ICICI Securities Ltd- Playing the financialization theme

ICICI Securities Ltd- Playing the financialization theme

May 22, 20204:10 pm

While looking out for companies that were working at their maximum capacity along the extended and harshest lockdown in India, I realized that brokerages were operating as usual & maybe in higher capacity than usual. As more and more people staying/working at/from home wanted to try their hands in the market. Link. 12 lakh new accounts were opened in March and April 2020 compared to 9 lakh in Jan-Feb 2020. Along with that trading activity has been all time high.  Even I am getting a lot of inquiries from friends and families who want to know how the market works. So, I thought of looking into the company best placed in the listed players to take advantage of this situation i.e. ICICI Securities Ltd. I will explain more about the company in the blog “ICICI Securities Ltd- Playing the financialization theme”.

Other than the COVID related factors, there has been structural shift in how Indian invest which is quite visible from the inflows to the Indian equity markets(In particular mutual funds), which I have listed below. All these will lead to the growth in the equity brokerage market.

ICICI Securities Ltd- Playing the financialization theme

Indian Brokerage Industry: Positives

  1. Transition from investment from Physical to financial assets
  2. Increase in Internet penetration
  3. Easier onboarding of clients completely via digital mode
  4. Immense growth in adoption of mobile app for transaction due to convenience & user-friendliness
  5. Very low penetration of financial products in India
  6. Lower interest rates: Makes fixed deposits(FD) and similar investments unattractive
  7. Unattractive real estate & gold investment
  8. 14% ADTO(Average Daily Turnover) CAGR in cash equities over the past 5 years. Now about 95% of ADTO happens online. And 50% + CAGR in trading volume.

Indian Brokerage Industry: Negatives

Brokerage industry is highly scalable given the operating leverage it gets due to the technology factor, which makes it highly competitive. And hence low barrier to entry. Every brokerage is fighting to get the clients, which is putting pressure on the commission charged as the product is standardized. But since the overall industry is growing rapidly, the drop is commission is more than compensated from the overall revenue/transaction/new client growth.

The industry is to a large extent dependent on the economic and market condition prevalent in the country.

ICICI Securities Ltd- Playing the financialization theme

ICICI Securities Ltd- About the company

 The company was incorporated as ICICI Brokerage Services Limited on March 9, 1995. The name of the Company was changed to its current name ‘ICICI Securities Limited’, on March 26, 2007. They were the pioneer to Launched online trading platform – ICICI direct in the year 2000 and in the subsequent year launched online mutual funds platform. Started distribution of health and life insurance products in 2006 & launched SIP product in equity in 2010. One of the pioneer of the e-brokerage business in India.

The IPO:

ICICI Securities Ltd came out with its IPO in March 2018, a couple of month post the stock market euphoria was over i.e Jan 2018. At the end of the 3rd day of IPO, the IPO got subscribed by only 88% that they received bid only for ₹3500 cr of the targeted amount of ₹4017 cr. Other than that the market volatility, the IPO was very richly valued at ₹520 at a price to earnings ratio of 35, the second probable cause for tepid listing. On the listing day share price fell by almost 16.5% to ₹435.

At the current market price of ₹375(21.05.20), the company trades at a discount of 28% & 14% to its IPO & listing price respectively. 

ICICI bank ltd held 100% share of the company prior to the IPO. As of Q4F20, they had held 79.2% stake in the company.

Seeing the tepid response to the IPO, the company got into some suspicious transaction, for which they were fined ₹28 lakh by SEBI.

Coming back to the business part, ICICI Securities’ business enjoys operating leverage i.e. in order to further grow the business the capital investment required would be quite low. Given, the high profitability of the business(on an average 30% profit margin), any further capital required to grow will be used from internal accruals. Because of this, they keep giving out handsome dividend of 50-60%. 

The company has to maintain a fixed deposit amount with both the exchanges to the tune of ₹1500 cr + as a part of regulation which is based on the volume of transaction , for which they receive interest payments. This amount they borrow via issuing commercial papers.

