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Buy ICICI Securities Ltd For Target Rs.650

Stable business traction; C/I ratio surprises positively

* ICICI Securities (ISEC) delivered 95% YoY growth in PAT to INR2.7b (9MFY21 PAT up 91% YoY to INR7.4b), driven by a stable performance in retail broking and strong cost control.

* Total revenue tapered ~10% from highs of 2QFY21, but remained 47% above YoY levels at INR6.2b. At the same time, the C/I ratio improved 300bp QoQ (1,400bp YoY) to 42%, the lowest ever, driven by 28% QoQ reduction in employee expenses – on account of lower variable pay provisions.

Retail broking – customer acquisitions strong, but market share drops

* The company acquired 139k new customers in 3Q v/s 113k QoQ. Around one-third of new customers are sourced from the open architecture platform, i.e., non-ICICIB customers. The number of NSE-active clients increased 90k QoQ, taking the total base to 1.3m.

* However, ISEC’s market share in cash/F&O trading fell 60bp/250bp sequentially to 10.5%/6.3%, largely on account of new margin funding norms on intraday trading (effective 1st Dec). Interestingly, equity revenues in Dec were up 9% MoM as the increase in cash delivery volumes offset decline in intraday volumes. Management believes its market share in F&O has bottomed out and should be stable / improve hereafter.

* ISEC launched ‘ICICIdirect NEO’ – a discount plan offering nil brokerage on Futures trades and INR20 per order on Intraday and Options trades.

Distribution income growth modest; funding book stable

* Distribution income was up 9% QoQ and 5% YoY to INR1.08b, driven by similar growth in both mutual fund and non-mutual fund distribution.

* The lending book and corresponding interest income were sequentially unchanged at INR18.7b and INR440m, respectively.

Key concall highlights

* 65% decline in revenue QoQ was attributable to fewer trading days and 35% was due to a higher share of PRIME and prepaid customers.

* A 50k increase was seen in the number of NSE-active clients in Dec ‘20 – the highest ever.

Valuation and view

Changes in ISEC’s product and sourcing strategies have yielded results over the past 1.5–2 years. Given intense competition in the sector, this is likely to continue in the foreseeable future. ISEC recently launched its ‘NEO’ plan to counter competition from discount brokers as well as some traditional brokers with discount plans. Also, its open architecture sourcing has seen fair success. On the other hand, the Distribution business remains on a moderate growth trajectory. ISEC’s path to profitability improvement is attributable to its costcutting initiatives, which it has been executing very well. We upgrade our EPS estimates for FY22/FY23E by 8–9%. Maintain Buy, with TP of INR650 (20x FY23E EPS)

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