ICICI Securities Ltd. Initiating Coverage

Page 1

ICICI Securities Ltd.

Initiating Coverage 9th December, 2020 India Equity Institutional Research II Initiating Coverage II 9th December, 2020 Page 2 ICICI Securities Ltd. Best Broking Investment CMP Target Price Upside Market Cap (INR Mn) Recommendation Sector INR 461 INR 565 22.5% INR 148,504 BUY Other financial services Headquartered at Mumbai, ICICI Securities (ISEC) has presence over 70+ cities in India besides wholly owned subsidiaries having presence in Singapore and New York. It serves diverse client base of Corporates, Financial Institutions, High Net- worth Individuals (HNIs) and Retail Investors. It offers wide range of financial services under the segments of broking, distribution of financial products, wealth management and investment banking. 156 ICICI direct branches and its strong network of 13,600+ business partners (70% YoY) has supported robust client acquisition. Low brokerages, digital/secured investment mechanism and easy availability of information has well positioned broking industry in the financial market. ISEC recorded exceptional growth of 71.6% YoY in H1FY21 brokerage revenue. 63 lakh new demat accounts added in H1FY21 (130% YoY) as new investors entered the stock market to tap the opportunity arising out of Covid-19 led sharp corrections in fundamentally sound quality stocks. Industry ADTO has grown at ~47% during FY14-20. ISEC has a vision to become a digital financial supermarket of all possible investments in the market.

MARKET DATA INVESTMENT RATIONALE Shares O/S (Mn) 322 Sustained leadership position through unique products and strategic pricing Equity Cap (INR Mn) 1,611 • Consistently ranked amongst top 3 brokers based on NSE active clients over Mkt Cap (INR Mn) 148,504 the past few years; latest market share stood at 8.2% as on Oct’20. Client 52 Wk H/L (INR) 569/204 activation rate has considerably improved from ~30% in FY18 to 58% in FY20 Volume Avg (3m K) 386 • Company’s product proposition with personalized services, regular launch Face Value (INR) 5 of unique products (Prime, eATM, Options 20) and cross-selling of offerings combined with pricing strategy aligned to the industry has helped it sustain Bloomberg Code ISEC IN its leading market position in the industry High operating leverage led by efficient operations and process digitization SHARE PRICE PERFORMANCE • Focus remains on managing infra and manpower expenses, where costs have been controlled during last couple of years. Ongoing efforts on 120 digitization of processes to further improve its C/I ratio <50% in next 2 years • Low inventory and adequate free cash flow generates high operating 80 leverage model which enables quicker payback to investors High retail investor participation backed by changing investment patterns; 40 ISEC remains as strong beneficiary due its early FinTech adoption • Key macro driving factors resulting in high retail investor participation over

past few years being, a) increased smartphone users with low data costs

18 19

- -

- has changed overall financial service providers’ operations, b) shift from

Apr

Dec Dec

Apr

Aug Aug Dec Aug households savings to financial savings, and c) Low domestic penetration (<5%) offers a huge opportunity for ISEC which has one of the largest pan- ICICI Securities Sensex India distribution networks, business partners and digital channels MARKET INFO • ISEC’s early FinTech adoption and advanced digitization has helped it to SENSEX 45,609 achieve 11.4% growth in total operational demat accounts ahead of industry’ 10.8% growth in FY14-20; Its digital client onboarding and open architecture NIFTY 13,393 has provided a platform to connect with potential clients at ease Valuation SHARE HOLDING PATTERN (%) We initiate coverage on the ISEC with a long term positive view at a premium Particulars Sep-20 Jun-20 Mar-20 assigning P/E multiple of 23.0x to arrive at a target price of INR 565 per share. Promoters 77.22 79.22 79.23 ISEC continues to manage its costs efficiently, resulting in strong operating leverage and adequate free cash flow generation. We expect 11.1% and 14.8% of FIIs 3.98 3.75 3.16 revenue and earnings growth in FY20-23E, respectively backed by operational DIIs 10.06 10.18 11.45 efficiency. Consistent dividend payout ensures healthy shareholder returns. Others 8.75 6.85 6.17 Asset light business model, strong brand, and leading market share makes a Total 100.00 100.00 100.00 good investment case.

