(ISEC IN, Mkt Cap USD2.1b, CMP INR473, TP INR625, 32% Upside, Buy)
- ICICI Securities (ISEC)'s Annual Report offers insights into the company's strategy going forward. The focus is on five key points: 1) creating scale, 2) increasing average revenue per user (ARPU), 3) improving customer experience, 4) increasing digitization, and 5) further improving operational efficiency.
- The company took some key steps to increase customer acquisition and retention, including: a) a tie-up with ICICIB and b) subscription plans such as 'Prime' and 'Prepaid'. These initiatives resulted in the number of active/NSE-active clients growing 16%/27% to 1.4m/1.0m. The company increased its market share in terms of NSE-active clients by 40bp to 10%.
- Other focus areas for the management comprise: a) growing the partnership network and b) improving technology. ISEC's network of independent financial advisors (IFAs), sub-brokers, etc., grew 32% YoY to 9,400+ and further to 12,500+ in 1QFY21. Also, clients sourced through the partnership approach grew 70% YoY. With the enhancement of digital capabilities, the platform was able to handle a peak of 3.2m+ trades per day v/s the earlier peak of 2m and over 64k concurrent customers v/s the earlier peak of 48k.
- ISEC is on the cusp of 'twin' benefits, stemming from: a) tailwinds to the sector from increased retail trading activities and b) initiatives undertaken by the management that are turning fruitful. While the Distribution segment is facing some challenges, we believe it should stabilize in the near term. The plan to implement cost-cutting is going well - we expect a 400bp reduction in the C/I ratio to 52% by FY23E. This should result in a 19% PAT CAGR over FY20-23E. Recent regulatory changes are likely to accelerate consolidation in the industry, and ISEC is expected to be a major beneficiary of the same. Reiterate Buy.
Strategy focused on five key elements; good traction in FY20
Going forward, the strategy would revolve around five elements: 1) creating scale by deepening the partner network and enhancing the tie-up with ICICIB, 2) increasing wallet share of clients with a focus on ARPU, 3) providing a better engagement experience, 4) introducing digital agility, and 5) enhancing operational efficiency (i.e., reducing the C/I ratio). ISEC acquired 0.45m customers in FY20, largely similar to earlier years. However, the focus has been more on activating rather than just adding customers - the activation rate improved to 58% in FY20 from 32% in FY19. With the focus on customer acquisition, ISEC increased the total number of active clients by 16% YoY and NSE-active clients by 27% YoY. While market share in terms of NSE-active clients improved 40bp YoY to 10% in FY20, the company is focused on increasing it further.
Improving digital capabilities yielding results
Over the past two years, ISEC has been focused on improving its digital capabilities and thus enhancing customer experience. 97%/94% of equity MF / overall MF transactions are conducted online. On heavy trading days, the platform was able to handle an unprecedented spike in volumes to 3.2m+ orders per day, compared with the earlier peak of 2m, and over 64k concurrent customers, vis-à-vis the earlier peak of 48k.
Retail brokerage - strong emphasis on partnership approach
The network of IFAs, sub-brokers, investment advisors (IAs), and accounts payables (APs) grew 32% YoY to 9,400+ in FY20, which further increased to 12,500+ in 1QFY21. As a result, the number of clients sourced through partnerships grew 70% YoY. In April 2021, ISEC went live with its open architecture offering - Insta. In this offering, a customer with a savings account with any bank could open a trading account with ISEC seamlessly. In our view, this could be a key factor in countering competition from discount brokers. With the 'ICICI' brand, a company such as ISEC is poised to benefit.
New product offerings to counter competition
ISEC launched a number of new propositions in the year. a) INSTA: A customer with a savings account at any bank could now open an account on the IDIRECT platform. b) PRIME: This is an annual subscription-based plan with a host of benefits, including reduced brokerage/MTF rates and increased liquidity to the customer. c) EIP: This comprises a multi-asset basket of exchange-traded funds. d) SIP PROTECT: This is a free term life insurance on mutual fund SIPs. e) PMS AND QUANT RESEARCH PRODUCTS: The company introduced additional product offerings to counter competition from discount brokers and increase ARPU. In the Prime offering, ISEC built a customer base of 0.31m in FY20; this pool of customers provides ISEC with annuity revenue of ~INR200m.
4.5% revenue market share in MF distribution
FY20 was a tough year for mutual fund distribution as TER cuts effective from 1st April 2019 for AMCs were passed on almost entirely to distributors. As a result, while mutual fund AUM grew 4% YoY to INR362b, MF distribution revenue declined 16% YoY to INR2.3b. In terms of mutual fund AUM, ISEC's market share stood at 3.3% as of FY20; MF revenue market share increased 50bp YoY to 4.5%. More importantly, ISEC has expanded its Distribution product offerings to Home Loans, Two-Wheeler Loans, Auto Loans, Personal Loans, Loan Against Property, Gold Loans, Lease Rent Discounting, Credit/Travel Cards, etc. The idea is to cross-sell more products to its existing customer base. Note that 0.9m customers are pre-approved for loans.
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Shares of ICICI Securities Ltd was last trading in BSE at Rs.473.35 as compared to the previous close of Rs. 472.6. The total number of shares traded during the day was 21089 in over 905 trades.
The stock hit an intraday high of Rs. 479.3 and intraday low of 471.1. The net turnover during the day was Rs. 10008935.