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Buy ICICI Securities Ltd For Target Rs.780 - Motilal Oswal

Revenue from Broking falls, Issuer Services segment witnesses some pressure

ISEC witnessed a 6% YoY and 7% QoQ decline in revenue from the Retail Broking segment. For the eighth consecutive quarter, revenue has been in the INR3-3.5b range. Its customer count saw a 1.5x jump. While its Prime subscription fees has scaled up (up 71% YoY), its share in overall revenue is small. Revenue for the Issuer Services segment fell 41% QoQ to INR649m. Overall revenue grew 20% YoY to INR8.9b (inline) as the negative surprise in Issuer Services was offset by a beat in the Distribution segment. PAT at INR3.8b (+42% YoY) was 6% lower than our estimate, while C/I ratio rose 410bp QoQ to 49% on higher marketing costs and technology investments.

We have lowered our FY23/FY24 EPS estimate by 10% each, to factor in weaker-than-expected traction in the Broking segment, a slowdown in the Issuer Services segment, the impact of a run-down in the ESOP funding book, and higher costs. We maintain our Buy rating on the stock with a revised TP of INR780 (based on 17x FY24E P/E), implying a potential upside of 24%.

Revenue from Retail Broking declines; momentum in client addition slows down

Revenue from Retail Broking fell 6% YoY and 7% QoQ to INR3.3b.

Its market share in the Retail Cash segment improved by 30bp QoQ to 10.1%, while the same in the Derivatives segment contracted 20bp to 3.3%.

Revenue from the Institutional Equities segment fell 1% YoY to INR479m.

ISEC added 618k new customers in 4QFY22 v/s 676k QoQ. Its Prime plan saw 90k customer additions as compared to 100k in 3QFY22.

The activation rate improved by 800bp QoQ to 82%. The number of NSE active clients rose to 3m from 2.8m QoQ.

Income from Distribution continues to drive overall revenue growth

Revenue from Distribution rose 21% YoY to INR1.7b (+3% QoQ), led by a strong performance in the distribution of MFs, which grew 35% YoY. Its SIP count rose to 0.99m from 0.98m in 3QFY22. AUM in the MF segment grew 22% YoY to INR503b, but remained flat QoQ.

Given the volatility in the equity market, revenue from Investment Banking fell to INR649m. ISEC continues to have a strong deal pipeline (IPO), with 67 deals amounting to over INR879b.

Highlights from the management commentary

Slower than industry client additions is on account of the management’s focus on improving the quality of the channel mix. The current monthly addition run-rate of 0.2m will continue in the near term

FY23 will be a year of investments for ISEC. It will make strategic investments made in technology and marketing

Its cost-to-income ratio is expected to increase in FY23, before trending down towards 40% in the medium term.

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 market share from the Broking business. With initiatives such as the NEO plan being implemented, the management expects an improvement going forward. We expect weakness in Issuer Services as a volatile equity market will delay its equity fund raising. The funding book is also likely to witness some pressure on the back of a run-down of the ESOP book. With costs likely to remain elevated owing to investments in technology and marketing, earnings are likely to remain under pressure. Income from Distribution will provide some cushion to earnings. New tieups and products will help scale-up the business. We lower our FY23/FY24 EPS estimate by 10% each to factor in a weaker-than-expected traction in the Broking segment. We maintain our Buy rating on the stock with a revised TP of INR780 (based on 17x FY24E P/E), implying a potential upside of 24%.

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