ICICI Securities. Investment Rationale. Objects of the issue Offer For Sale (OFS) (INR Mn) 40170

Transcription

1 March 21, 2018 IPO - te ICICI Securities Recommendation: SUBSCRIBE ICICI Securities is a leading technology-based securities firm in India that offers a wide range of financial services including brokerage, financial product distribution and investment banking and focuses on both retail and institutional clients. They have been the largest equity broker in India since fiscal 2014 by brokerage revenue and active customers in equities on the NSE (Source: CRISIL), powered by their significant retail brokerage business, which accounted for 90.5% of the revenue from the brokerage business (excluding income earned on the funds used in the brokerage business) in FY17. As of 9M FY18, ICICI direct, an electronic brokerage platform, had approximately 3.9 million operational accounts of whom 0.8 million had traded on NSE in the preceding 12 months (Source: NSE). BFSI Issue Snapshot Issue Open: Issue Close: 22-Mar Mar-18 Price Band INR Issue Size (mn) INR Market Cap (mn) INR Particulars Fresh Issue (. of shares) (mn) 0 OFS Issue Size (. of shares) (mn) 77 QIBs 71% n-institutional 14% Retail 9% Capital Structure Pre Issue Equity (INR Mn) 1611 Post Issue Equity (INR Mn) 1611 Bid Lot 28 Minimum Bid Maximum Bid Shareholding Pattern (%) Pre Issue (%) Post issue (%) Promoters 100% 76% Others 0% 24% Particulars Face value 5 FY18 P/E* 31.5 *Upper band/ annualised Objects of the issue Offer For Sale (OFS) (INR Mn) Investment Rationale Largest Equity Broker in India Powered by the Proprietary Technology Platform: ICICI direct ICICI Securities has been the largest equity broker in India since FY14 by brokerage revenue and active customers in equities on NSE (Source: CRISIL), powered by their significant retail brokerage business. Retail customers accounted for 89.1% of the revenue from the brokerage business (excluding income earned on funds used in the brokerage business) in FY13, FY14, FY15, FY16 and FY17 and 9M18 respectively. As of December 31, 2017, the company had 0.8 million active customers who had traded on the NSE in the preceding 12 months (Source: NSE). Natural Beneficiary of Fundamental Transformation in the Indian Savings Environment India has historically been and is expected to continue to be a high savings economy with household savings as a proportion of GDP at approximately 19% in 2016, as compared to 9% in USA, 6% in Brazil and a global average of 9% in 2016 (Source: EIU). Household savings are increasingly shifting from physical assets to financial assets. The share of financial savings as a proportion of household savings has increased steadily from 31.1% in fiscal 2012 to 41.5% in fiscal The share of financial savings is likely to rise further, as stable inflationary trend is generally expected to diminish the behavior of physical savings such as investments in gold and real estate. In the past, positive real income growth and low inflation have had a positive effect on financial savings. Strong and Growing Distribution Business with an "Open-Source" Distribution Model The company has adopted an "open-source" distribution model with respect to all the distribution products, except insurance products, pursuant to which it does not distinguish between the third-party partners whose products they distribute based on affiliation. They also provide the customers with recommendations of mutual funds based on various qualitative and quantitative parameters. As a result of these factors, ICICI Securities are the 2nd largest non-bank distributor of mutual funds in India, in terms of the revenues from such distribution of mutual funds, in FY17 (Source: CRISIL). In addition, the product portfolio enables the customers to manage their investments across multiple asset classes. Outlook & Valuation ICICI Securities, India's largest retail broker has seen a revenue growth of ~15% CAGR from FY15-FY18 (on annualized FY18E revenue) as the broking industry in India witnessed high growth in terms of increase in new accounts, higher income from distribution business and sharp rise in primary market transactions in the last 2 years. It has a capital light business model which is reflected by its high average ROE of ~70% since FY15. ICICI securities is a direct beneficiary of the activities in the capital market business which has experienced an improved macro environment, shift from physical assets to financial assets and stable government and its policies. However, declining customer/revenue market share, increase in online competition in distribution, declining 3-in-1 account penetration and regulatory changes are the key risk the company faces. At the upper price band of INR 520 per share, the stock is being valued at 31.5x 9M FY18 annualized earnings. We recommend SUBSCRIBE to the issue for long term investment. Siddhesh Mhatre siddhesh.mhatre@spasec.in Ph / Ext