S. No. Particulars Page No.

1 Company Overview 4

2 Investment Rationale 6

a) Sustained leadership position through unique products and strategic pricing 6

b) High operating leverage led by efficient operations and process digitization 9

c) ISEC a strong beneficiary of early FinTech adoption and growing retail participation 10

d) Strong Fundamental Performance 12

3 Industry Overview 13

a) Tech innovations, remain driver for growing participation in equity markets 13

b) Changing savings and investment patterns influenced by financial literacy 14

ISEC remains one of the top leading players in the industry across various segments c) 15 compared to peers SEBI reforms aimed at securing retail investors interest, encourages higher d) 17 participation; while, impacting companies operations in the near term

4 Valuation 18

a) Peer Comparison Analysis 19

b) Financial Statements 20

5 Appendix 22

a) Products and Services 22

b) Management and Board of Directors 22

c) Peer Comparison 23

ICICI Securities Ltd.

COMPANY OVERVIEW ISEC, a subsidiary of ICICI Bank Ltd. has commenced its operations in 1995. ICICIdirect serves its customers with diversified offerings in investment, protection and borrowing needs and has emerged as a full service digital financial supermarket.

Categorised Product Portfolio

•Fixed Income & Deposits Wealth & •Equity Highly recognized brand across the country for Investments •Mutual Fund diversified financial •PMS services

ICICI Direct:

Extensive product Assets & •Insta Loan portfolio to satisfy Loan •MTF & ESOP

most requirements Distribution •Mortgage

•Life Protection •Health •General

Source: KRChoksey Research, Company reports

Revenue Segments: • Equities (Retail and institutional) and Allied: i) Retail Equity (equities, derivatives, currency, MTF, ESOP, etc.); ii) Institutional Equities (domestic and overseas institutional clients, block deals, Algo, corporate access, etc.) • Distribution: Various third party products distribution; primarily Mutual Fund (MF) and Life Insurance • Issuer Services and Advisory (Corporate Finance): Investment banking, IPO deals, further diversification and contribution from increased non-IPO deals Revenue by Business (INR bn) FY14-20 CAGR Performance Semi-Annual Performance 11.1% 10.6 75% 73% 8.4 5.7 14.6% 4.2 4.8 4.3% -13% 1.9 2.0 1.8 0.6 0.8 0.5 0.8

Equities and Allied Distribution Issuer Services & Equities and Allied Distribution Issuer Services & business Advisory Revenue Advisory FY 2014 FY 2020 H1FY20 H1FY21 YoY (%) Source: KRChoksey Research, Company reports

Brokerage income forms a part of equity and allied which has been >50% of overall revenue on an average basis; however, the company has well diversified its revenue streams across segments and has a strategy to monetise the client value. Brokerage Revenue: Retail and Institutional

ISEC has been focusing on 10.2 9.5 diversified sources of 9.3 revenue while brokerage 7.6 7.8 1.1 income forms majority. 1.2 1.3 0.5 6.6 0.7 5.0 0.5 0.3 9.2 8.2 8.2 7.0 6.1 7.0 4.6 Consistent growth has been seen in Institutional FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 brokerage income. Retail Brokerage (INR bn) Institutional brokerage (INR bn) Source: KRChoksey Research, Company reports

An exceptional performance in H1FY21 with 81% and 16% of YoY growth was observed in retail and Institutional brokerage revenue, respectively.

7.4 0.7 4.3

Brokerage revenue has 0.6 6.7 grown for H1FY21 backed by increased new client 3.7 acquisition and rising trading volume H1FY20 H1FY21 Retail Brokerage (INR bn) Institutional brokerage (INR bn)

Source: KRChoksey Research, Company reports

ISEC has continuously generated highest brokerage and commission revenue in the

past couple of years amongst full service brokers led by its strong market share;

closely followed by Kotak Securities.

Broker-wise broking & commission revenue Broking & Commission FY 2019 FY 2020 YoY (%) (INR mn)

ICICI Securities 15,807 15940 0.8% HDFC Securities 6,522 6,878 5.5% FY19 & FY20 Brokerage & commission revenue Kotak Securities 15,258 15,758 3.3% highest amongst full Axis Securities 1,597 1,389 -13.0% service brokers Motilal Oswal 11,334 12,249 8.1% IIFL Securities 7,821 6,800 -13.0% Emkay Global Services 1,414 1,298 -8.2%

Source: KRChoksey Research, Company reports

India Equity Institutional Research II Initiating Coverage II 9th December, 2020 Page 6

ICICI Securities Ltd.

