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Near term Headwinds Exist; Long term story remains intact!

CICI Securities Ltd. (ISEC) reported numbers stood below our and consensus estimates, mainly owing to lower brokerage income driven by weak market sentiments arising from the geopolitical tensions. While the momentum on the client addition has been strong YoY, it has moderated on a sequential basis. The digital sourcing and open architecture approach continue to aid new customer sourcing with ~80% of new customer additions coming from non-ICICI Bank channels vs ~69% in Q4FY21. The age group of the company’s customer base has also shifted with ~66% of customers being <30years vs 62% YoY. Similarly, a large part of the newly-sourced customers being Gen-Z and Millenials gives ISEC the opportunity to partner with them in their financial journey. Currently, 40% of the revenues are generated by this category of customers

The company’s revenue stood at Rs 892 Cr (+21% YoY, -5% QoQ), below our expectations of Rs 920 Cr, as broking revenues took a hit owing to weak cash segment volumes along with the issuer and advisory business which was affected by the geopolitical tension resulting in delays in issues. However, healthy growth in the distribution business revenues supported revenue growth. Despite Opex growth remaining flattish QoQ, the company’s C-I Ratio inched up to 49% owing to higher marketing costs and technology investments. The company's EBITDA stood at Rs 563 Cr (+16% YoY, -7% QoQ) vs our expectation of Rs 585 Cr PAT stood at Rs 329 Cr (+3% YoY, -11% QoQ) vs. our expectation of Rs 362 Cr.

Key Result Highlights

Customer sourcing momentum remains robust – The customer sourcing momentum has sustained YoY with ISEC adding 618K customers (vs 354K customers YoY and 676K customers QoQ during Q4FY22 taking the client base to ~7.6 Mn (+39% YoY) customers. Total active clients stood at 3.39 Mn (+78% YoY), while NSE active clients stood at 3.03 Mn (+92% YoY), thus helping ISEC maintain its NSE active customer market share stable at ~8.4% YoY.

Improving Cross-sell Ratio – The company’s cross-sell ratio stood at 1.65 vs 1.75 in Q3FY22 and 1.78 in Q4FY21. However, the number of clients having 2+ products improved to 1.15 Mn vs. 1.12 Mn in Q3FY22 and 1.02 Mn in Q4FY21, led by a superior product proposition.

Revenues growth driven by Distribution and Interest Income – Distribution income stood at Rs 169 Cr (+19% YoY, +3% QoQ), supported by strong growth in the MF distribution incomes (+35% YoY) while life insurance distribution revenues reported a modest growh of 6% YoY. The wealth management segment continued its growth momentum with AUMs growing at 70% YoY. The company added ~3,000 clients in Q4FY22, taking the total client base to ~68,000. Wealth management revenues grew by 58% YoY. Blended yields moderated marginally to 0.35% vs 0.4% in Q4FY21.

Management Concall Key Takeaways

Opex to remain elevated in the near term – ISEC continues to invest in building its franchise through marketing and tech advancements, keeping Opex elevated in the near term. A sizeable portion of the planned Opex will be towards technology as ISEC expects tech spends to be ~2.5x FY22 spends. The company aspires to bring the C-I ratio to ~40% over the medium term. We expect the C-I ratio to inch up and remain in the range of 47-48% over FY23-24E vs ~46% in FY22.

Valuation and Recommendation

We believe near-term headwinds exist owing to the unfavourable market conditions which are likely to pose challenges in terms of revenues growth, especially in the broking segment. However, the diversification efforts that the company has made so far and will continue to pursue will partially insulate and support the top line. Higher spends on tech and marketing will keep the C-I ratio elevated. However, improving the share of variable expenses will help ISEC counter revenue cyclicity. We trim our EPS estimates by 10/2% over FY23/24E to factor-in lower brokerage revenues, run-down in the ESOP funding book and higher opex. We like the management’s focus on on-boarding high-quality clients and believe this could help ISEC improve its ARPU. We maintain our BUY recommendation on the stock with a revised target price of Rs 865/share (17x FY24E EPS), implying an upside of 38% from CMP.

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