2 Overview ICICI Securities is a leading technology-based securities firm in India that offers a wide range of financial services including brokerage, financial product distribution and investment banking and focuses on both retail and institutional clients. They have been the largest equity broker in India since fiscal 2014 by brokerage revenue and active customers in equities on the NSE (Source: CRISIL), powered by their significant retail brokerage business, which accounted for 90.5% of the revenue from the brokerage business (excluding income earned on the funds used in the brokerage business) in FY17. As of 9M FY18, ICICI direct, an electronic brokerage platform, had approximately 3.9 million operational accounts of whom 0.8 million had traded on NSE in the preceding 12 months (Source: NSE). Since inception, they have acquired a total of 4.6 million customers through this platform and have an established track record of delivering consistent returns to shareholders. PAT was INR mn, INR mn, INR 2,938.7 mn, INR 2,387.2 mn, INR 3,385.9 mn and INR 3,990.9 mn in FY13, FY14, FY15, FY16, FY17 and 9MFY18 respectively, and the ROE has exceeded 30.0% for each measured period since FY13. FY17 ROE was 69.2%. Evolution to ICICI Securities Year Events 1995 Incorporated as ICICI Brokerage Services Ltd Launched online trading platform - ICICIdirect Launched online mutual funds platform 2002 Launched derivatives, Direct Link and 'Buy Today, Sell Tomorrow' 2005 Expanded through ICICIdirect branches 2006 ICICI Web Trade merged with ICICI Brokerage Services Ltd. Launched distribution of health and life insurance products 2007 Launched overseas trading services 2009 Launched online currency derivatives and private wealth management services 2010 Preferential allotment of shares to ICICI Bank (500 mn shares). Launched SIP product in equity Launched life time prepaid brokerage plans Launched investment in AIFs on a private placement basis on ICICIdirect, margin trading facility, funding of employee stock option schemes. Revenue ICICI Securities is the largest Indian broker, based on brokerage revenue since fiscal The following table sets forth the brokerage revenue for the top five brokers (in FY17) which have publicly disclosed their brokerage revenue for the periods mentioned therein: Revenue (INR mn) FY14 FY15 FY16 FY17 ICICI Securities 4,960 7,554 6,607 7,759 Kotak Securities 3,439 5,917 5,719 7,424 Motilal Oswal 2,648 4,449 4,510 5,516 India Infoline 3,233 4,726 4,254 4,412 HDFC Securities 2,039 3,374 3,116 4,211 Others 66, ,608 92, ,478 Total 82, , , ,800 Revenue Mix for last 5 Years Investment Rationale Largest Equity Broker in India Powered by the Proprietary Technology Platform: ICICI direct ICICI Securities has been the largest equity broker in India since FY14 by brokerage revenue and active customers in equities on NSE (Source: CRISIL), powered by their significant retail brokerage business. Retail customers accounted for 94.3%, 93.2%, 93.0%, 91.9%, 90.5% and 89.1% of the revenue from the brokerage business (excluding income earned on funds used in the brokerage business) in FY13, FY14, FY15, FY16 and FY17 and 9M18 respectively. As of December 31, 2017, the company had 0.8 million active customers who had traded on the NSE in the preceding 12 months (Source: NSE). ICICI Securities were also one of the pioneers in the e-brokerage business in India, having started offering online, real-time execution of trades on stock exchanges in fiscal 2000 through ICICI direct. ICICI direct, which is the award-winning proprietary electronic brokerage platform, provides approximately 3.9 million customers (as at December 31, 2017) access to a wide range of products and services. Their electronic brokerage platform is backed by robust infrastructure and has processed, at peak usage, over 1.9 million orders and trades in a day. The IT infrastructure underlying the electronic brokerage platform is designed with redundancy in mind and has a three-tier disaster recovery process. The electronic brokerage platform is built using a plug-and-play architecture so that it can be easily integrate the platform with the internal systems and the systems of third parties whose products the company distributes. As of 9M FY18, the company has integrated the electronic brokerage platform with the systems of over 25 third-party product providers, including depositories, exchanges and credit bureaus. The risk management systems are also fully integrated with the electronic brokerage platform, which allows the company to manage their risks in real time, including through automated changes in margin requirements by tracking trigger 2