INVESTMENT RATIONALE a) Sustained leadership position through unique products & strategic pricing

ISEC’s product proposition delivers more value to customers’ service A well-known brand, ISEC is gaining market share in a highly competitive environment. Cross-selling of products remain an integral strategy for strengthening its client stickiness; whereas in case of inactive customers, the company works towards We expect ISEC’s industry enhancing their life time value to gain better positioning. market share to remain strong in the long run • Retail investor participation has been increased via various product offerings including PRIME brokerage plan, OPTIONS 20, PMS for HNI clients, and Direct2U for private wealth clients – Option 20 has helped in expanding its derivative market share to 8.8% in Q2 FY21 from 7.3% in the last comparable period

– Its Prime Plan has garnered significant attention led by the Instant liquidity (eATM) offering, which is unique in the industry ; It reduced brokerage revenue slightly which has been superseded by increased ADTO across segments

It offers end-to-end digital ICICIDirect Prime Plans Cash Margin/Futures eATM Daily Limit process for investments in INR 299/ year 0.27% 0.027% INR 2.5 Lakhs overseas securities INR 999/ year 0.22% 0.022% INR 10 Lakhs

INR 1,999/ year 0.18% 0.018% INR 25 Lakhs

INR 2,999/ year 0.15% 0.015% INR 1 Crore

Source: KRChoksey Research, Company reports • ISEC offers a vast array of 400+ product combinations, including 20+ combinations which are more focused towards providing personalised services

• Another key customer expansion strategy includes its tie-up with ICICI Bank (under a

revenue-sharing agreement) and business partners to gain market share

• For investment in US securities by clients, it has partnered with a leading global online broker. Investors’ with available disposable income may look forward to diversify their portfolio across multiple international markets

Aims to grow clients assets while ensuring long tenured relationship

ISEC’s ability to maintain strong long lasting client relationships has been an integral factor in client retention over the years; In FY20, its wealth management vertical contributed 29% of revenue from clients acquired in last 5 years while 54% of revenue was from clients acquired more than 10 years ago.

Vintage Split of AUM & Revenue (FY 20) Acquiring Profitable Clients 26.9

>2015 27% 29% 23.1 Majority of AUM & 85,098 revenue contributed from 2010-2015 18% 17% 69,437 high vintage clients 2005-2010 25% 26%

2000-2005 30% 29%

AUM Revenue 2000-2015 2015 Onwards ARPU AUM/Client (Rs. mn) Source: KRChoksey Research, Company reports KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 HOR: Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS www.krchoksey.com Associate: Priyanka Baliga, [email protected], +91-22-6696 5408 Thomson Reuters, Factset and Capital IQ

India Equity Institutional Research II Initiating Coverage II 9th December, 2020 Page 7 ICICI Securities Ltd.

ISEC Private wealth management business growth: Assets and Revenue Trend Wealth Management Clients' Assets (INR bn)

990 906 832 683 159 192 178 463 109 401 55 68 747 798 574 654 346 395

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 transactional assets Recurring assets

Source: KRChoksey Research, Company reports Wealth Management Revenue (INR bn) 2.59 0.30% 0.30% 2.36 0.27% 2.18 1.70 0.23% 0.28% 1.34 1.16 1.33 1.51 0.62 0.46 0.89 1.36

0.72 0.70 0.81 1.03 0.82 1.08

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Transactional Recurring Yield on Total AUM Source: KRChoksey Research, Company reports

AUM across segments semi-annual growth: MTF+ESOP book has been grown by 175% YoY at INR 18.7 bn as on Sep’20. Reduced exposure of book up to INR 5.8 bn as on Mar’20 due to COVID-19 risk mitigation approaches followed. Private wealth clients’ assets stood at INR 1.1 tn of ~36,000 clients as on Sep’20; ~2000 clients were added during the quarter. Besides all this, proprietary PMS AUM has reached at INR 1.1 bn.

15% 1,153 358 175% 18.7

999 352 6.8

-2%

Private wealth AUM MF Avg AUM MTF & ESOP

1H FY20 1H FY21 YoY % Source: KRChoksey Research, Company reports

Axis Securities 0.50% 0.05% 0.05% INR 20 /lot 0.05% INR 10 /lot 0.03% INR 50 /lot

