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Brokerage revenue continues to disappoint…

…interest income and distribution income provide cushion

* ICICI Securities (ISEC)’s retail broking revenue declined 25% YoY/19% QoQ in 1QFY23. Customer acquisition run rate dropped to 0.45m from 0.6m in 4QFY22. However, Prime subscription fees continued to scale up (+95% YoY) to INR626m. Issuer services segment revenue decreased 46% QoQ to INR350m led by a sharp decline in primary market activity.

* Overall revenue grew 6% YoY to INR7.9b, 5% above our estimates as the setback in brokerage revenue was more than offset by a beat in interest income and distribution income. PAT at INR2.7b (-12% YoY) was above our estimates by 2%, while C/I ratio inched up 480bp sequentially to 53.8% (v/s our estimate of 53%) in 1QFY23.

*  We cut our FY23E/FY24E EPS by 2.6%/2.5%, respectively, to factor in weaker-than-expected traction in the broking segment and higher C/I ratio. We retain our BUY rating with a TP of INR570 (based on 15x FY24E P/E).

Retail broking topline declines; client addition run-rate subdued

* ISEC’s retail broking revenue declined 25% YoY and 19% QoQ to INR2.6b.

*  Its retail cash segment market share contracted 30bp QoQ to 9.7% while derivatives market share expanded 20bp QoQ to 3.5%.

* The Institutional Equities segment revenue declined 5% YoY/14%QoQ to INR411m in 1QFY23.

* ISEC added 447k new customers in 1QFY23 v/s 618k QoQ. The activation rate declined 300bp QoQ to 79%. The number of NSE active clients rose to 3.2m from 3.0m QoQ.

Interest income and distribution income drive revenue growth

* ISEC’s interest income grew 66% YoY/3% QoQ to INR2.2b. MTF book remained flat sequentially at INR58b, whereas MTF market share expanded 10bp QoQ to 22.4%. As directed by the management, ESOP book declined to INR13b from INR14.6b last quarter due to the revised regulatory norms.

* Distribution revenue rose 26% YoY to INR1.5b (-10% QoQ), led by strong performance across segments. SIP count increased to 1.0m from 0.99m in 4QFY22, while SIP market share declined to 3.4% from 3.7% in 4QFY22. Overall, MF AUM rose 11% YoY to INR489b but dipped 3% QoQ in 1QFY23.

* With volatile equity markets, investment banking revenue decreased to INR350m (-46% QoQ). However, ISEC continues to have a strong deal pipeline (IPO) with 42 deals (excluding 23 deals where the amount is yet to be decided) amounting over INR825b.

Highlights from the management commentary

* The regulator is focused on ensuring that the brokers are maintaining adequate checks and balances before allowing customers to start trading in F&O, which is quite prevalent in the industry.

* Considering the current tough conditions, the management has calibrated its FY23E investment plans and now has spread it over the next six quarters.

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 is relatively higher. Further, the primary issuances have slowed down materially. ISEC is now on the course to diversify 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 calibrating spends considering the revenue slowdown. We cut our FY23E/FY24E EPS by 2.6%/2.5% to factor in weaker-than-expected traction in the broking segment and higher operating cost. We maintain our BUY rating on the stock with a revised TP of INR570 (based on 15x FY24E P/E).

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