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Strong performance led by MTF and the Distribution business

* ISEC delivered yet another quarter of robust performance, with revenue (INR8.6b, 26% YoY) and PAT (INR3.5b, 26% YoY) beating our estimates by 9%. The C/I ratio inched up by 70bp sequentially to 45%, led by an 11%/34% rise in employee cost/other expenses (related to marketing cost and technology investments). Employee cost-to-total income stood ~20% v/s ~23% in FY21 and 29-32% over FY18-20.

* We have raised our FY22E/FY23E EPS estimates by ~5%/4% to factor in higher than expected traction in MTF, Distribution, and Investment Banking segments. Profitability should improve over the medium term with scale benefits. We maintain our Buy rating with a TP of INR970/share (21x FY23E EPS).

Muted growth in Retail Broking revenue, customer acquisition remains strong

* ISEC added 583k new customers v/s 390k QoQ. In 2QFY22, acquisition cost amounted to INR250-300m. The cost of acquisition in the digital channel, which is a key focus area, is witnessing a declining trend on a MoM basis.

* The activation rate witnessed an improvement (300bp QoQ) to 74%. The number of NSE active clients rose to 2.8m from 1.9m QoQ.

* Equity/Derivatives market share fell 40bp/20bp QoQ to 8.8%/3.1%.

* Revenue from Retail Broking declined by 1% both YoY and QoQ to INR3.5b.

* The Institutional Equities segment delivered 15% YoY and 3% QoQ revenue growth at INR445m.

Distribution income drives overall revenue growth

* Distribution revenue rose 53% YoY to INR1.51b (25% QoQ).

* In MF distribution, SIP count increased by 42% YoY to 0.92m, while ISEC’s market share improved to 4% v/s 3.4% in 2QFY21. Overall MF AUM was up 37% YoY to INR483b.

* With healthy deals, revenue from Investment Banking was strong at INR727m. The company continues to have a strong deal pipeline (IPO) with 54 deals amounting to over INR1,214b.

Highlights from the management commentary

* As a percentage of revenue, employee cost increased by 200-300bp in the near term.

* MTF book has been growing faster, driven by new product launches a few quarters back. ISEC’s market share in the MTF business rose to 21.8% from 17% a year ago.

* With several initiatives in the Derivatives segment, the management expects market share improvement in the next few quarters.

Valuation and view

In the past few quarters, ISEC has seen significant traction in client addition, driven by digital organic sourcing. However, the same has not been replicated in its Broking market share. With initiatives such as the NEO plan being implemented, the management expects an improvement going forward. There has been a significant growth in the MTF book, led by a strong product offerings.

Distribution income has seen significant growth, led by all sub-segments: MFs, Insurance, and Loans. With strong capital markets, new tie-up with HDFC Life, and new Loan product launches, we expect the momentum to sustain. We raise our FY22E/FY23E EPS estimate by ~5%/ 4% to factor in strong revenue traction in the Distribution and MTF business. We maintain our Buy rating with a TP of INR970/share (21x FY23E EPS).

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