ICICI Securities Primary Offer. ICICI Securities: Promising platform

ICICI Securities, the largest equity broking company in the country, is making its stock market debut, as its promoter — ICICI Bank – is offloading a part of its stake.

The company derives 70 per cent of its revenue from equity broking and the balance from the distribution of financial products and investment banking.

ICICI Securities stands out from its peers with respect to its larger customer base (3.9 million operational accounts in its online broking platform of which 0.8 million had traded on NSE in the preceding 12 months), its reach, with a nationwide network consisting of over 200 of its own branches and about 2,600 branches of ICICI Bank and, more than 4,600 sub-brokers, authorised persons, independent financial associates and independent associates.

At the upper end of the price band of ₹519-520, the company is asking for a valuation of 31.5 times its annualised earnings for 2017-18.

Peers such as Motilal Oswal Financial Services and Geojit Financial Services trade at 28 and 32 times respectively, of their likely earnings for 2017-18.

ICICI Securities’ asking price for the IPO is not expensive, given the company’s scale and reach. On broking revenue, ICICI Securities is the largest (with annual turnover of ₹776 crore), followed by Kotak Securities, Motilal Oswal and India Infoline, as per a CRISIL report. The IPO would be suitable for investors with at least a three-year horizon. The stocks of broking companies have taken a beating after the announcement of a 10 per cent long-term capital gains tax on equity.

The continued strong inflows into mutual funds in February, however, show that long-term investors may continue to be attracted to equity investments.

Any adverse regulatory thrust on curbing trades in derivatives, though, remains a risk for the company.

Over the next one to two years, given the political and interest rate risks the market may face, it may not be appropriate for investors with a short-term perspective to bet on stocks of broking houses, and certainly not with the idea of benefitting from a listing gains perspective.

Promising business

There is stiff competition in the equity broking space. However, there are only four/five large firms at the top, with ICICI Securities being the most prominent. Over the last four years, ICICI Securities has strengthened its position further with market share (on total traded volumes) moving up from 6.6 per cent in 2015-16 to 9.1 per cent now.

In 2016-17, the company reported a revenue of ₹1,404 crore, of which broking revenue was ₹775.9 crore (55 per cent). Broking revenue has grown at a compounded annual rate of 15 per cent over the last four years. Retail customers account for 90 per cent of the business, helped by the reach of its online portal — ICICIdirect.

The share of the broking business in overall revenue for ICICI Securities has been coming down in recent years (it was 70 per cent of revenue in 2012-13), which is a positive, as it reduces the risk from market vagaries.

In 2016-17, the revenue from the distribution business accounted for 25 per cent of total revenues.

The company distributes third-party mutual funds, insurance products, fixed deposits, loans and pension products to retail customers to generate fee-based income.

The segment’s revenue has grown at a compounded annual rate of 22 per cent over the last four years, helped by its online presence as well as an all-India network of branches and sub-brokers.

Going ahead, as retail market participation in the market through mutual funds and direct equity investment improves, ICICI Securities will benefit.

Besides, its strategic moves to grow distribution income through cross-selling by leveraging on the large retail customer base should help. This will further reduce revenue volatility.

The company is also trying to increase focus on products that provide recurring revenues such as mutual funds, long-term life insurance policies and portfolio management services.

Improving efficiency

ICICI Securities’ total revenues and profits have grown at a compounded annual rate of 19 per cent and 47 per cent respectively over the last four years. The company’s cost ratio, which is the ratio of total expenses to total revenue, has decreased from 84.6 per cent in 2012-13 to 62.8 per cent in fiscal 2017.

This fell to 54.4 per cent in the nine months ended December 2017. Employee productivity has also improved. The ratio of revenue to employee count has increased from ₹18 lakh in 2012-13 to ₹43 lakh in the nine months ended December 31, 2017.

This is thanks to the automation of operations and the reach of its online trading platform - icicidirect.com. The company claims that close to 90 per cent of all buying/selling of equity and MFs happen without a human interface from its end.

The offer is open till March 26.

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