is your outlook for 2018?
We believe that returns in 2018 from equity markets will primarily be dependent on interplay between domestic liquidity and earnings growth. Earnings growth has been a laggard and markets are discounting a bounce back in FY19. Any slip in earnings growth will be detrimental for performance of equity markets in 2018. Probability of recovery in earnings growth is reasonable because of low base created due to demonetization and GST. Therefore, performance in equity markets is expected to remain moderate in 2018 but certainly not as high as current year.