0.05% or min 1% of INR 25 or premium INR 20 INR 23 0.025% or min HDFC Securities 0.50% 0.05% ceiling 2.5% of amount or INR 100 /lot /contract /contract INR 20 /order transaction max INR 100 value /lot INR 20 or INR 20 or INR 20 or 0.03% INR 20 or 0.03% INR 20 or INR 20 or Zerodha 0.00% INR 20 /order 0.03% / 0.03% /order* /order* 0.03% /order* 0.03% /order* order* /order* INR 20 or INR 20 or 0.05% INR 20 or 0.05% INR 20 INR 20 or 0.05% RKSV (Upstox) 0.00% INR 20 /order 0.05% INR 20 /order /order* /order* /order /order* /order* INR 20 INR 20 INR 20 5 paisa INR 20 /order INR 20 /order INR 20 /order INR 20 /order INR 20 /order /order /order /order INR 10 INR 10 INR 10 Edelweiss 0.05% INR 10 /order INR 10 /order INR 10 /order INR 10 /order /order /order /order

Motilal oswal 0.50% 0.05% 0.05% INR 100 /lot INR 20 /lot INR 20 /lot 0.05% NA

Source: KRChoksey Research, Company reports * Whichever is lower, NA- Not Available

b) High operating leverage led by efficient operations and process digitisation ISEC continues to focus on managing its infrastructure and manpower expenses ISEC target’s a C/I of <50% coupled with efforts on setting processes with the help of digitisation where it has a over the next few years target to maintain its cost to income ratio below 50% going forward. Its has high backed by cost operating leverage and strong moat driven by adequate free cash flow generation and management and higher business model scalability. process digitisation • During lockdown, ISEC had negotiated on infrastructure related expenses which has improved its cost to income ratio during H1 FY21 • However, intellectual capital is the core of company’s business growth and it will continue to monitor manpower requirement accordingly.

Branch count Employees 4,298 200 198 198 4,180 187 4,051 4,077 178 172 171 3,955 3,790 156 3,729

3,669

Q1FY21

Q2FY21

Q1FY20

FY 2019 FY

FY 2018 FY

Q1FY20

Q2FY20

Q3FY20

FY 2018 FY 2019 FY

Q4FY20

Q2FY20

Q3FY20 Q4FY20 Source: KRChoksey Research, Company reports

Below 50% of Cost to Income ratio achieved well in advance as per guidance Cost to Income (%) 66.7% 62.8% 62.8% 53.9% 56.7% 57.0% 56.1% 48.5% Operating efficiency has been improved over the years

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 H1FY20 H1FY21

Source: KRChoksey Research, Company reports

Being a full service broker, it leverages growing investor awareness to effectively

churn clients’ portfolio from equity to other financials products, resulting in higher

yields. On of the key factor to be watched includes SEBI’s guidelines and changing regulations primarily in the interest of retail investors, which may have a short term impact on operations; however, these changes are expected to see systematic growth in long run.

c) ISEC a strong beneficiary of early FinTech adoption and growing retail participation Digital on-boarding and +13,600 business partners allowed ISEC for greater market penetration, while engaging the clients with convenience. Multi-channel open architecture to support further growth in client sourcing. Activation rate of clients sourced through ICICI bank alone has increased to 58% in FY20 from ~26%/32% in FY2018/FY2019, respectively

Industry aligned pricing strategy with Increased Direct Prime Clients

the launch of PRIME product in FY20 275% has played a big role where average 163% ~65000 clients on a quarterly basis Highest prime subscribers 0.42 have been added (total prime growth observed during subscribers in Q2FY21: 4,24,678). Q1FY21 despite COVID-19 0.38 Similarly, Option 20, lifetime prepaid, pandemic led lockdown one click investments, ETF Intelligent

portfolios are few other customer Q1FY21 Q2FY21 oriented services/products enabling Direct Prime Clients (mn) YoY (%) next level of client engagement Source: KRChoksey Research, Company reports

Favorable response for PRIME brokerage plan has resulted in growth of new client acquisition (NCA) and their activation rates. Focus on client sourcing with a strong business partners network to support end customer experience through an upgraded partner’s portal and dedicated mobile app.

Building strong sourcing through Activation rates are improving business partners +13.6K 68% +12.1K 57% 58% 63% +8.6K +9.4K Growth in activation rate 44% +7.5K +8.0K 34% led by prime plan has 266% 251% brought more business 16% 23% 45% 73%

from its earlier inactive

customers

Q1FY21

Q2FY21

Q1FY21

Q1FY20

Q2FY21

Q2FY20

Q3FY20

Q1FY20

Q4FY20

Q2FY20 Q3FY20 Q4FY20 Business Partners NCA % change Source: KRChoksey Research, Company reports Activation rates = % of New client acquisition (NCA) who have traded during the quarter

Annual expansion of business partners’ network across cities Expanding business 9400 partners network across 7100 various cities over and 5400 above ICICI bank 4000 4600 branches network has gained traction in client 800 sourcing 443 411 580 711

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Business Partners Partner Spread (cities and towns covered)

Source: KRChoksey Research, Company reports KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 HOR: Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS www.krchoksey.com Associate: Priyanka Baliga, [email protected], +91-22-6696 5408 Thomson Reuters, Factset and Capital IQ India Equity Institutional Research II Initiating Coverage II 9th December, 2020 Page 11 ICICI Securities Ltd.

