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IB revenue and MTF book drove overall profitability

* ICICI Securities (ISEC)’s 3QFY24 revenue grew 50% YoY to ~INR13.2b (in line with our estimate). 

* Retail brokerage revenue rose 46% YoY to INR4.8b (5% lower than estimate). The growth in revenue for allied activities was aided by MTF income.

* During the quarter, the C/I ratio moderated to 52.9% from 54.4% in 2QFY24 (vs. est. of 55.1%). ISEC’s reported PAT jumped 66% YoY to INR4.7b (6% higher than our estimate). 

* ISEC’s 9MFY24 revenue/PAT grew 38%/36% YoY to INR35.1b/INR11.6b. 

* Currently, the rating for the stock is ‘Under Review’.

Retail broking revenue up 46% YoY

*  Retail broking revenue grew 46% YoY to INR4.8b, 5% lower than our estimate. Allied activities revenue was up 54% YoY to INR3.5b, 11% higher than our estimate. This was mainly because MTF income grew 61% YoY to INR2.8b (14% higher than our estimate).

* Avg. MTF book grew 26% QoQ to INR99b from INR79b in 2QFY24. MTF market share stood at 21.7%. 

* ISEC added 218k new customers in 3QFY24 vs. 340k in 3QFY23. The number of NSE active clients fell to 1.87m in 3QFY24.

Robust performance by Issuer services & advisory

*  IB revenue, at INR974m, surged 102% YoY and was 23% higher than estimate. ISEC has a strong IPO pipeline with 39 deals amounting over INR614b, in addition to a mandate of 11 deals whose amount is yet to be decided. 

* Total institutional broking revenue (including allied revenues) came in at INR903m, which grew 94% YoY (11% miss). ISEC consolidated its position among the top domestic institutions. 

* Distribution revenue rose 5% YoY to INR1.7b. MF and other distribution revenue grew 14% YoY and 16% YoY, respectively. SIP flows grew to INR14.7b in 3QFY24 vs. INR13.4b in 2QFY24. 

* ISEC distributed loans worth INR21.7b in 3QFY24, up 116% YoY. Investment & Trading income jumped 90% YoY to INR629m.

Moderation in C/I ratio

* The operating cost increased 39% YoY to INR7b (3% lower than our estimate). Employee costs rose 30% YoY to INR2.3b in 3QFY24. 

* Other operating expenses for the quarter increased 28% to INR906m.

* During the quarter, the C/I ratio moderated to 52.9% from 54.4% in 2QFY24 (vs. est. of 55.1%).

Highlights from the management commentary

* Retail cash market share improvement was driven by the new app, research, margin finance, and a focus on quality customers. Going ahead, the focus for the cash segment will continue to be quality customer acquisition and retaining them.

* Management will not be focusing on life insurance products in distribution. Loan distribution will be one of the key focus areas.

* Customer sourcing, technology, MTF Funding, and banking solutions are the synergies for delisting.

Valuation and view

ISEC has seen a strong performance over the past couple of quarters on the back of strength in IB business and interest income on MTF book. The retail broking business, however, continues to demonstrate a muted performance. Going ahead growth in MTF book will be challenging, while investments into tech and human resource will keep costs elevated. On the distribution side, focus will be on loans and mutual funds.

Its Board of Directors, on 29th Jun’23, approved a draft scheme of arrangement for the delisting of equity shares of the company. Pursuant to this, ICICI Bank will issue equity shares to the public shareholders of the company, thereby making the company a wholly owned subsidiary of ICICI Bank. The swap ratio is 67 equity shares of face value INR2 each of ICICI Bank for every 100 equity shares of ISEC. Currently, our rating on the stock is ‘Under Review’.

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