Company envisages growth via three strategies: 1) Customer acquisition 2) Superior experience to its customers 3) Customer retention- giving more more value added product and services to its clients

In terms of bringing process efficiency, they have been shutting down not so remunerative branches as trend shifts digital now. Once the revenue picks up, operating leverage will come into play. In the last 4 quarters the company has reduced its number of branches from 200 to 172. But can’t expect a lot of reduction from here. The further network growth is likely to be via greater penetration of ICICI Bank branches where I-Sec employees are placed and they do the business development.

The company has 2 subsidiaries: ICICI Securities, Inc. & ICICI Securities Holdings, Inc. (subsidiary of ICICI Securities, Inc.). Other than ₹12 cr investment by ICICI Securities Ltd into  ICICI Securities, Inc., there is no big transaction between them.

ICICI Securities Ltd- Management

At the time of IPO,the company was led by Shilpa Kumar, a 27 year veteran of ICICI Bank in the areas of planning, project finance, corporate banking and treasury at ICICI Bank. She was made the Managing Director and Chief Executive Officer of our Company since November 3, 2016. Linkedin

Shilpa Kumar had a salary of ₹3.97 cr as on for FY19 and total management & director salary being more than ₹10 cr which is quite conservative given the high profitability of the company.

Only one thing which I could not understand why to pay Company Secretary a salary of ₹1 cr.

Since May 2019, Vijay Chandok was made the MD & CEO of the company, another ICICI Bank veteran with an experience of 25 years with ICICI group. Linkedin

I like the fact that they promote within the group.

ICICI Securities Ltd- Business​ Segments

ICICI Securities Ltd- Playing the financialization theme
ICICI Securities Ltd- Business Segment

ICICI Securities Ltd- Brokerage Business

Company charges broking fee for each transaction done on its platform/app. It is the core product of the company and contribute to 50% of revenue.  This segment of the business depends a lot on the way stock market is performing. Upward movement in indices helps usually helps the equity brokerage amount. In volatile situations, the traders take the centerstage. Trading margins are lower than equity cash based margins.

In term of institutional segment, their parentage with ICICI bank helps where they are able to execute block deals among large wealthy customers and institutes. 

Earlier the company used to measure yield per transaction that is how much brokerage the company is generating per transaction. But with advent of discount brokerages in the last 5 years, they are now bound to provide lower brokerage rate coupled with lot of lower value added product & services. Now, the metric used to measure is ARPU(Average Revenue Per Customer).

I-sec’s has total customer base of 48 lakhs as of Q4FY20. Of which 9 lakh customers have two or more products with the company and 10.8 lakhs have done atleast 1 transaction on NSE in the last 12 months.

Over the last 4-5 years, the markets ADTO(Avg Daily turnover ) has been growing by 50% + CAGR. The same stands true for the company. This volume growth cushions the drop in brokerage yields.

Prepaid:

Customer prepay a fixed amount with the company. Avail lower rate of brokerage. Intended for customers who are highly active.

Subscription plans vary from ₹10,000 to ₹3,00,000 which can be valid for 15 years.

Brokerages rates vary between  9 bps-25 bps.

Prime: 

Annual subscribstion plan.

Three plans: ₹900 per year, ₹4500 per year & ₹9500 per year. 

Revised brokerage rate varies from 15-18-25 basis points.

Liquidity window: ₹25 lakhs in 30 min cycle .

Free currency trading.

Earlier it was invite only but opened for everyone on 1st Oct 2019. Co. is adding 60-80k new clients to the ‘Prime’ plan every quarter.

Options 20:

Done to attract option traders that contribute to the bulk of FnO market.

Charges: ₹20 per order and ₹5 per lot.

It is available only on invitation basis as of now and pricing wise it competes with all the discount brokers.