3 prices for every client position with a margin. These integrations give the company the capability to be the first in the market to offer emerging products, such as NPS policies online, and to offer more competitive prices and better features. Natural Beneficiary of Fundamental Transformation in the Indian Savings Environment The Indian economy is the fourth largest economy in the world in terms of GDP at purchasing power parity, with an estimated GDP, in purchasing power parity terms, for 2016 of approximately US$8.70 trillion (Source: CIA World Factbook, as of vember 14, 2017). Further, India has historically been and is expected to continue to be a high savings economy with household savings as a proportion of GDP at approximately 19% in 2016, as compared to 9% in USA, 6% in Brazil and a global average of 9% in 2016 (Source: EIU). Household savings are increasingly shifting from physical assets to financial assets. The share of financial savings as a proportion of household savings has increased steadily from 31.1% in fiscal 2012 to 41.5% in fiscal The share of financial savings is likely to rise further, as stable inflationary trend is generally expected to diminish the behavior of physical savings such as investments in gold and real estate. In the past, positive real income growth and low inflation have had a positive effect on financial savings. According to CRISIL Research, the yields on 10-year Indian Government securities have reduced from 7.4% in April 2016 to 6.9% in October 2017 (Source: RBI). This falling interest rate cycle has helped channel higher investments towards equity instruments. Strong brand name, large registered customer base, wide range of products across asset classes and complimentary advisory services positions the company to be the natural beneficiary of these transformational changes in the Indian savings markets. From FY14 to 9M FY18, the number of brokerage and distribution customers who had operational accounts increased from approximately 2.1 million to 3.9 million, respectively, of whom approximately 0.5 million and 0.8 million, respectively, had traded on NSE in the preceding 12 months. Average daily turnover for cash equity and equity derivatives traded by the customers (i.e. excluding any proprietary trading) increased from fiscal 2013 to the nine months ended December 31, 2017, at a CAGR of 59.9% as compared to the corresponding market ADTO which increased at a CAGR of 37.4% (Source: CRISIL, SEBI). There has also been a growth in digitization recently caused by a significant push and reforms by the Indian government. This trend has been further augmented by increasing Smartphone penetration and faster data speeds in India (Source: CRISIL). With the experience as one of the pioneers in the e-brokerage business in India and the electronic brokerage platform, the company is wellpositioned to benefit from the increasing trend in digitization as more financial transactions are performed online. In FY17, over 95% of the brokerage transactions, by notional value, and over 90% of the mutual fund transactions, by number of transactions, performed by the customers were online. Strong and Growing Distribution Business with an "Open-Source" Distribution Model ICICI Securities have a strong and growing distribution business, where we distribute third-party mutual funds, insurance products, fixed deposits, loans and pension products to the retail customers for commission income. Revenues from the distribution business have increased from INR 1.62 bn in FY13 to INR 3.5 bn in FY17 and were INR 3.3 bn in 9M FY18. Revenue from the distribution of third-party mutual funds accounted for 36.7%, 47.3% and 60.7% of the revenue from the distribution business in FY13, FY17 and 9M FY18, respectively. The company has adopted an "open-source" distribution model with respect to all the distribution products, except insurance products, pursuant to which it does not distinguish between the third-party partners whose products they distribute based on affiliation. They also provide the customers with recommendations of mutual funds based on various qualitative and quantitative parameters. As a result of these factors, ICICI Securities are the 2nd largest non-bank distributor of mutual funds in India, in terms of the revenues from such distribution of mutual funds, in FY17 (Source: CRISIL). In addition, the product portfolio enables the customers to manage their investments across multiple asset classes. The distribution business is supported by the nationwide network, consisting of over 200 branches and over 4,600 subbrokers, authorized persons, IFAs and IAs as on 9M FY18. The network enables them to augment the reach of the electronic brokerage platform and also provides with a way to drive trading volume to the electronic brokerage platform. Strategic Component of the ICICI Ecosystem ICICI Securities are the sole equity securities arm of the ICICI Group. As a strategic component of the ICICI Group ecosystem, they have mutually beneficial agreements with various companies in the ICICI Group. In addition to the access to ICICI Bank branches for the purposes of customer acquisition, they are a key partner of ICICI Bank since they are currently the only broker that allows the customers of ICICI Bank to trade in equity securities using a "3-in-1 account" facility linked to their existing savings and demat accounts held with ICICI Bank. 3

