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Good quarter but uncertainty ahead

With FY21 being a super-normal year for brokers, ISEC reported pure broking revenue growth of 55/12% YoY/QoQ. With implementation of the second phase of peak margin, ISEC lost another 330bps QoQ in derivative market share. However, we are comforted by (1) the company’s focus on gaining client share through diversified channels and (2) its initiatives to recoup its market share. However, we remain wary of the impact the successive phases of peak margin regulations may have on the overall trading activity.

Discount brokers’ acquiring a higher client share remains a concern. Given the highly cyclical nature of the business and the stage of the current cycle, we expect earnings to moderate in FY22/23E. We maintain an ADD rating with a target price of INR560, i.e. 23x Mar-23E EPS.

* 4QFY21 highlights: The total broking revenues at INR 5.03bn (+55%/12% YoY/QoQ) were ahead of estimates (+28% vs. estimate) as the share of highyielding cash delivery volumes improved in the overall mix. The implementation of the second phase of peak margin requirements resulted in derivative/cash market share falling further 330/90bps QoQ in Mar-21. Client acquisition has significantly picked up to 354k acquisitions (+234/155% YoY/QoQ), with digital channel contributing the majority share. ISEC believes that the higher number of trades will compensate for the lower pricing in the derivatives and intra-day segments. MF distribution revenue was at INR694mn (+22/11% YoY/QoQ) as AAUM recovered 8% sequentially, driving the overall distribution revenue higher by 22/22% YoY/QoQ to INR1.41bn. Driven by 15 deals, IB revenue grew +4.4/1.3x YoY/QoQ to INR533mn.

* Employee expenses improved 24/18% YoY/QoQ as performance for maximum payable variable pay was achieved in 1HFY21; ISEC had already provided for this. However, other expenses grew sharply (+65/58% YoY/QoQ) as a result of expenditure on technology and digital marketing. The strong beat on APAT (+41% vs. est.) at INR3.3bn (112/24% YoY/QoQ) was driven by higher revenues, but partially offset by higher expenses.

* Outlook: While FY21 has been a year of volatile markets, we believe volumes would moderate in FY22E, particularly in the derivative segment. Further, we remain watchful of the impact of changing regulations, and believe earnings are peaking out.

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