Hi,
Trying to understand, what’s the reason for the -ve FCF over the 5 yr, 3yr and TTM
Disc - Invested a small lot at 723 recently
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FCF and CFO will be negative for lending institutions.
Do not use the same metrics to asses different companies. Depending upon the nature of the industry, we need to use different metrics. Even in the same industry, sometimes a company is matured so FCF will be positive, another company which is still growing will have negative FCF.
Thank you so much for the good point. Will keep in mind w.r.t metrics.
One q though - ICICI sec is not a lending institution right ? Maybe your point on the growing concern may be true…
I don’t follow the company but looks like there are plethora of services provided by the company including credit. So it is not a typical lending institution but it does deal with lending.
https://www.icicisecurities.com/wfrmOurBusiness.aspx?BusineesType=19
While it generates revenue through fee, partnerships, commissions etc from different products, it also lends out.
2 Likes
Peer results- HDFC sec( 40%+ YoY in topline and bottomline)
ICICI security numbers would be in similar/better range given better digital push participation and plans.
Base case /Good performance - Revenue 900-950 cr and OPM of 62-63%, PAT, 350 cr+
V Good performance - Revenue 1000cr+, Opm of 65%, PAT closer to 400 cr - Annualized PE at 1600 cr profit would still still be under 15, further rerating potential though a shallow cyclical biz.
Key monitorable - Operating leverage, Market share and Neo plan performance and non brokerage segment performance. Price volume action at taking out ATH last week indicates optimism.
Invested
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Company is taking right steps in becoming a marketplace for financial products, investing in tech stack and also being conservative on quality of acquisition ( rather than harping a lot about 5L + acquisition).
Growth strategy
- Product basket( demonstrates by HSBC, HDFC coming on platform besides ICICI) and customer addition
- LTV focus with quality of acquisition
- Operating leverage commitment over Medium term( investing phase now - tech ++ dig mktg hence not committed for short term) - cost to income at 45% in Q2.
- Diversification of revenue pool makes performance more resilient- Equity allied, Distribution, Institutional
They might be lagging from digital natives such as Angel and Zerodha on acquisition, however they are catching up, have broader product offerings and deifined strategy, will do 1400cr+ profits in this year, not bad for a 24K cr mkt cap company which is going to grow at 20%+ and an asset light and low risk play on financialization theme.
Invested
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My thoughts on Q2 and beyond
• Apart from customer addition what stood out for me was the growth in mtf book and distribution business
• Management recognises that they have a lot of work to do in FNO segment to make it more appealing to that cohort of traders.
• Cost to income ratio may deteriorate in the coming quarters due to higher tech investments and marketing spends
• The continued focus on quality over just quantum of growth gives me comfort that by the time this phase of super normal growth for industry is over, Isec would have transformed itself into a financial marketplace. Hopefully by then price multiples will expand as market sees more granular sources of revenue
2 things that I think might happen here:. With respect to user experience whatever difference there is between the top 5 brokers would have almost disappeared in the next 2 years. I m talking about UX. that too purely from a users point of view( I use angel zerodha upstox Isec). I know a lot of people who prefer their discount broker simply because they feel it’s platform is better than the “bank brokers”. that perception is likely to change. secondly CAC is likely to go up as market penetration for the industry increases. no more low hanging fruit. Readers please feel free to opine
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Another good Qtr from peer HDFC securities, Q2 HDFC sec has grown 45%+ topline and bottomline, while ICICI security did 25%+ in Q2.
Hdfc sec Q3 gets stronger despite volatility in Nov and Dec, delivers 55%+ at both topline and bottomline, PAT margins are 50%+ a rare breed with explosive growth. All this is while HDFC sec is hardly talked about in era of digital brokers.
Industry continues to do well despite being termed cyclical and Nov & Dec being quite volatile.