ISEC’s early FinTech adoption allowed higher client acquisition and overall increased market penetration. ISEC is one of the top 3 brokers with 8.2% market share. India’s top 10 brokers by number of NSE active clients shared ~67% of brokerage industry market.

Top 10 brokers: NSE Active clients and market share as on Oct’20

17.6%

ISEC is amongst top 3 9.4% 8.2% brokers based on NSE’s 7.2% 5.5% 2,603 5.0% 4.6% 4.1% 3.1% active clients data where 2.7% 67% of overall industry is 1,389 captured by India’s top 10 1,216 1,069 brokers. 813 735 685 600 461 394

ISEC 5Paisa

MOFSL

Zerodha AXIS AXIS SEC

HDFCSEC Sharekhan

SEC KOTAK Angel Broking Angel (RKSV) Upstox NSE Active Clients ('000) Market Share (%)

Source: KRChoksey Research, Company reports

Consistent industry growth, company’s growing client acquisition and less penetration

across India provides huge opportunity for brokerages. According to SEBI bulletin

Oct’20, there were 46.6 mn (18.6% YoY) demat accounts as on Sep’20.

Industry’s Total Demat Accounts* (in mn)

40.8

ISEC’s NSE active clients 22.0 have been grown at 14% CAGR during FY14-20. We expect the growth to be sustained in the long run. FY 2014 FY 2020

ISEC Operational Accounts ISEC NSE Active clients (in mn) (in mn)

4.8 1.1

2.5 0.5

FY 2014 FY 2020 FY 2014 FY 2020

Source: KRChoksey Research, Company reports *NSDL+CDSL

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 H1FY20 H1FY21 Revenue (INR bn) YoY (%)

Source: KRChoksey Research, Company reports

Although revenue experienced de-growth, PAT saw a recovery in FY20 backed by its improved operational efficiency.

PAT - Annual (INR bn) PAT – Semi-annual 89% 5.5 5.4 4.9 -7% 2.9 3.4 2.4 4.7 0.9 2.5

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 H1FY20 H1FY21

PAT (INR bn) YoY (%) Source: KRChoksey Research, Company reports

Investors have benefitted from the company’s sound and consistent dividend payout policy over the years.

Dividend and Dividend Payout Return on Equity

67% 61% 62% 65% 55% 55% 100% 47% 3.5 3.0 77% 82% 3.0 65% 2.1 52% 48% 1.6 1.6 38%

0.4

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Dividend (INR bn) Dividend Payout (%)

correction in valuations. Rising financial awareness resulted in a surge from retail FinTech has played a investors, resulting in 130% growth in demat account openings with 63 lakh accounts major role in the being opened during H1FY21. Similarly, nearly all IPOs and rights issues have been over brokerage industry subscribed. India has seen net FPI inflows while many other emerging markets like growth reinforced by Taiwan, Brazil, etc. have seen outflows. growing smartphone users with high speed and India’s economic growth and digitisation led improvement in investors’ awareness low data costs towards financial markets are expected to advance broking industry. Elevated participation from retail segment has changed industry framework driven by ease in trading with convenient platforms and change in saving patterns. Post demonetisation digital banking has brought more prominence to FinTech companies backed by increased internet speed and smartphone users. Uptrend in telephone subscribers with improved tele-density at 85.9% as on Jun’20 compared to 79.6% as on Jun’12.

