ValuePickr Forum

ICICI Securities Ltd

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Can we expect more share selling by these promoters.

In my opinion, as SEBI has started probe against ICICI Prudential AMC in regards of heavy subscription during IPO. If found any discrepancies, they have to offload some of the stake in open market. And that warrants the fall in scrip price will continue to fall in coming time.

ICICI Securities has prepaid model which has less brokerage charges. It goes as low as 0.12% based on the plan you choose. Anybody seen that ? Has anybody used this ?

In prepaid model I(as NRI) am paying 0.35% + regulatory charges ,its not 0.12%

Depending on the prepaid brokerage that you are willing to pay, the brokerage changes. It starts from 0.12%. See here: http://content.icicidirect.com/mailimages/ic_PB_April2017.html
Many full service brokers also offer this and SBI starts with 0.1% with lifetime no AMC. I think ICICI and HDFC does waiver of AMC (or discounted AMC) if the value is above certain threshold.

This thread is for discussing ICICI Securities Ltd and not brokerage. For brokerages, go here: Selecting a broker

This questions integrity of entire organization culture. There are enough examples in history about cistomers/shareholders are taken for a ride. There is no reason to consider them better than PSU as far as corporate governance is concerned.

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It’s the genes, investor. Its the same evil everywhere. ICICI Pru Life insurance risks the livelihood of gullible investors in quest to meet Internal Premium targets. ICICI DNA runs deep in all these companies - use any and every means to make profits. It starts right at the top, with ICICI Ceo’s questionable role in the Dhoot dealings.

PSU’s merely bungle, but ICICI actively subterfuges investor/customer/share holder interests.

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is there any difference between ICICI direct and ICICI securities? I found two different research reports with different target prices on the same stock. e.g. after latest DCB results ICICI sec has given 240 target but direct.com 170 if I am not wrong.

ICICI Sec Q1 demonstrates how fickle broking revenues can be - especially when a vast majority of it comes from retail clientele. Some panic for a few days and retail brokerage can dry up quickly. A heartening takeaway from the results was the steady increase in non-broking revenues (from distribution) which should steady the ship somewhat in turbulent times. Stock’s still pricey at around0 20 PE.

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Table below shows market share of brokers ranked by their size

image
Source: ISEC annual report 2018

Over last 5 years small brokers (ranked > 50) have lost market share to top 5 brokers while the middle tier has largely maintained their market share. Especially on BSE this trend is well pronounced where small brokers lost 15% points market shares to both big and small. On NSE as well, small brokers lost about 5% points share to large brokers which increased their market share from 14% to 20%.

These changes are not just statistical sampling errors but an indication of underlying structural change in the industry. As trading is becoming more and more technology driven with mobile devices, and algos taking a larger share of the volume. Small brokers which typically are brokers for a community of small businessmen in Mumbai and Delhi and other metros are unable to keep up the pace of technological evolution while their clients (especially their next generation) are migrating to tech savvy brokers.

With every bear market, a small set of these brokers are likely to fold with their business moving to larger brokers. In 2016, we can see that share of large brokers jumped 3% while share of small brokers dropped by a similar amount and that became the new normal since then.

This trend will provide a cushion to fall in revenue during bear markets which is the major risk for ICICI Securities. As overall volumes on exchanges drop during bear markets, larger brokers are likely to gain market share softening the blow. While bear market will be pretty bad for this company in the short term, it will end up strengthening its competitive advantage in the long run by eliminating marginal weak players.

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Market risk is the biggest risk facing ISEC. In order to assess this risk, I performed some analysis of trading volumes on NSE and its correlation to ISEC revenue. Here is the data

