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Strong Performance Continues, Maintain BUY!

ICICI Securities Ltd. (ISEC) reported a strong set of numbers that were above our estimates across all parameters. The highlight of the quarter was the continued momentum on customer sourcing as ISEC added ~583K customers during the quarter. Revenues stood at Rs 856 Cr (+26% YoY, +15% QoQ) aided by strong growth in the distribution income and interest income, though broking revenues remained flat. Cost savings and ‘variable’-ization efforts continued, which enabled ISEC to maintain its C-I Ratio at 45% (flat YoY/QoQ).

The company intends to continue controlling its fixed expenses even as it continues to spend on marketing and technology. ISEC aims to reduce its C-I Ratio to <40% over the medium term. The company's EBITDA stood at Rs 544 Cr (+31% YoY, +16% QoQ) against our expectation of Rs 488 Cr, while EBITDA Margin improved to 63.5% (our expectation of 62.4%) from 62.9% in Q1FY22 and 60.9% in Q2FY21. PAT stood at Rs 351 Cr (+26% YoY, 13% QoQ) vs our expectation of Rs 318 Cr.

Key Result Highlights

* Customer sourcing - With the highest ever customer additions during the quarter, the company’s total customer base currently stands at ~6.3 Mn (+27% YoY). Overall active clients stood at 2.58 Mn, while NSE-active clients stood at 2.27 Mn (+90% YoY). The management has indicated that the market share in incremental new customer sourcing stood at 12% in Sep’21.

* Improving Cross Sell Ratio – Cross sell ratio improved to 1.76 vs 1.74 in Q2FY21 and 1.79 in Q1FY22. The no. of clients having 2 or more products improved to 1.09mn vs 1.05mn in Q1FY22 and 0.97mn in Q2FY21.

* Distribution Incomes - Distribution income stood at Rs 151 Cr (+53% YoY, 25% QoQ), supported by strong growth in the MF distribution incomes (+52% YoY) and life insurance product distribution revenues (+92% YoY).

* Wealth Management - This segment continued its growth momentum with AUMs growing at 115% YoY. The company added ~6,900 clients in Q2FY22, taking the total client base to ~6,1850 as against ~54,900 in Q1FY22. Wealth management revenues grew by 130% YoY. Improvement in the yield of recurring assets aided blended yield which stood at 0.41% vs 0.39% QoQ and 0.38% YoY.

Management Concall Key Takeaways

* Focus on Improving Derivatives Market Share: ISEC is aiming at derivative segment market share improvement over the next couple of quarters, which is likely to be driven by the company's (a) Competitive pricing, (b) Proposition to facilitate trading, and (c) Access to the platform in a simple and new-age way. While the company has already introduced NEO to counter the intense price-based competition, ISEC is working towards other 2 factors which will facilitate market share gains. The management is confident that the results of these efforts will be visible in the next couple of quarters.

Valuation and Recommendation

With efforts channelised to improve the granularity of revenues, we expect ISEC to remain insulated from chances of revenue cyclicity across market cycles. While scaling up of the distribution business, which is contributing significantly to the company’s revenues, is a key positive, it also aligns well with ISEC’s strategy of building 3-4 major revenue streams. The digital channel ramp-up is aiding new customer acquisitions. Furthermore, expectations of this trend likely to sustain are encouraging and will aid revenues and AUM growth alike.

The reengineered business model will help ISEC remain a formidable player in the intensely competitive landscape and help it achieve market share gains across segments. We continue to like ISEC for its superior ROE profile, better brand recall, and innovative product proposition across customer segments. We maintain a BUY rating on the stock and revise a target price to Rs 940/share (20x Sept’23E), implying an upside of 15% from CMP.

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