ICICI Securities Ltd- Distribution Business​

I-Sec is the second largest non-bank mutual fund distributor in India. For Mutual fund distribution, they generate upfront commission and a recurring trail commission. But SEBI’s change of rule on such commission to ban upfront commission and to reduce trail commission, it led to drop in the commission yield but overall growth in the mutual fund business have compensated for the drop in margin.

Distribution business is basically you go to their platform, compare between various mutual fund schemes using filters you want, and then decide which one you want to buy. If you buy any scheme through their platform, I-Sec will get certain commission.

In terms of Insurance distribution, earlier they used to do only Life and general insurance distribution. In FY19, they added health insurance to the existing portfolio via tie up with Religare & Star health insurance, for life they do it only with ICICI prudential.

ICICI Securities have been rapidly ramping up the sub-broker network as well as partnership with IFA/IA(Independent Financial Advisors/ Investment Advisors). This will lead to growth in distribution revenue mainly in tier II & tier III cities.

With people losing jobs and issues with overall income, we may see Mutual fund redemption.

~75% of ISEC’s AUM is in equity assets, where the commission earned is higher. Moreover, the company distributes over 660k SIPs(Systematic Investment Plans) monthly.

Since, it is a distribution only product , there is no differentiation with other platforms. Whoever offers lower or even no fee can compete. Here, the strong parentage helps. They can differentiate only by providing value added products. Investors doing SIPs via ICICI Direct platform will be provided with life insurance cover once they meet certain criterias. SIP Protect plan

I am sure other full service brokers mainly associated with banks would be providing such facilities but still all these types of value added products helps to retain customers from competition by tech only platforms.

Digital loan: Company will provide Personal Loan, Auto Loan, Credit Card & Home loan top up. All the loan will be from ICICI Bank. 5 lakh account holders will be pre-approved and paperwork will be required only for Auto and Home loan top up. Launched in July 2019. Within 9 months i.e. by March 2020, they have disbursed loan of ₹200 cr and the margin ranges from 0.5% to 1%.

ICICI Securities Ltd- Lending Business​

Margin based lending or ESOP Lending: I-Sec will lend on the basis of share held as collateral. Also allowed ESOP(Employee Stock Ownership plan) holders of Large publicly listed companies to use those ESOP to get the margin amount. As of now, ESOP based lending is allowed for 39 companies.

Q3FY20 they launched the MTF(Margin Trading Fund) for NSE. Earlier it was just for BSE. Given that most of the transaction takes place on NSE, this doubled the lending book in Q3FY20 to around ₹1200cr from an average of ₹500-600 cr per quarter. This facility was scaled down in Q4FY20 on account of higher market volatility. But this remains a huge opportunity area for the company to grow.

The interest rate charged for Q4FY20 varied between 8.9% to 14% depending on the Prime plan you take.  

ICICI Securities Ltd- Wealth Management

Includes distribution of products to wealthy clients through their 300+ wealth managers.  Products offered are similar to that of retail clients, plus some sophisticated products such as PMS and AIFs. They have 32,000 clients & manages over ₹83,000cr in wealth management assets. Small contributor to the overall revenue.

ICICI Securities Ltd- Investment Banking/Corporate finance

Small part of revenue from Investment banking/ Corporate finance. Depends on the market condition. Have been on decline since FY18 due to subdued market. Deeply cyclical. To keep the deals pipeline strong, I-Sec has increased focus on distressed asset related transaction sourced through referral by ICICI bank.

ICICI Securities Ltd- Playing the financialization theme​

ICICI Securities Ltd- Diversifying the revenue stream

ICICI Securities Ltd- Playing the financialization theme

Over the years, the company has reduced its dependence on one line of business(brokerage) by growing its other business mainly Mutual fund(MF) distribution. MF distribution contribute more than 50% of the non-brokerage revenue.