966 904 943 1,007 1,060 1,211 1,170 1,187 1,161 100% 14% 0.15 80% 36% 40% 41% 42% 42% 42% 44% 43% 45% 0.1 7% 60% 5% 0.05 4% 40% 2% 0 -2% 20% -3% -0.05 64% 60% -6% 59% 58% 58% 58% 56% 57% 55% 0% -0.1 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Jan/18 Jan/19 Jan/20 No. of subscribers (in mn) Share of urban Share of rural Total Subscribers Growth (%)

Source: KRChoksey Research, TRAI Retail segment growth driven by Mobile/Internet based trading • Mobile based trading has been mainly used by retail investors as companies’ largely invested in user friendly and convenient apps with secured platforms • FinTech companies expected to play a vital role in firms remaining competitive given their ability for offering innovative solutions to attract customers / grow business

NSE cash market mode of trading: October 2020 Smart order Routing Industry’s efforts on ‘Do- 0.8% it-yourself’ platforms supported surge in mobile Non Algo Mobile / internet based trading 16.0% 23.3% for retail investors Algo 11.4% Direct Market Access (DMA) Internet Based 1.1% Trading (IBT) Colocation 13.2% 34.3%

Source: KRChoksey Research, NSE

Savings Pattern (Percentage of Household Savings) Uptick in financial savings 6% 7% 7% 6% despite declining 3% 5% 5% 3% household savings depicts growing awareness towards financial 67% 66% 62% 62% 53% 57% 58% 63% markets. 36% 45% 41% 40% 31% 33% 36% 36% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Net Financial Savings (%) Physical Savings (%) Growing per capita Per capita income YoY growth (%) income and capital Source: KRChoksey Research, RBI markets participation

Classified Gross Financial Savings of Household Sector (Percentage of GNDI*)

4% Investment in shares and 2% 1.1% 1.0% debentures has grown 0.2% 0.2% 0.2% 0.2% 0.2% 0.4% 0.4% post FY16, which has later 0% experienced de-growth; investment in shares and -2% debentures is expected to FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020# experience upward trend. Currency Deposits

Shares and Debentures Claims on Government

Insurance Funds Porvident and pension funds

Source: KRChoksey Research, RBI # As per the preliminary estimate of the Reserve Bank, *GNDI- Gross National Disposable Income IPOs and SIPs investments gain traction with retail investor segment Growing awareness about various equity / financial instruments amongst retail investors has remained a key driving force for their increased market participation into products such as IPOs, SIPs etc. over the years. For example, during H1 FY21, IPOs and mutual SIPs saw relatively increased investments from retail segment. Upcoming IPOs of quality stocks like NCDEX Ltd, LIC of India are expected to further attract more investors towards capital markets. Below mentioned are the number of times subscriptions received for select few IPOs from retail segment in FY20-21 No. of times subscribed No. of times subscribed IPOs QIBs NIIs RII Total IPOs QIBs NIIs RII Total FY2020 FY2021 Polycab India Ltd 92.4x 110.4x 4.7x 52.0x Rossari Biotech Ltd 85.3x 239.8x 7.2x 79.4x Neogen Chemicals Ltd 30.5x 113.9x 16.1x 41.2x Happiest Minds Tech Ltd 77.4x 351.5x 70.9x 151.0x IndiaMART InterMESH Ltd 30.8x 62.1x 14.1x 36.2x Route Mobile Ltd 89.8x 192.8x 12.7x 73.3x Affle (India) Ltd 55.3x 198.7x 11.0x 86.5x CAMS Ltd 73.2x 111.9x 5.6x 47.0x IRCTC Ltd 108.8x 354.5x 14.9x 112.0x Chemcon Speciality 113.5x 449.1x 41.2x 149.3x CSB Bank Ltd 62.2x 164.7x 44.5x 86.9x Angel Broking Ltd 5.7x 0.7x 4.3x 3.9x Ujjivan SFB Ltd 110.7x 473.0x 49.1x 165.7x Likhitha Infrastructure Ltd 22.0x 1.5x 23.7x 9.5x SBI Cards & Payment Serv Ltd 57.2x 45.2x 2.5x 26.5x Mazagon Dock Shipbuilders 89.7x 678.9x 35.6x 157.4x Source: KRChoksey Research, NSE QIBs: Qualified Institutional Buyers, NIIs: Non Institutional Investors, RIIs: Retail Institutional Investors KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 HOR: Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS www.krchoksey.com Associate: Priyanka Baliga, [email protected], +91-22-6696 5408 Thomson Reuters, Factset and Capital IQ India Equity Institutional Research II Initiating Coverage II 9th December, 2020 Page 15 ICICI Securities Ltd. c) ISEC remains one of the top leading players in the industry across various segments compared to peers Rapid growth in Average Daily Turnover (ADTO) ISEC is one of the top 10 brokers in market share backed by diversified products, substantial growth in number of retail investors and its competitive approach. Rapid and constant growth in ADTO suggests financial markets’ huge potential.

