ICICI Securities IPO

IPO Rating - 52 (Investment Recommended)*

Last year witnessed beginning of the trend of banks listing their different business arms, providing special business focus and raising funds to independently cater to their growth. We saw a wave of insurance companies being listed from both private and public sectors. The next in the line is ICICI Securities, which will get its own identity and and independent status from its parent ICICI Bank.

About the offer

ICICI Securities issue is an offer for sale (OFS) by the promoter of the company, ICICI Bank, which currently owns 100% of the shares. Through the IPO, the promoter bank plans to sell 7.7 crore shares, representing 24% of the total shareholding. Out of this offer, 5% will be reserved for ICICI Bank employees. The retail investors will be getting a lower share of 9.5% out of the shares being offered. The issue size is Rs.4016 crore on the upper price band and the shares have a face value of Rs 5.

The offer price range is Rs 519 -520 and the minimum lot size is 28. Hence, the minimum investment needed is Rs 14,560. The issue will remain open from March 22 to March 26, 2018. The successful book-building will entitle the company to list on the BSE and NSE.

Purpose of the issue

This is an OFS and hence the company will not receive any funds from the IPO proceeds. However, it will benefit from the better brand visibility on account of listing.

Industry overview

The broking industry has been dominated by large brokers with top 25 brokers accounting for ~51% of the trading turnover. The market share of top five brokers has grown from 14% in 2013 to 19% as of Sep 30, 2017.

Also, the last two years witnessed higher primary market activity and higher retail participation in secondary markets. As per CRISIL, brokerage revenues are expected to grow by 15-18% CAGR over the next five years as against the growth of 14% seen over 2012 to 2017.

The equity capital markets witnessed peak activity due to higher liquidity in the market and increasing exits by private equity investors. With buoyancy in the primary and secondary markets, the MFs also witnessed heightened activity with growth of 26.8% CAGR from March 2013 to Sep 2017.

These trends have benefited Indian brokerage firms and full service brokerage houses saw higher traction in revenues.

ICICI Securities

The company provides products and services to retail clients, FIIs and corporate clients. The company derives ~90% brokerage revenue from retail business. Its flagship brand ICICIDirect is the proprietary electronic trading platform with ~3.9 million operational accounts.

Retail customers - It offers products and services in equities, derivatives and research, and it also distributes various third party products, including mutual funds, insurance products, fixed deposits, loans, tax services and pension products. The retail brokerage and distribution businesses consist of 200 own branches, over 2,600 branches of ICICI Bank through which the company's electronic brokerage platform is marketed and over 4,600 sub-brokers/authorised persons. It also offers variety of advisory services, including financial planning, equity portfolio advisory, access to alternate investments, retirement planning and estate planning.

Though the company’s retail franchise remains strong, the threat of competition is looming large with new discounted entrants in the business such as Zerodha, which have grown substantially in their trading platform. However, brokers attached with banks due to full service portfolio have been able to grow their subscribers.
ICICI Securities has been able to sustain its market share to a large extent due to its integrated electronic brokerage platform and plug and play architecture leading to embedding of over 25 third-party product providers, including depositories, exchanges and credit bureaus.

Domestic and FIIs – ICICI Securities offers domestic and foreign institutional investors with brokerage services, corporate access and equity research.

Investment banking – Under this function, it offers equity capital markets services and other financial advisory services to corporate clients and the government and financial sponsors. From 2012 to Sep 30, 2017, ICICI Securities was the leading investment bank, considering the number of primary issues managed.
The revenue from investment banking business has grown exponentially from Rs 70.14 cr in 2013 to Rs 1,194.8 cr in FY17, at a CAGR of 14.2%, and was ₹ 1,134.4 million in the nine months ended December 31, 2017.

ICICI Securities is the second largest non-bank mutual fund distributor with market share of 3.5%. The highest market share of 8.9% is by NJ Indiainvest. In the banking category, the market share of 7.9% is commanded by HDFC Bank.
Its revenues from the distribution business increased from ₹ 162.1 cr in FY13 to ₹ 350 cr in FY17 and was ₹ 328 cr in the nine months ended December 31, 2017. The contribution pie from this business rose substantially from 36.7% in 2013 to 60.7% currently of the revenue from the distribution business.

Financial performance

The total revenue and profit after tax increased from ₹ 705.8 cr and ₹ 71.7 cr, respectively, in FY13 to Rs 1404.2 cr and Rs 338.59 cr in FY17, respectively, representing a CAGR of 18.8% and 47.4%, respectively. The RoE of the company is more than 30% since FY13, and for FY17, it was 69.2%.
It also had a high dividend pay-out ratio of 60.6% in FY17.

Comparing the nine-month period ended Dec 31, we see that the company has been able to grow revenues at 31.5% YoY, with brokerage income and income from services growing at 32.1% and 29.6% YoY, respectively.

The operating profit also increased by 56.4% due to less than proportionate increase in employee costs and other operating expenses. The operating profit margin peaked to 48% during this period, the highest ever since 2012.



Our view

We see that due to the buoyant market conditions, early mover advantage and having a bank as its parent, ICICI Securities has been able to grow at a faster pace in the last three years. We see that the brokerage space is evolving and players are attracting attention of new investors. with lower transaction costs. We believe the year 2019 will probably be a year of consolidation for the company. The growth in the industry has attracted new players and each will try to enter the high margin business. So, going forward we believe, margins will be flat or lower and the new user coming on board will be costlier than before. However, we believe ICICI Securities, with its stronger base and technology, will be able to sustain its market share. At the upper band, the IPO comes at P/E of 34.8x with TTM EPS of Rs 14.94, which looks on the higher side. Considering the higher moat and no listed peers, we urge investors to subscribe to the issue for listing gains.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment

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