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Brokerage revenues stay flattish, MTF and distribution income yield positive surprise

* ISEC witnessed flattish retail broking revenue for the seventh consecutive quarter despite improved traction in client acquisitions. However, this was more than offset by the strong performance in distribution, MTF books and investment banking revenue. Resultantly, ISEC’s 3QFY22 revenue at INR9.4b (+52% YoY) was 10% higher than our forecasts. PAT at INR3.8b (+42% YoY) was ahead of our estimates by 11%, while the C/I ratio inched up 90bp sequentially to 45.9% driven by 11% rise in other expenses (mainly marketing costs and technology investments).

* We have raised our FY22E/FY23E EPS by ~3%/1%, to factor in higher-thanexpected traction in the distribution segment. We have, however, lowered our growth estimates for Investment Banking and MTF segments (due to the impact from ESOP funding rule). We maintain our BUY rating on the stock with a revised TP of INR1,000 (based on 21x Sep’23E P/E), implying 22% potential upside.

Retail broking topline remains muted; client additions gain traction

* Retail broking revenue remained flat QoQ, but grew 7% YoY to INR3.5b.

* ISEC’s equity market share declined 50bp QoQ to 8.3% and derivatives market share saw a contraction of 10bp QoQ to 3.0%.

* The Institutional Equities segment delivered 15% YoY growth and 2% QoQ de-growth at INR438m.

* ISEC added 676k new customers in 3QFY22 v/s 583k QoQ. Its Prime plan saw the highest ever client additions during 3QFY22, taking the total customer count to 960k. Client acquisitions in the Neo plan have also started to witness some uptick.

* The activation rate was stable sequentially and improved 700bp YoY to 74%. The number of NSE active clients rose to 2.8m from 2.3m QoQ.

Distribution income continues to drive overall revenue growth

* Distribution revenue rose 52% YoY to INR1.6b (+8% QoQ), led by strong performance in MF distribution that grew 11% QoQ. SIP count rose to 0.98m from 0.92m in 2QFY22. Overall, MF AUM grew 31% YoY to INR503b.

* With healthy deals, investment banking revenue jumped to INR1.1b. ISEC continues to have a strong deal pipeline (IPO) with 63 deals amounting over INR850b.

Highlights from the management commentary

* Gross revenue impact of INR150-200m due to the revised RBI guidelines on ESOP funding. The MTF and ESOP books to see some decline in the coming quarters with ESOP books winding down.

* ISEC’s market share in the MTF business stood at 22%.

* Some of the initiatives, to improve the market shares in Cash and Derivatives segments, have already been implemented and a few would be implemented in 4QFY22. Results are expected to be visible in 1-2 quarters.

Valuation and view

ISEC has seen significant traction in client additions over the past few quarters, driven by digital organic sourcing. However, the same has not been replicated in brokerage market share. With initiatives such as the NEO plan being implemented, the company expects improvement going ahead. Conversely, there has been a marked growth in the MTF books led by a strong product offering. Distribution income growth has been robust driven 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. However, we have moderated our growth assumptions for the MTF (due to ESOP funding impact) and Investment Banking segments. Our FY22E/FY23E EPS are higher by ~3%/1% to factor in higherthan-expected traction in the distribution segment. We maintain our BUY rating on the stock with a revised TP of INR1,000 (based on21x Sep’23E P/E), implying 22% potential upside.

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