ICICI Securities Ltd- Playing the financialization theme

ICICI Securities Ltd- Cost to Income ratio

ICICI Securities Ltd- Playing the financialization theme

Cost to Income ratio represent how much cost is required to generate 1 unit of Income. Obviously, the lower the ratio the better. Here, cost represent all the cost of the company except tax expenses. For ICICI Securities Ltd, the cost has come down over the year implying better utilization of resources & digitizing more & more products. In terms of efficiency compared with other full service brokers, I-Sec lags only behind HDFC securities where the efficiency stands at 37%. In a way it implies that I-Sec has still some room to become further more efficient. 

ICICI Securities Ltd- Financial Analysis

ICICI Securities Ltd- Playing the financialization theme
ICICI Securities Ltd- Financial Analysis​

As you can see from the Line item number 2, that in good market years the company’s revenue increases significantly but in bad years it drops marginally. In the year 2015-16, the drop was due to Chinese slowdown data, in 2018-19 the slowdown was due to Indian economy slowing down as well as NBFC crisis. There was similar drop in 2012-13. When the revenue improves the operating leverage comes to play leading to significant improvement in profitability(Line item no-16-17) and hence the Return on equity(Line item number-26).  This explains the cyclical nature of the business.

The same trend follows for other line items such as EBITDA & Profit after tax margin.

You might ask why take the short term debt(Line item no 18) when so much of profitability. It is mainly to maintain deposit required with the exchanges depending on the volume of transactions. 

ICICI Securities Ltd- Playing the financialization theme

ICICI Securities Ltd- Future growth drivers

  1. Allowed other bank customers to open an Broking Demat account with ICICI securities(I-Sec):                                                                                                                                                                                   As of Q2FY20, ONLY ICICI Bank customers can open accounts with I-Sec but now anyone can open an account with them. This opens up a very large untapped opportunity for them. Management in a call mentioned that 90% of opportunity lies outside ICICI Bank and I would more than agree. 
  2. Revenue sharing arrangement with ICICI Bank: ICICI Securities will get access of all the account holders of ICICI Bank customers and can target them to open an account with I-sec. This arrangement will involve 2 years of revenue sharing with the bank (First year-35% & Second year-25%)
  3. This tie-up has increased level of client activation significantly clubbed with their various plans.
  4. Revenue sharing arrangement with ICICI Bank: Will get access to high quality clients who have been associated with ICICI group for long time.
  5. Lower brokerage plans: Launched a number of subscription based products mainly to counter the challenge faced by the discount brokerages such as Prepaid, prime and options 20.
  6. e-ATM: Allows customers to withdraw ₹50,000 from broking account within 30 minutes of completing the transaction which otherwise takes more than 2 days in all the company’s brokerage account. It is applicable only for BSE transaction but I am sure they will launch it soon for NSE transactions. Available to all ICICI Direct clients without any cost to customers but obviously it will increase I-Sec’s costs.
  7. Increasing partnership: In order to grow the distribution business, they are bringing more and more investment advisers with them.
  8. Other features on ICICI direct app: Interoperable facility between bank and brokerage account i.e. fund transfer would be in real time, place order for a week compared to just a day for other brokerages, place order at multiple prices, Real time display of LT capital gains, ICICI direct investor sentiment, upload the portfolio details of stocks hold in other brokers account in ICICI direct platform and view one’s entire portfolio performance in one place without actually transferring the shares, sector based portfolio etc
  9. Being associated with bank helps them launch a number of new products which other brokerage houses can’t give.
  10. In talks with other smaller banks who don’t have their own brokerage house to push ICICI direct to their customers. It helps both the parties as the referring bank would see higher CASA in their account and likely to be more active. I would agree with them given by own practice. 
  11. T20: Launched digital customer acquisition process including the digital signature on power of attorney document required by brokerages.
  12. Open architecture platform: If they find anything relevant/value enhancing to be added to their platform from third parties, it can be done with ease.
  13. Increase in penetration in ICICI bank branches.Lower requirement of their own physical branches. 
  14. Focusing on NRIs through ICICI Bank where there are very limited competition
ICICI Securities Ltd- Playing the financialization theme​

Discount Broker Vs Full Service broker

Discount brokerages are those that just provide a technology platform for trading without any additional service but a very low cost compared to Full service brokers. Full service brokers provide relationship managers to their clients , along with research and other sort of services. Because of the additional cost borne by full service brokers, they are expensive as compared to discount ones. 