4 To use the electronic brokerage platform for brokerage services, the customers requires using a "3-in-1 account". Through a single login step, the 3-in-1 account links the customers' savings bank and demat accounts held with ICICI Bank to the electronic brokerage platform, which allows the customers to seamlessly trade without having to deposit money in the brokerage account. In addition, this allows them to efficiently and swiftly transfer funds into the customer's account as soon as it is made available to them in the case of sell orders. This seamless and interoperable feature of the electronic brokerage platform provides the clients with greater flexibility in the use of their money. Strong Financial Performance with Significant Operating Efficiency ICICI Securities has an established track record of strong financial performance and delivering returns to shareholders. The total revenues and PAT increased from INR 7.06bn and INR million, respectively, in FY13 to INR 14.04bn and INR 3.4bn in FY17, respectively, representing a CAGR of 18.8% and 47.4%, respectively. In 9M FY18, revenues and PAT were INR 1345bn and INR 3.99bn, respectively. ROE has exceeded 30% for each measured period since FY13. For FY17, ROE was 69.2%. The company has a consistent record for paying dividend and the dividend pay-out ratio was 60.6% in FY17. While the revenues have been growing, the focus is on managing costs by leveraging the efficiencies inherent in the technologybased business model, which is scalable and asset-light. As a result, cost ratio, which is defined as the ratio of total expenses to total revenue, has decreased from 84.6% in FY13 to 62.8% in FY17. Our cost ratio was 54.4% for 9M FY18. During the same time, the employee productivity, which is defined as the ratio of annualized revenue to the period ending employee count, has increased from INR 1.8 mn in FY13 to INR 4.3 mn in 9M FY18. Experienced Senior Management Team The management team has extensive experience in the financial services sector. MD & CEO has been with the ICICI Group for over 27 years. Prior to joining the Company, she served in a wide variety of roles within the ICICI Group, including treasury, corporate banking and project finance. The quality of management team has been critical in achieving the business results and that the management's experience will help the company make timely strategic and business decisions in response to evolving customer needs and market conditions. In particular, the management team has strong cross-functional expertise across business segments, product design and technology. Strategies Continue Investing in Technology and Innovation As one of the pioneers in the e-brokerage business and given that large majority of the customers interact through our electronic brokerage platform, the company need to continuously invest in technology to ensure that they provide the customers with a fast, seamless and secure experience. It plans to continue making investments in the IT infrastructure underlying the electronic brokerage platform to augment capacity, deliver innovative products and improve the user interface across devices. They intend to continue to improve the processing speed of trades/orders, keep up with latest cyber security best practices, and increase integration and interoperability with third parties to provide the customers with more products and services. They also aim to increase the use of technology in other parts of the business to optimize the operations, reduce costs and errors, including in the areas of sales, customer relationship management, information security and risk management. As the customer base increases, they have access to an increasing amount of data. They intend to continue investing in analytics capabilities to ensure that they are able to gain actionable insights from such data. They have, and will continue to, use analytics to help understand customer preferences, design new products, identify targets for cross-selling and increase customer transactions. Strategically Expand Our Financial Product Distribution Business Through Cross-Selling They intend to maintain the growth momentum in the financial product distribution business and evaluate new opportunities to expand. They believe that the significant retail brokerage customer base presents them with significant potential to cross-sell third-party financial products. In particular, they believe that certain asset classes are underpenetrated among the customer base and will leverage the analytics capabilities to selectively target customers based on their likelihood to purchase such products. They also intend to continue working with third-party providers to increase the number of products available to our customers. They believe that growing urbanization and increasing affluence are poised to benefit Tier-II and Tier-III cities, and increase retail participation in financial instruments in such cities. To benefit from this trend, they will explore the expansion of our 4