FY20 Industry ADTO: INR 9.7 tn (46.7% CAGR) FY20 ISEC ADTO: INR 0.8 tn (60.9% CAGR) 99% 72% 85% 58% 55% 51% 55% 48% 41% 9.67 43% 43% 6.25 0.76 0.53 11% 4.14 0.37 2.41 1.53 0.19 0.97 1.37 0.04 0.07 0.10

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Industry-wide ADTO (INR tn) YoY (%) ISEC ADTO (INR tn) YoY (%)

Source: KRChoksey Research, Company reports ADTO : Turnover on NSE and BSE excluding proprietary, Market share : The ratio of our ADTO to the sum of the ADTO on NSE and BSE excluding proprietary turnover

ISEC’s Growing Market Share (%) ISEC has expanded its market share across Equity and Derivatives market up to 11.1% and 8.8% as on Sep’20 as compared with 8.7% and 7.9% as on FY20. ISEC Blended (Equity+Derivative) Market Share (%) 9.0% 7.8% 8.5% 7.9% 6.6% 4.5% 4.7%

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Source: KRChoksey Research, Company reports

ISEC Life Insurance Business experiences relatively weaker growth compared to industry Overall life insurance premium growth has seen an uptrend; however, ISEC has seen moderate de-growth over the last 2 years. We expect ISEC to recover the performance in the future.

Industry Life Insurance Premium (INR bn) ISEC Life Insurance Premium (INR bn)

2588.9 9.0 8.9 2146.7 8.4 8.0 1938.7 1750.2 6.8 1386.6 5.6 1201.6 1131.4 4.1

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Source: KRChoksey Research, Company reports

ISEC’s Mutual Fund (MF) Business gaining share The company’s mutual fund market share (basis revenue) has been growing over years which stood at 4.5% in FY20.

ISEC’s MF Revenue Market Share (%)

4.5% 4.0% 3.5% 3.7% 3.0%

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Source: KRChoksey Research, Company reports

The stress in the MF business continued during the COVID-19 pandemic which has witnessed de-growth over the years due to changing regulations. It has negatively impacted overall distribution business. However, ISEC’s MF AUM has grown up to INR 362 bn ahead of industry growth by FY 2020.

Mutual Fund Industry Average AUM (INR tn) ISEC Mutual Fund Average AUM (INR tn)

0.3 0.4 27.0 0.3 23.1 24.5 0.2 18.3 0.2 0.1 11.9 13.5 0.1 9.1

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Mutual Fund Average AUM (INR tn) ISEC Mutual Fund Average AUM (INR tn)

Source: KRChoksey Research, AMFI, Company reports Overall Industry wise growth: ADTO/Mutual Fund- Average AUM/Life Insurance Premium

997

644

427 299 248 255 271 202 179 215 141 157 131 150 146 161 100 100 100 94 115

Total Market ADTO (INR bn) Mutual Fund-Average AUM (INR bn) Life Insurance Premium (INR bn)

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Source: KRChoksey Research, Company reports FY14 Numbers are Indexed to 100

KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 HOR: Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS www.krchoksey.com Associate: Priyanka Baliga, [email protected], +91-22-6696 5408 Thomson Reuters, Factset and Capital IQ India Equity Institutional Research II Initiating Coverage II 9th December, 2020 Page 17 ICICI Securities Ltd. d) SEBI reforms aimed at securing retail investors interest, encourages higher participation; while, impacting companies operations in the near term • New margin rules – 1 September, 2020 and 1 December, 2020 Upfront margin collection from clients in cash and derivative segment are in the interest of investors. This will ensure client’s holdings as collateral for client’s margin needs only. Penalty is not applicable for brokers in case of at least 20% of margin collection on the same day. Investors are required to pledge their holdings separately to avail margin for their trades. Margin requirement at the time of selling securities has been levied in the view of settlement risk caused by T+2 settlement; however, brokers are required to make operational changes to transfer these shares to brokers account to avoid the same. We expect market participants have already adopted these regulations largely, and hence will see very minimal impact on trade volumes. • Launched SOP in case of trading members (TMs) /clearing members (CMs) leading to default – July 1, 2020 It is a kind of early warning mechanism to prevent client’s holdings and further actions wherein TMs/CMs are required to provide a list of bank accounts with stock exchanges (SEs) and clearing corporations (CCs) followed by SEs/CCs shall obtain Undertaking cum Indemnity bond from the TM within 90 days from the date of SEBI circular which is now extended till October 31, 2020. • Proposal to discontinue use of pool accounts for MF transactions Safeguarding client’s funds is the main objective behind this proposal, as it has been Changes in SEBI observed that brokers/CCs tend to use clients money to fulfill their settlement regulations are expected obligations. We believe SEBI’s proactive approach will prominently encourage retail to be a continuous investors towards capital markets. process in order to standardise business • Trading of Government securities (G-secs) exclusively to a single platform, operations and protect preferably stock exchanges the entire structure In July’20, SEBI proposed to simplify trading infrastructure of corporate bonds and G- Secs to enable retail participation in the bond markets, specially for Govt. bonds. • Advisory and distribution fees SEBI has asked registered Investment Advisors (IAs) to segregate advisory and distribution activities at client level and has put a cap on charged fees either up to 2.5% of Asset under Advice (AuA) or in case of fixed fees not exceeding INR 1.25 lakhs per annum per client across all services offered by entering into an agreement with its clients. Existing clients who wish to avail advisory services will not be eligible for availing distribution services within the group/family IA and vice versa. New clients will be eligible to avail either advisory or distribution services at the time of boarding. IAs are required to enter into requisite agreement with its clients (incl. existing clients) latest by April 1, 2021 while submitting the report with SEBI latest by June 2021. In addition to several other initiatives as mentioned earlier; recently SEBI Chairman, Ajay Tyagi highlighted on few key things: • He encourages other financial intermediaries of financial markets to self-regulate their operations in order to develop confidence among other stakeholders/ investors for financial markets • Also, he urged independent directors who resigns due to corporate governance to raise such issues in the interest of all stakeholders; as many resignations has been observed in the last 2 years

