ICICI Securities Q4 show appears good, valuation reasonable post correction

In the backdrop of IPO debacle and weak performance since the listing on the stock exchanges, ICICI securities reported an operationally better quarter. While market share in the brokerage business remains a key monitorable, valuation appear reasonable at this juncture.

Brokerage income sees flattish growth in a difficult quarter

In Q4 FY18 results, ICICI securities exhibited 35 percent YoY (year-on-year) increase in revenue guided by higher brokerage income and income from services. While brokerage income increase was aided by higher broking turnover, increase in income from services was on account of third party product distribution and corporate finance fee. Interest income increased due increase in interest on margin funding.

Here, it is noteworthy that ADTO (Average Daily Turnover) was Rs 446 billion versus Rs 236 billion in Q4FY17 which also implies that brokerage yields (brokerage income/ADTO) have declined to 0.62 percent (from 0.88 percent). Secondly, on a quarterly basis, brokerage income has witnessed flattish growth.  However, given the equity market volatility in the last quarter, it doesn’t appear worrisome at this stage.

Another noteworthy number is the finance cost that has increased by about 64 percent YoY on account of increase in the borrowings related to margin trading products.

Overall, net profits surged 91 percent YoY aided by lower cost to income ratio (54 percent vs 63 percent in FY17).

Market share: marginally contracted

Company’s market share in terms of ADTO was 9 percent for the FY18, tad lower than what company reported in the IPO Prospectus at 9.1 percent. While we don’t see ADTO share as the prudent method to gauge market share in brokerage business, our earlier observation that company may be losing market share in terms of brokerage revenue keeps us vigilant on this perspective.

IPO listing and valuation

The IPO of ICICI securities came at a significant premium and there was also lower subscription to the original OFS (Offer for Sale). However, merchant bankers were able to sail through after the size reduction of IPO and anchor allotment. IPO listing was disappointing and the company got listed at 14 percent below the offer price both on account of stretched valuation as well as corporate governance issues at the parent bank level.

The stock is currently trading at 25x FY18 earnings which is at a discount to its closest peers (IIFL holdings, Motilal Oswal, Geojit Financial services). Interestingly, now the market cap of the company appears closer to the fair value estimated through SOTP method in our IPO note.

Overall, quarterly results of the company appear good, given the volatility in the equity markets. Sustenance of the market share in the broking business and the prospects of higher competition in the distribution business are the two key factors to watch out for.

Having said that, we remain positive on the macro factors supporting brokerage business (increasing share of financial savings, internet penetration) and believe that the company is well positioned to benefit from such long-term trend