Zenvora Broking earns 60% of its revenue from equity derivatives. New rules cut derivative volumes by 30%. With 70% of costs fixed, what happens to revenue and profit?

Revenue falls 18% to Rs 820 crore, but pre-tax profit falls about 37% to Rs 252 crore. Derivatives revenue drops by Rs 180 crore, yet only Rs 32.4 crore of variable cost goes with it, because Rs 420 crore of costs are fixed. The margin falls from 40% to about 31%. Concentration in one revenue line plus a fixed cost base roughly doubles the percentage hit.

Picture a coaching centre whose rent and teachers' salaries are fixed. If a third of its students leave, the fees fall a third, but the rent does not, so profit falls much more than a third. When most costs are fixed, every lost rupee of revenue falls almost straight to profit, and the percentage fall in profit is a multiple of the fall in revenue. That multiple is operating leverageHow much profit changes for a given change in revenue. High fixed costs mean high operating leverage, in both directions., and here it is about 2.0x.

Derivatives revenue of Rs 600 crore falls 30% to Rs 420 crore; other revenue is unchanged at Rs 400 crore, so revenue is Rs 820 crore, down 18%. Variable costs were Rs 180 crore on Rs 1,000 crore of revenue, 18 paise per rupee, so they fall to Rs 147.6 crore. Fixed costs stay at Rs 420 crore, so profit is Rs 820 crore less Rs 567.6 crore, about Rs 252 crore, a fall of 36.9%.

Three levers, in order of speed. It can cut fixed costs, but slowly: a 10% cut to the Rs 420 crore base adds back Rs 42 crore, taking profit to about Rs 294 crore, still well below 400. It can push customers towards cash equity and distribution, which earn less per client but are not hit by the rule. And it can accept a lower margin while competitors with weaker balance sheets shrink. The analyst's point is that concentration was the risk all along: 60% of revenue from one product, under one regulator's control, with costs that could not follow it down.

Say the limitation. Revenue may not fall one for one with volumes: brokers can raise pricing on the remaining trades, and the most active traders, who generate a large share of revenue, may be the least affected. Ask for revenue by customer activity band before accepting the full 30%.