Higher Brokerage Soon? ??

What’s Up, Market?

Monthly Performance

Nifty 50:?+4%

Tech Mahindra:?+6%

Founder’s Recap?

SEBI’s Fee Overhaul: A Fair Play? ??

SEBI has just dropped a game-changing directive, which has everyone talking. While it is meant for market infrastructure institutions (like stock exchanges, depositories and clearing corporations), it is likely to result in higher brokerage for investors.

The media widely reported Nithin Kamath saying Zerodha may have to let go off its zero brokerage structure, or increase brokerage for F&O trades. Gone are the days of 0 brokerage then?

What’s Happening?

Market infrastructure institutions, like stock exchanges, depositories and clearing corporations charge stock brokers slab-wise fees, based on their turnover. Higher the volume stock brokers generates, lower their fees are.

Brokers however, charge investors at the highest slab rate. The difference between what brokers charge investors and what they pay to exchanges, they pocket, and show as revenue.

While this may seem petty, the difference made up for a healthy chunk of profits for brokers. For Angel One this spread contributed to ~20% of its profit in FY24.

What Will Change?

Once the SEBI guideline comes into effect in October 2024, brokers will have to pass on the exact fees to MIIs, eliminating any chance for extra earnings, which they used to get because of their higher turnover advantage.

It’s a move towards greater fairness but one that comes at a cost for the brokers. This change signals a shift toward greater transparency, but it also requires brokers to adapt quickly or face significant profitability challenges.

Why Should I Care?

As brokers grapple with reduced profits, some might hike their brokerage rates. Investors who enjoyed rock-bottom fees may need to prepare for slightly higher charges. It’s a small price to pay for transparency but one that might sting nonetheless.

On the bright side, this directive aims to make trading fees clearer and more predictable. Smaller brokers can compete more effectively, potentially leading to better services and innovations in the market.

Zerodha’s popular zero-brokerage model might be on the chopping block. Investors should watch for changes in their fee structures as brokers adjust to the new regulations.

Wrapping Up

While the transition may be tough, SEBI’s directive paves the way for a more equitable market. Investors can look forward to transparent fees and fairer competition among brokers.

With old fee structures out the window, brokers will be pushed to innovate, creating a healthier, more competitive trading environment.

So, buckle up and get ready for a market where transparency reigns supreme and everyone plays by the same rules—well, in theory at least. Here's to a fairer trading future!

Market Stories?

Will a New CEO Solve Tech Mahindra’s Problems? ??

Despite being a heavyweight in the IT world, there’s one company that’s often struggled to keep up with the likes of TCS and Infosys.

No, we aren’t talking about Wipro. We are talking about Tech Mahindra, which unlike Wipro, only underperforms periodically. Tech Mahindra, over the years, has been marred by a high amount of cyclicality, thanks to its dependence on the telecom sector for a large part of its revenue.

As we all see around us, the global telecom industry goes through cycles of research and deployment (like 3G to 4G and so on), and that directly has a bearing on Tech Mahindra, which assists major telecom providers with services around development, maintenance, networks, processes and upgrades, amongst others.

But now, there’s something brewing, which can potentially change the fate for Tech Mahindra. It has brought in a new leader, with an ambitious three-year plan in place, which could give it a new direction, and re-write its path.

What’s the Problem?

For the first time in 5 years, the company’s revenues dropped from US$ 6.4 billion in FY23 to US$ 6.2 billion, declining by 2%.

While the drop can be attributed to an across-the-board slowdown, thanks to high inflation, rising rates and lower economic growth over the last couple of years; for Tech Mahindra, the story is slightly different.

Its revenue from the Telecom segment, which makes for 36% of its total revenue, declined by 12% in FY24. Most telcos incurred significant capex on 4G migration and 5G deployment over the last few years, resulting in a drying down of IT budgets, directly impacting revenue growth for Tech Mahindra.

The Diversification Solution…

High Telecom exposure is a legacy problem for Tech Mahindra. It was originally founded Mahindra British Telecom (MBT) in 1986 through a partnership between Mahindra & Mahindra and British Telecom, which transitioned to a standalone entity when British Telecom exited the venture in 2012.

In 2012-13, the Mahindra’s made a rather ballsy move by acquiring the fraud-laden Satyam Computers, which gave it exposure to IT services in sectors like banking, financial services, retail and healthcare.

Cut to a decade, after robust organic growth and numerous acquisitions, Tech Mahindra has managed to go from a 100% Telecom exposure, to about 36% now.

But the industry is so deeply cyclical, that despite a revenue of US$ 2.2 billion from Telecom, Tech Mahindra saw a revenue decline of 12% in FY24.

…Isn’t Really the Only Solution

But Telecom isn’t the only problem Tech Mahindra has been grappling with.

1. While revenue declined, there seemed to be little hope for a strong revival that order wins provided. The TCV (Total Contract Value) of deals Tech Mahindra’s got in the bag has been reducing since FY22 - to US$ 1.9 billion in FY24, from US$ 3.3 billion in FY22
2. A large part of that can be attributed to missing large deal wins. The last time Tech Mahindra won a big deal was back in 2019 from AT&T (US Telecom company) which was worth more than US$ 1 billion
3. At the same time, revenue from its top 10 clients has fallen from 30% of the total revenue in FY23 to 26% in FY24 since a majority of its clients are in the Telecom space, with one even declaring bankruptcy
4. The company has been divided across 12 business units which made operations siloed. This fragmentation showed up as a problem not just in management, but also in deal making, and focus on top clients
5. Tech Mahindra has also been seeing some management flux, with 2023 seeing 5 exits taking place at the leadership level

New Leadership In

A leadership change in Tech Mahindra has brought a ray of hope. With the previous CEO resigning, the company has hired the BFSI president of Infosys, Mohit Joshi.

This move made sense as the company was lacking in the BFSI segment, whereas its peers TCS and Infosys predominantly earn their revenues from this segment.

Mohit, along with him brought Atul Soneja (now COO, the company did not have a COO before this), Richard Lobo to head HR and Peeyush Dubey to head marketing.

The new leadership brings a host of advantages, which seem like legit solutions to existing problems - focus on BFSI, positions held in a much larger organisation, processes and systems, sales rigour, and even deep industry / customer connect.

New Ambitions Laid

With this, the company aims to achieve:

1. Revenue growth > peer average
2. EBIT Margin of 15% (versus 6% as of FY24)
3. ROCE of >30% (versus 12.5% as of FY24)

The management has clearly outlined the transformation roadmap for the company over the next three years:

Additionally, the company has changed its strategy of acquiring companies in the past, to focus more on organic growth for the coming years. In the past, Tech Mahindra has made 36 acquisitions till date and have spent US$ 1.7 billion on the same.

As Tech Mahindra embarks on this transformative journey, we can expect some volatility in FY25 due to the significant changes being implemented. However, the company is clearly on the path to a turnaround.

With a new management team, strategic initiatives like Project Fortuis, and a focus on innovation and efficiency, the future looks promising for Tech Mahindra.

It will be fascinating to watch how these changes unfold and drive the company towards success. Keep Tech Mahindra on your watchlist—this could be the beginning of an exciting new chapter for the IT giant.

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