Trading volumes on NSE CASH egment

FY NSE Mcap NSE Turnover Delivery Turnover NSE ADTO ISEC Income ISEC PAT Turnover / Mcap Delivery %
1995 363,350 1,805 898 17 0% 50%
1996 401,459 67,287 11,775 276 17% 17%
1997 419,367 294,503 32,640 1,176 70% 11%
1998 481,503 370,193 59,775 1,520 77% 16%
1999 491,175 414,474 66,204 1,651 84% 16%
2000 1,020,426 839,052 82,607 3,303 82% 10%
2001 657,847 1,339,510 106,278 5,337 204% 8%
2002 636,861 513,167 71,765 2,078 81% 14%
2003 537,133 617,989 87,956 2,462 320 108 115% 14%
2004 1,120,976 1,099,535 221,364 4,328 372 157 98% 20%
2005 1,585,585 1,140,071 277,102 4,506 230 64 72% 24%
2006 2,813,201 1,569,556 409,353 6,253 474 157 56% 26%
2007 3,367,350 1,945,285 544,434 7,812 438 64 58% 28%
2008 4,858,122 3,551,038 972,803 14,148 749 150 73% 27%
2009 2,896,194 2,752,023 611,535 11,325 518 6 95% 22%
2010 6,009,173 4,138,024 917,705 16,959 746 124 69% 22%
2011 6,702,616 3,577,412 979,269 14,048 708 113 53% 27%
2012 6,096,518 2,810,893 785,268 11,289 718 77 46% 28%
2013 6,239,035 2,708,279 797,504 10,833 706 72 43% 29%
2014 7,277,720 2,808,488 823,042 11,189 812 89 39% 29%
2015 9,930,122 4,329,655 1,276,589 17,818 1,210 295 44% 29%
2016 9,310,471 4,236,983 1,252,658 17,154 1,125 239 46% 30%
2017 11,978,421 5,055,913 1,479,963 20,387 1,404 339 42% 29%
2018 14,044,152 7,234,826 2,019,893 29,410 1,859 559 52% 28%
2019 14,292,302 3,990,204 1,008,624 32,087 56% 25%
CAGR 17% 16% 22% 17% 12% 12%

Notes

  • All numbers are Rs Cr (except %)
  • FY 19 data is until Sept 2018
  • ADTO = Average Daily Turnover

Source: NSE (for trading volume data) and ICICI Sec for company data

As the table above shows, volumes on NSE is growing at around 16% CAGR about the same as growth in total market cap which is also growing at around 17% CAGR. Delivery volume is growing at a high rate mainly because delivery % was low few years ago which appears to have peaked at 30%. Going forward, delivery volume could grow at around same rate as total volume. ISEC revenue as grown at a lower 12% CAGR mainly because brokerage rates may have dropped as a % of deliverable volume.

Although bulk of the volume on NSE is coming from F&O segment, ISEC revenue is highly correlated to volumes in the cash segment (especially delivery based volume). Hence I am using cash segment data for this analysis. F&O volume numbers are also based on notional value of contracts. Actual premium paid is only a fraction of the notional value. brokerage on F&O trades is also quiet low compared to brokerage on delivery based cash trades so volumes in the cash segment is more important for assessing revenue risk for Isec.

image
NSE Turnover as a % of market cap.
Source: NSE

In order to assess risk of a fall in trading volumes, I looked at the previous drop in trading volumes. Trading volumes dropped in 2002, 2004-2006, 2009 and 2011-2014 periods. In each of this case, there was a surge in volumes prior to this drop and volumes as a % of mcap reached as high as 200% in 2000 or 95% in 2009. In comparison, trading volumes as a % of market cap is only 56% right now (closer to long term average but higher than 2014 low) so risk of a long drawn drop in volumes over next few years is low.

Deliverable volumes also dropped along with total volume but to a lesser extent mainly because during bear markets, drop in intraday volumes is higher than drop in delivery volumes. ISec revenue is highly correlated to delivery volumes.

Chart below shows delivery volumes over last several year along with a simple (OLS) trend line.

image
NSE Delivery Volumes
Source: NSE

As the chart above shows, current delivery volumes are trending just below the trend line so risk of a fall in delivery volumes also appears to be low.

Finally, chart below shows that ISec income is highly correlated with ADTO on NSE.

image
Source: NSE (for trading volume data) and ICICI Sec for company data

For first 6 months of FY 19, ADTO is higher by about 8% compared to FY18, so here also there is no risk of a sharp fall in ISec income in FY 19.

Based on this analysis, a sharp pullback on ISec income and PAT for FY 19 is unlikely. Given the strong performance in FY 18, some pullback is expected, but at 13 times TTM EPS, CMP has more than priced in near term risk.

View invited.

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The main issue with ICICI Securities is not the likely decline in volumes in case of a bear market… as your analysis shows over a period they may remain constant or increase at moderate pace…

I think the main issues are

  1. Its inability to diversify beyond the brokerage business due to parent being already there in all businesses… and hence stuck with brokerage only business model…
  2. The competition from discount brokers and further disruption of brokerage business itself. For most self service users it doesn’t add any incremental value compared to low cost broker… They need to cut the flab and make their charges competitive…

Disclosure:

  1. Not invested. Tracking
  2. Using ICICIDIRECT from 10+ years. Not happy with high charges.
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We should bear in mind that ICICI Direct earned ~INR 280 odd crores from Distribution of MFs. With new direct MF platforms gaining popularity plus the reduction in commissions by AMCs imminent, this source could really fall by a decent no. So it has to be seen, how much could EPS be in next 12 months. The EPS of 17 in FY18 could really have been the peak EPS. I would conservatively expect 20-30pc reduction from FY17 EPS and expect a stable EPS of INR 8-10. Wouldn’t give it more than 15x, valuing this at 150. I know this sounds quite bearish, but clearly the income streams for Icici Securities are all going to be under stress. Brokerage from discount brokers, Distribution from change in business model and reduction in fees. Plus other cyclical segments such as Capital Markets with recent downtrend in markets could really put more pressure on earnings.

