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Muted performance led by pressure on MTF NIMs 

* ICICI Securities (ISEC)’s overall revenue declined 7% YoY to INR8.8b in 3QFY23, In-line with our estimate as the weakness in retail brokerage and IB revenue was offset by strong interest rate-linked revenue (MTF and Treasury book).

* ISEC’s retail broking revenue declined 13% YoY to INR3.3b. The fall would have been steeper had it not been for an 18% YoY growth in interest income and 35% YoY jump in Prime Fees. Issuer services segment’s revenue dipped 56% YoY to INR483m during the quarter.

* PAT for 3QFY23 stood at INR2.8b (-26% YoY), in line with our estimate, while C/I ratio contracted to 57.1% (v/s our estimate of 56.2%).

* ISEC’s revenue for 9MFY23 stood at INR25.4b (flat YoY) with PAT at INR8.6b (-18% YoY).

* Our EPS estimates broadly remain unchanged. We maintain our BUY rating with a TP of INR610 (premised on 15x FY25E P/E).

Weakness in retail broking revenue continues

* ISEC’s retail broking revenue declined 13% YoY to INR3.3b. However, its retail cash segment market share improved 66bp YoY to 10.5%, while derivatives segment market share expanded 22bp YoY to 3.8%.

* The Institutional Equities segment revenue declined 17% YoY to INR363m in 3QFY23. Other fees and charges were up 106% YoY to INR313m along with improvement in treasury income to INR332m (up 45% YoY).

* ISEC added 340k new customers in 3QFY23 v/s 676k YoY. The activation rate declined 23% YoY to 51%. The number of NSE active clients fell to 2.69m from 2.75m YoY.

Interest income and distribution income drive revenue growth

* ISEC’s interest income grew 18% YoY and 16% QoQ to INR1.7b. Avg MTF book improved to INR64b YoY from INR52b, whereas MTF market share rose 50bp YoY to 22.7%. As directed by the management, ESOP book dipped to INR7.9b v/s INR13.9b last year due to revised regulatory norms.

* Distribution revenue rose 2% YoY to INR1.7b, led by strong performance in Life Insurance segment. Others segment fell sharply by 8% YoY. While SIP count improved marginally to 1.2m, SIP flows recovered to INR12.3b following two consecutive quarters of decline.

* Investment & Trading income increased 45% YoY to INR332m (-21% QoQ).

Highlights from the management commentary

* The new discount broking platform will see a soft launch during CY23 followed by an official launch. The product, under a new brand, will use the “Powered by ICICI Direct” approach.

* Tech spends have risen QoQ by INR120-140m to INR500m in terms of opex. The large tech spends (capex) will continue for another 4-5 quarters, which will be directed towards building data centers and moving to cloud. Approximately INR1b will be incurred as capex for these initiatives

Valuation and view

ISEC has seen tough times in the recent past due to high linkage of its revenue to broader equity markets. This has translated into a sharp decline in broking revenue as its dependence on cash volumes has been relatively higher. However, there has been stability in 3QFY23. The primary issuances are recovering from the lows seen during 2QFY23. ISEC is now on the course of diversifying its revenue with the launch of several tools and products for the derivatives segment. Besides, the company has intensified its focus on increasing penetration of MTF among its customers. The launch of new distribution products will further enhance revenue in due course. On the cost front, ISEC is judiciously spending on human resource and technology. We broadly retain our estimates and maintain our BUY rating on the stock with a TP of INR610 (premised on 15x FY25E P/E).

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