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Strong customer acquisition; Distribution segment healthy

* 4QFY21 was another robust quarter in an overall strong year for ISEC. PAT more than doubled YoY to INR3.3b (45% beat), driven by 54% growth in revenue, coupled with significantly lower C/I ratio.

* In FY21, ISEC delivered 50%/97% revenue/PAT growth. We increase our FY22E/FY23E EPS estimate by ~10% to factor in healthy brokerage revenue. Maintain Buy with a TP of INR650/share (18x FY23E EPS).

Retail Broking: Pick-up in customer acquisition drives healthy topline

* ISEC added 350k new customers v/s 139k QoQ. Of this, 220k customers were added through the Digital channel initiated last year. Around 55% of such accounts are being opened by non-ICICIBC channels.

* The activation rate jumped to 84% from mid-60s levels in the past two quarters. As a result, the number of NSE active clients increased to 1.6m from 1.3m QoQ.

* However, its cash market share dipped by ~100bp to 9.5% QoQ. In the F&O segment, ISEC’s market share had dropped to 3.5% in Dec’20 post the implementation of new regulations. The company largely maintained its market share (~3%) in 4QFY21.

* Retail Broking revenue improved 7% QoQ to INR3.5b despite the moderation in market share.

Strong performance in the distribution financial products too

* Distribution revenue was up 22% YoY to INR1.41b (QoQ not strictly comparable due to seasonality). This was driven largely by all segments.

* In MF distribution, the SIP count increased 12% YoY to 0.74m, while ISEC’s market share improved 75bp YoY to 4.05%. Overall MF AUM was up 20% YoY to INR413b.

* The Institutional Equities segment delivered 30% YoY revenue growth to INR480m. Given the buoyant capital market, revenue from Investment Banking more than doubled QoQ to INR533m.

Other highlights

C/I ratio declined 200bp QoQ and 17pp YoY to 40%. The management has guided at near term C/I ratio above these levels. The lending book grew 37% QoQ to INR25.7b.

Valuation and view

* Changes in ISEC’s product and sourcing strategy have yielded results over the past year. The ‘NEO’ plan has helped counter competition from discount brokers as well as some traditional brokers who offer discount plans.

* We are now seeing the digital sourcing model gain strong traction in terms of customer acquisition. After a few turbulent years, the Distribution business has stabilized. The impact of regulations on margin, coupled with overall trends in industry volumes, would be key to watch out for in FY22E. We raise our FY22E/FY23E EPS estimate by ~10%. Maintain Buy with a TP of INR650 per share (18x FY23E EPS).

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