5 distribution network in such cities to increase their customer base, including through the opening of new branch offices, increasing the penetration in ICICI Bank branches, or through additional sub-brokers, authorized persons, IFAs and IAs. Leverage Our Leadership in Equity Capital Markets to Strengthen Our Financial Advisory Businesses The company intends to maintain their leadership position in the equity capital markets business in terms of number of primary market issuances by acquiring new clients who will also strengthen their advisory business and increase the number of advisory transactions. The equity capital markets business provides them with various advantages which can be leverage to increase the market share and ranking in the financial advisory business. For example, their demonstrated execution capabilities, strong and visible brand, existing corporate relationships and corporate access services are all complementary to the financial advisory business. Management team Name Designation Background Shilpa Naval Kumar MD & CEO A graduate diploma in management from Indian Institute of Management Calcutta. She has previously worked with ICICI Bank for over 27 years in the areas of planning, project finance, corporate banking and treasury at ICICI Bank. Harvinder Jaspal CFO He holds a bachelor's degree in engineering from Maulana Azad College of Technology, Bhopal and holds a post graduate diploma in business management from Indian Institute of Management Society, Lucknow. He has previously worked with ICICI Prudential Life Insurance Company Limited for approximately 10 years in the finance and accounts division. Raju Nanwani CS He holds a bachelor's degree in commerce from the University of Mumbai and holds a bachelor's degree in law (general) from University of Mumbai. He has over 19 years of experience in capital markets and financial services industry. Outlook & Valuation ICICI Securities, India's largest retail broker has seen a revenue growth of ~15% CAGR from FY15-FY18 (on annualized FY18E revenue) as the broking industry in India witnessed high growth in terms of increase in new accounts, higher income from distribution business and sharp rise in primary market transactions in the last 2 years. It has a capital light business model which is reflected by its high average ROE of ~70% since FY15. ICICI securities is a direct beneficiary of the activities in the capital market business which has experienced an improved macro environment, shift from physical assets to financial assets and stable government and its policies. However, declining customer/revenue market share, increase in online competition in distribution, declining 3-in-1 account penetration and regulatory changes are the key risk the company faces. At the upper price band of INR 520 per share, the stock is being valued at 31.5x 9M FY18 annualized earnings. We recommend SUBSCRIBE to the issue for long term investment. 5

6 Financials Income Statement (INR mn) FY15 FY16 FY17 9M FY18 Revenue from operations (a) Brokerage income 7,554 6,607 7,759 7,490 (b) Income from services 3,363 3,499 4,983 4,694 (c) Interest and other operating income ,087 1,118 (d) Profit/(loss) on sale of securities (net) Total Revenue 12,095 11,246 14,042 13,447 Expenses (a) Employee benefits expenses 3,921 4,014 4,847 4,148 (b) Operating expenses 1,045 1,015 1,290 1,103 (c) Other expenses 2,158 2,058 2,244 1,603 EBITDA 4,971 4,159 5,663 6,593 EBITDA Margin (%) 41% 37% 40% 49% (d) Depreciation and amortization expense EBIT 4,808 3,999 5,508 6,477 EBIT Margin (%) 40% 36% 39% 48% (e) Finance costs Total expenses 7,598 7,505 8,822 7,321 Profit before tax 4,497 3,741 5,220 6,126 Tax expense (a) Current tax 1,631 1,475 1,904 2,216 (b) Deferred tax Total tax expense 1,558 1,354 1,835 2,135 Profit after tax 2,939 2,387 3,386 3,991 PAT Margin (%) 24% 21% 24% 30% EPS Ratios BVPS (not annualised) ROA (%) (not annualised) 22% 17% 17% 14% ROE (%) (not annualised) 83% 60% 69% 59% P/E* (annualised) P/BV (not annualised) Balance Sheet (INR mn) FY15 FY16 FY17 9M FY18 Liabilities (a) Share capital 1,611 1,611 1,611 1,611 (b) Reserves and surplus 1,912 2,371 3,285 5,141 3,523 3,982 4,896 6,751 n-current liabilities (a) Other long term liabilities (b) Long term provisions ,165 1,243 Current liabilities (a) Short term borrowings 2,265 1,729 3,954 8,607 (i) Micro, small and medium enterprises 5,569 5,925 8,699 10,397 (ii) Others 1,545 1,402 1,710 2,129 (c) Other current liabilities (d) Short term provisions 9,420 9,098 14,414 21,222 Total 13,629 13,975 20,474 29,217 ASSETS n-current assets (a) Fixed Assets (i) Property, plant and equipment (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) n-current investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets Current assets (a) Current investments (b) Stock-in- trade (c) Trade receivables (d) Cash and bank balances (e) Short-term loans and advances (f) Other current assets TOTAL

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