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Strong quarter, outlook bright

In 4QFY21, ISEC witnessed its highest ever client acquisition at ~354,000 accounts, driven in large part by the scale-up in digital sourcing. This took its NSE active client base to 1.58mn (+46% YoY). Despite the ADTO decline in the quarter, retail broking revenue grew 9% QoQ driven by higher blended yield. ISEC lost some market share due to the impact of the margin norms; however it has undertaken certain new initiatives to begin to claw this back over the next few quarters. Client acquisition is expected to remain strong going forward, aided by ISEC’s diversified sourcing and product offerings. We raise earnings by 3.9/5.9% for FY22/23ii. As a result, we marginally increase our target price to Rs580. Maintain BUY.

Key highlights of 4QFY21:

ISEC’s reported profit of Rs3.29bn grew 111% YoY driven by sharp growth in overall revenue (+53% YoY) and controlled operating expenses (+9% YoY). Brokerage revenue grew 37% YoY despite a contraction in ADTO; driven by sharply higher blended yield owing to the higher mix of equity in overall ADTO and higher mix of delivery within equity. Distribution revenue grew 25% YoY, while investment banking revenue was sharply higher at Rs0.53bn (Rs0.10bn in 4QFY20).

Raise earnings by 3.9/5.9% for FY22/23ii:

We increase our broking revenue estimates, as higher blended yields are partially offset by lower volume estimates. We also build-in a slight moderation in investment banking revenue in FY22ii. Overall however, the revenue mix will shift toward non-broking revenue streams going forward. We expect cost-to-income ratio to remain at <50% as ISEC continues to focus on improving both productivity and efficiency.

Strong profitability outlook; valuations favourable:

While overall profits could decline versus FY21 owing to the decline in broking yields, continued high pace of client acquisitions and newer product propositions would aid ISEC in delivering a 40-50% RoE going forward. We increase our target price marginally to Rs580/share.

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