ICICI really smartly priced it at 520 when even 200 looks expensive to me right now.

Disc: Not invested.

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ISec Q2 - decent performance. growth flattening out.
Q3/Q4 should reflected the pain in the broking and distribution revenue.
3.7/- interim dividend though.

On the business segments, here’s my take -

  1. Investment banking - Will suffer with lower markets since the primary market pipeline with fall at an alarming pace when markets go into extended corrections. This is fee income where employee cost is the highest cost, ICICI Sec has shown the willingness to let people go during bad times so management can take necessary steps here to cushion impact on profitability from this segment

  2. Broking - Once again, not much control on the top line here. What I find interesting is that ICICI Direct keeps coming up with newer features and functionalities, their product management team looks solid to me. The bulk of the revenue depends on the cash turnover, F&O revenue will probably account for just 15-20% of the revenue going by whatever rudimentary numbers I have run over the past week. This segment is all about operating leverage, costs will not scale with revenue during good years while they can bite disproportionately during years when income falls. The key variable I would track here is market share which can indicate a weakening competitive position over the medium term if it trends down. I would not worry too much about fluctuation in revenue since that is a function of the industry itself

  3. Distribution - This is a much more predictable and solid segment, key question is how much of upfront commissions have they been booking over the past 3-4 years. Managements will never directly answer this question, I will attempt to get a sense of this by speaking to some industry guys over the next few days (wealth managers and AMC folks). If the upfront revenue component was high, expect a fall in revenue over the next 12M as the SEBI directive on a all trail commission model kicks in

The real big risk I see here is that there is a huge dependence on ICICI Bank for customer acquisition, if any regulatory change prevents ICICI Direct from having desks at ICICI Bank branches this can materially impact their competitive position and market share. Some finer work needs to be done to assess this probability.

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No of SIP’s triggered in last 12M (as per H2 report) = 1.1 Mn
Assuming average SIP = INR 5000
Monthly gross inflow from SIP = 550 Cr

Current pricing for most MF equity schemes is 1% upfront and 0.5% trail per year from day 1
Assuming overall commission stays the same, after SEBI directive the mix will be 0% upfront and 1.5% trail per year

Once you cast these numbers and try to estimate the impact (purely for the annual SIP book of 6600 Cr mind you), the exercise is pretty interesting -

In short, impact on the first 2 Q’s post the SEBI directive on the MF revenue will be huge. From Q5 onward (of the transaction being executed), trail model actually becomes more predictable and steady assuming the AUM remains constant.

For H1, MF revenue was up 18% to 150 Cr

I would not be surprised if the Q3 and Q4 MF revenue actually shows a dip YoY even if the AUM base is higher. One needs to understand that the same trend of revenue as projected above for SIP will hold for lumpsum equity MF investments as well.

On top of this there will be the impact of reduction in TER for large AMC’s which they will pass on to the distributor (HDFC AMC Q2 presentation states this in black and white). This means a double whammy is likely in Q3 and Q4 on income from MF distribution.

With Investment banking and Prop trading income expected to remain subdued and brokerage income showing only a slight growth, remains to be seen if FY19 will be better than FY18 in absolute numbers (my take is that they could be lower, yet to quantify the total impact)

I’ve also done channel checks on what the commission structure from MF for ICICI Sec Wealth management has been all these years, looks like it was a mix of upfront and trail based on the inputs I have received so far.

What remains to be done -

  1. Try to get a sense of the risk due to ICICI Bank working as a customer acquisition channel for ICICI Sec, if something is changed here by the regulator the impact on future customer acquisition can be huge

  2. Get a sense of what % of MF AUM comes from UHNI families (those with an MF book of 50 Cr and above), they will most likely move to the advisory/RIA model where they pay the advisor a % of AUM rather than do transactions through the regular route. In this case return in assets (fee as % of AUM) for this segment will be way lower than what ICICI Sec is currently making. Try to quantify this impact if one can, this is expected to impact over the next 2-3 years

  3. Get a sense of the operating leverage involved from the customer base point of view. Hardly 20% of the customer accounts are active, the dormant people whenever they start investing will most likely do it through ICICI Sec rather than go somewhere else

  4. Get a sense of what scenario is being discounted by the CMP and see to what extent the above risks are being priced in

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