Key monitorable for Icici sec
- segmental performance ( while margin funding and distribution biz should do well, IPO/B2Band broking revenue trends imp)
- Cross sell and upsell metrics -LTV
- Financial mktplace progression
- Digital acquisition and activation, Neo plan performance ( vis a vis Discount brokers)
Invested - Isec and Angel
5 Likes
Concall notes of Q3FY22
- 52% on YoY and 10% on sequential basis. topline 42% YoY 8% sequential profit
- Signs of moderation: Sequential decline on Month on Month basis specially November and December
- Pricing pressure is settling down in the industry
- Consolidation of clients and volume with digital players coming in??
- SIP recorded highest ever inflow.
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RBI direction to align ESOP product in line with banks is affecting ESOP business which has set 2 million per client cap.
- Around 15-20cr impact on revenues QoQ.
- 6800cr is MTF + ESOP (more than 80% is MTF)
- within this ESOP will go down and no new positions
- MTF 22% market share and has grown sequentially.
- Client addition remains strong:
- 68% new client were 30 years below and 80% tier 2/3 cities.
- These clients wont have much options of monetization initially years.
- Registered market share gain on sequential basis.
- Insurance business is flat. Sequential no growth in insurance business. (3% decline)
- Till 20th of December was fine but suddenly after increasing of cases it was hit.
- There should be clear sequential growth.
- ICICI 1% decline and second partner 2% growth.
- Advisory business: strong pipeline.
- This could moderate in future
- To reduce volatility of income they focus on Advisory business and QIP within this segment.
- Retail equity market share: largely stable
- similar to last quarter it is flattish.
- They are implementing few things in trading segment like T+5, etc.
- Number of clients in NEO 1.8 lakh customers.
- Question by Analyst: Quarterly broking revenue flat for past 7 quarters. Which segment is not growing within this?
- Broking alone should not be tracked as non-broking revenues are being added.
- It doesn’t matter from which segment the money comes.
- Management shares an example: Don’t focus just on the air ticket. Rather on the extra services like extra leg space, premium seats, etc.
- Company is not driving brokerage singularly.
- Broking alone should not be tracked as non-broking revenues are being added.
- Market share in cash segment 8.3% last quarter 8.8%.
- November and December month impacted.
- We have started to see the uptick again in this quarter.
- They have a team for marketing and try to capture customers into other segments.
- November and December month impacted.
- Investment banking contributes 15-20%
- 12% cyclical
- Within this there is QIP which is less cyclical.
- Market share of 90% is raising fund market?
- 8% predictable business
- For last one year funding raising has been high.
- 12% cyclical
- Employee cost 30% is variable
- Non-broking business has gone from 9 to 35%. Focusing on diversification to manage cyclicality.
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Management agrees that cyclicality is the risk in this business and one cannot run away from it. They are trying to reduce that by diversifying. Every passing quarter the business is getting more diversified.
- They believe there is on average 3 years of cycle.
- Revenue mix: No significant mix. More towards cash rather then F&O
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Our equity market share is trending downward from 11% to 8%. Declining past 7 quarters.
- New margin regime has stabilize now. Looking forward there should be improvement.
- Our endeavor is to improve the market share.
- Digant Haria from GreenEdge: F&O volumes doesn’t have any cyclicality. Over past 6 years the volumes are just going up.
- Management believes that promoting F&O product during a downturn is a strategy which they don’t follow and F&O cannot be used to counter cyclicality.
- Target for ARPU:
- Not a product specific target rather how can you provide products as per their need.
- The client should grow with us and their assets with us.
- 140-145 Branches currently
- Q3 saw highest PRIME 9.5 lakh customer 75% customers have gone for auto renewal.
- Further, two new plans launched and the movement shall continue
- For NEO also there is uptick going on.
- PRIME is a way to attract high intent customers
- If MTF book has to run off completely it would take 4-5 quarters
- Yields in mutual funds have increased.
- Q: What is the average wallet size of new customer? Will these customer survive a market crash to join back?
- Management: Even if a percentage of them turn out to be long and sticky customer it will be worth it. The survived customer would compensate for the marketing expense done today.
