Upgrade to ADD on ICICI Securities - Pushing the Right Levers - HDFC Securities

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities.

ICICI Securities (Update): Pushing the Right Levers. Upgrade to ADD
(TP Rs 442, CMP Rs 418, MCap Rs 135bn)

We recently interacted with the management of ISEC and were impressed by its focus on digital initiatives. We believe C/I ratios will improve over FY20-22E to 45.9% (-520bps). Additionally, in the near term increased market volatility is expected to boost revenues and earnings. We upgrade ISEC to ADD (from SELL) with TP of Rs 442 (22.5x FY22E EPS).

Digital focus to reduce costs. ISEC remains focused on driving its business digitally. Initiatives such as insta account opening are speeding up customer acquisition while reducing manpower dependence. Branch/employee counts have reduced 13.6/6.0% YoY to 172/3,790 as of Mar-20. We expect this trend to continue and C/I to improve from 51.1% in FY20 to 45.9% in FY22E.

Regulatory changes to result in market share consolidation. Increasing margin requirements for cash and derivatives segment, and new pledging mechanism will hurt profitability of smaller brokers as access to funds fot them gets restricted and they will not be able to provide leverage to clients. Top 10 brokers now account for 70% (+2,419bps over FY16) of active customers - consolidation will likely continue.

Lockdown results in surge in activity. Beginning Mar-20 there has been a huge surge in trading activity as cash ADTV surged 42.7% YoY to Rs 558bn. Interest and demand for online broking accounts was at 3 yr high in Mar/Apr-20 as visible in google trends. New demat account adds averaged 689k/month over Mar to May-20 vs. 11MFY20 average of 388k. Cash ADTV's (ex-prop) for Apr/May 20 continue at higher levels- 42.3/53.9% YoY despite steep decline in stock prices. Cash is the highest yielding line for brokers.

Revenues to sustain despite lower stock prices (vols). While ADTVs have been strong in Apr/May-20, we expect ADTVs to stabilize at lower levels as volatility subsides. We expect FY21E pure broking revenues at Rs 11.0bn (-1.3% YoY), given price competition and pressure on ADTVs. Distribution revenues are expected to be stable at Rs 3.9bn (-3.9% YoY).

We expect FY21E to be a year of consolidation for broking as lower prices imply lower ADTVs and lower MF distribution revenues. Additionally, environment for financial product sales remains challenged. Having said the above, we expect ISEC's digital focus, cost reduction initiatives, and favorable regulatory environment to benefit it over FY20-22E and we increase FY21E/22E EPS estimates by 9.7/11.9% to Rs 17.0/19.7. We are increasing our target multiple to 22.5x (from 18x) on Mar-22E EPS, implying an upgrade to ADD (from SELL) with TP of Rs 442/share. Risks include prolonged sub-dued markets, lower market share, weak environment for financial product sales, and any lower than expected reduction in costs.

Shares of ICICI Securities Ltd was last trading in BSE at Rs.419.5 as compared to the previous close of Rs. 418.05. The total number of shares traded during the day was 9003 in over 879 trades.

The stock hit an intraday high of Rs. 429.3 and intraday low of 413.75. The net turnover during the day was Rs. 3785376.

Source : Equity Bulls

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