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Well-placed For Sustainable Growth!

We initiate coverage on ICICI Securities (ISEC) with a BUY recommendation and a Target Price of Rs 870/share, implying an upside of 22% from CMP. With a market share of 8.4% in FY21, ISEC stands as the 4th largest broker amongst the active clients in NSE despite increased competition from the discount brokers. By leveraging its strong digital platform, the company endeavours to become a comprehensive solutions provider and cater to the various needs across the investors life cycle comprising of investment, protection, and borrowing. While the COVID-19 has front-loaded opportunities in the capital market, the broking industry continues to consolidate in favour of digital and larger players.

We believe ISEC is well-placed as the industry leader and we expect its growth to be driven by (1) Longterm industry tailwinds; (2) Limited revenue cyclicity owing to the diversified product basket as well as its efforts to further diversify revenue stream; (3) Improving customer sourcing and activation through proactive use of the digital platform; and (4) Improving profitability due to its cost rationalization efforts. Additionally, ISEC is ensuring its growth by undertaking various initiatives to improve customer engagement and activation as well as increase monetization of customers’ wallet shares. This cements our confidence in the company’s bright prospects over the long term which is reflected in our target multiple of 19x Sept’23E EPS.

Investment Thesis

Industry tailwinds keep the structural story intact

While India is a high-savings economy, it is showcasing an increasing interest in investing in financial assets such as mutual funds, life insurance plans, and equities vis-à-vis traditional investment options. This trend is expected to continue on account of a) Digital initiatives increasing ease of transaction; b) Superior returns offered by the equity markets vis-à-vis traditional investments; and c) Higher investor awareness coupled with increased retail participation aiding growth over the medium to long term.

Focus on reducing revenue cyclicity through revenue granularization

ISEC aims to reduce its dependence on the broking business by bringing down its share below 50% over the medium term. While it contributed ~59% of the company’s revenues in FY21, we expect the broking revenues to drop below 50% FY23E onwards. The company looks to granularize its revenues by focusing on improving its cross-sell ratio which will also play an instrumental role in reducing its revenue cyclicity. ISEC maintains its sharp focus on improving the Average Revenue Per User (ARPU).

Diversified sourcing mix and new initiatives to drive customer growth and activation

The COVID-19 advent resulted in an increased focus on scaling up digital channels which enabled ISEC to scale up its pace of customers sourcing. This also helped the company broaden its geographical reach, providing it with access to the underpenetrated Tier II and Tier III cities as well as younger customers. Along with a ramp-up in the digital channels, tie-up with ICICIB aids the company in sourcing affluent customers. Moreover, its open architecture for broking presents ISEC with a huge addressable market, thus aiding customer sourcing further. Additionally, customer-centric initiatives such as “Prime” and “NEO” are expected to improve the company’s customer activation moving forward.

Cost optimization measures led by the shift towards digitization

With the digital transformation underway, ISEC achieved significant cost savings by reducing its dependence on the physical model and deciding to prune down its branch count. Going ahead, it plans to focus on “variable”-izing costs to improve its C-I Ratio further. We expect the C-I ratio to range between 45-48% over the medium term.

Play on Financialization; Initiate with BUY

ISEC is a play on the increasing financialization of savings and increasing interest of retail clients in the equity markets. Over the past couple of years, ISEC has re-aligned its business model to leverage the technology platform. It also undertook several customer-centric initiatives to improve customer sourcing and activation which has started yielding results.

Despite increased competition from the discount brokers aggressively sourcing customers, ISEC has continued to maintain a respectable market share and with growth levers in place, we expect the company to improve its market share over the long term. We also believe that ISEC is eligible to trade at premium valuation vs its peers given its superior ROE profile, strong parentage, and competent management team. We initiate coverage with a ‘BUY rating and a target price of Rs 870/share (19x Sept’23E EPS), implying an upside of 22% from CMP.

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