- Their cash burn has become very negligible.
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They have a huge debt of Rs.7800 Cr. Any particular reason for this.Please help
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Those are debt securities. Please check the balance sheet for more details
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NCD’s used to fund Margin Lending
Average to good quarterly results, good dividend payout, company focusing on transformation from brokerage to complete weath solution provider, diversified revenue streams, considering current environment in capital market it may seem right strategy, what I want to know is P/E multiple to pay for this business. Not great but good business to own in terms of Buffet’s criteria. What’s your view here?
Road to Zero brokerage seems to end.
Could you please elaborate on what you meant by it
I want to know reasonable valuation multiple can be paid to this business. IciciDirect may retaliate to new age player in coming years.
Is ICICI group better in terms of IT and technology in general that many other banks it competes with? If they are, I would expect this technological advantage to benefit ICICI Securities as well. How is ICICI securities better than other wealth management companies? What are the strengths that bode well for the future of this company? Does the balance sheet strength of ICICI Bank benefit ICICI Securities in terms of being trusted by Wealth Management customer base?
P.S. I am not saying that the balance sheet of ICICI Bank is strong as I am not sure how to assess the balance sheet strength of a bank. However, being a systemically important bank in India, hopefully there are not too many skeletons in the cupboard.
ICICI SEC Q4 highlights -
Cash broking revenue at 20 pc of total,this used to be 50 pc plus for ICICI SEC a few yrs back (this fall is in line with industry trends as discount brokers don’t charge here)
Derivatives revenue at 15 pc of total, up continuously for 7 straight Qtrs
Distribution revenues at 22 pc of total (very healthy, mostly insurance, loans distribution- industry leading matrix this one)
MTF revenues at 26 pc of total (again Mkt leading)
Segment wise Mkt share -
Retail Cash - 11 pc, up yoy- AVG
Retail Derivative - 3.6 pc, up yoy - AVG
Commodity- 6.1 pc,up yoy, AVG
MTF- 22.3 pc, up yoy, Exceptional
MF distribution- 1.7 pc,flat yoy, AVG
Company is the leader in Insurance, Loan distribution vs peers - big positive
Wealth management AUM - 3.2 lakh cr vs 2.9 lakh cr, industry leading . Avg yields here are 0.32
Derivative broking revenue at 117 vs 85 cr yoy !!
Loans disbursed at 1250 cr vs 660 cr yoy. Partnership with TATA capital went live. With many others to go live shortly
Life insurance premium collected at 432 vs 295 cr. Has 12 insurance partnerships via open archietecture
Increase in Qtly cost due - increase in interest rates to provide funds for MTF trading, enhanced technology investments MTF book
NIM at 3.0 vs 4.8 pc- company absorbing cost to gain mkt share
Wealth management customers (> 1 cr aum )at 78k vs 68k yoy
Revenue from wealth management clients crossed 1000 cr vs 3416 cr revenues for the entire company - A huge positive …IMO. 66 pc of this income is recurring, 34 pc is transactional
Revenue from insurance ( both life and non life ) distribution at 102 cr, up 45 pc yoy !!!
ISEC PMS AUM at 1400 cr vs 720 cr LY, a big positive as this is one of the highest yielding product
Company earning 65 bps commission on overall loan sourcing book. When personal loans kick in, this yield should head higher !!!
NIMs on MTF book should be around 3.5 pc for FY 24
Company to press harder for greater mkt share in F&O segment
MTF book at 6.5k cr vs 4.5k cr LY despite weak mkt conditions
Expect FY 24 to be investment heavy yr, wrt investments in Tech, Feet on ground
Added 10k customers in wealth management space in this FY. Aim to accelerate these customer additions
Disc: holding Angel One. Planning to take up a small position in ICICISEC
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Isec should launch a separate discount broking arm like some other full service brokers. That will be a game changer for them as it will become the first discount broker with the backing of a bank. They’ll get the first mover advantage.
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