ICICI Securities used to be the #1 broker in India which they lost to Zerodha a couple of year back(In terms of number of clients). But in terms of revenue generated, Full service brokers have a lions market share of 95% in India compared to 30% in US. 

Although, products are standardized, Indian full service brokers provide a number of value added products and in particular those associated with banks. Also, they have reduced their rates significantly. 

One factor that makes full service brokerages still relevant & thriving in India would be the unreliability of Indian discount broker such as Zerodha. Having used them for a couple of days, I have vowed to stay away from such firms. Their platform often doesn’t work and this is going on for many years now and they repeatedly refuse to take responsibility. 

Other factor I think would be lack of financial knowledge among Indians requiring them to be handholded for many processes.

Only two players (Zerodha and I-Sec) have more than 10% share in active clients.

Recent incidents such as that of Karvy and other smaller players is likely to make investors/traders move towards large, institution-backed brokers like I-Sec.

ICICI Securities Ltd-My opinion

Because of the competition faced from discount brokers, the yield has declined as full service broker such as ICICI Securities Ltd also have reduced their commission. But given the factors mentioned above in the “Future growth drivers”, their overall revenue growth is likely to continue more likely with the market. As of now the growth in the level of transaction is just cushioning the drop in yields. The full potential will be seen when the market stabalizes and gets into a bull phase. With Schemes such as ‘Prime’, ‘Prepaid’, ‘eATM’ and ‘Options 20’, they are trying to ring fence their customers. 

AND MOST OF THE NEW INITIATIVES HAVE BEEN TAKEN IN THE LAST 1-1.5 YEARS. IT WILL TAKE SOME TIME TO SEE HOW THOSE GIVES OUT RESULTS. SINCE, THEY ARE TAKING A LARGE NUMBER OF INITIATIVES, A FEW WILL BE DEFINITELY START GIVING RESULT, PUSHING THE GROWTH OF THE COMPANY. Prime has already started to show results(As on Q4FY20, it had 3.1 lakh prime members).

This is a cyclical business which moves with the market phases. But the company is trying to reduce the cyclical part by introducing lending, distribution products. Given the diverse product portfolio the company has, they focus on cross-selling its various products to its customer. Also, trying to bring in recurring revenue sources: The share of recurring revenue has been increasing and stood at 58% as of FY20(which includes regular SIPs, Insurance premium, prepaid plans etc). A higher share of recurring revenue reduces volatility of earnings.

Strong parentage of ICICI Bank and ICICI brand name helps to win over competition to some extent. Also, the focus of the parent to grow the subsidiary business is of immense value. Reaching out to existing customer of ICICI Bank(specially wealthy ones) to open an account with I-sec is likely to source quality clients and can be a potential game changer. Opening the ICICI direct platform to other bank’s customer opens up a big untapped opportunity.

The company is rightly placed with all the products and have been able to grow despite the headwinds. Everyday 1000+ accounts are getting added and of which 30% are different bank account holders other than ICICI which is an encouraging sign. 

A large part of the business is similar to lending business of NBFCs/Banks/ Gold financing. Not much differentiation in products. EVERYTHING BOILS DOWN TO EXECUTION & VALUE ADDITION. They have brought various counter products to tackle the competition by tech only platforms.

Going forward they want to be viewed as a one-stop shop for anyone’s financial need and have products across all age groups and classes rather than just a brokerage houses. 

I would say, it is not an exceptional company as there can only be a few but a good company with good scope for growth if bought at right prices.

Whether I invest or not but I am definitely going to open an account with them.

 

In terms of valuation, it is reasonable but it would be prudent to wait for a certain decided price to get into the stock. 

Over time I have realized, buying at high prices and then seeing the price fall and wait for the prices to recover is really a fruitless strategy. 

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Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

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