It has stood out amongst its peers after successfully eliminating challenges of product pricing and aggressive adoption of technology. It is now one of the leading company in the sector based on number of clients and AUM. a) Peer Comparison

EPS (INR) DPS (INR) MCap TTM CMP Curr P/E Companies (INR EPS (INR) (x) mn) (INR) FY18 FY19 FY20 1HFY21 FY18 FY19 FY20

ICICI Securities 461 148,504 24 19 17 15 17 15 4 9 11

MOFSL 649 94,856 25 26 43 20 12 31 9 9 -

JM Financial 85 80,558 6 14 7 7 6 2 2 1 0

Edelweiss Financial 79 73,631 -28 NM 10 11 -23 -3 1 1 -

Indiabulls Ventures 292 175,734 -4 NM 5 8 0 0 1 1 2

IIFL Securities 48 15,181 6 9 6 5 7 3 - - -

Dolat Investments 48 8,483 5 10 2 3 4 3 0 0 0

5Paisa Capital 354 9,009 -2 NM -12 -9 -3 NA 0 0 0

Share India 117 3,739 17 7 6 8 13 NA - 0 1

Geojit Financial 58 13,881 4 15 3 1 2 2 2 1 2

Centrum Capital 17 7,073 1 21 1 3 0 NA 0 0 -

Indianivesh Limited 22 834 -23 NM 1 -1 -25 NA 0 - -

Emkay Global 79 1,956 -2 NM 12 4 -5 2 2 1 -

Aditya Birla Money 44 2,455 2 18 1 2 2 1 0 - -

Source: KRChoksey Research, Factset NM- Not Meaningful, NA- Not Available

Revenue (INR mn) PAT (INR mn) Companies FY18 FY19 FY20 1HFY21 FY18 FY19 FY20 1HFY21

ICICI Securities 18,610 17,270 17,213 12,269 5,535 4,907 5,420 4,712

MOFSL 26,678 24,608 21,449 15,391 6,223 2,940 1,834 4,635

JM Financial 31,003 35,691 35,130 14,945 6,009 5,722 5,450 2,327

Edelweiss Financial 89,189 1,09,549 1,05,926 41,766 8,632 9,952 -20,452 -2,936

Indiabulls Ventures 9,258 19,954 28,869 7,896 2,095 4,591 43 158

IIFL Securities 9,320 8,712 8,095 3,965 1,806 1,714 2,340 924

Dolat Investments 1,388 1,155 1,577 1,022 312 506 710 459

5Paisa Capital 197 608 1,083 NA -253 -190 -79 NA

Share India 1,391 2,065 2,792 NA 153 250 400 NA

Geojit Financial 3,669 3,079 3,058 1,997 732 231 470 562

Centrum Capital 99,026 3,822 4,800 NA 319 1,162 144 NA

Indianivesh Limited 3,592 2,923 814 NA 25 -18 -926 NA

Emkay Global 1,560 1,490 1,366 751 286 87 -126 36

Aditya Birla Money 1,647 1,711 1,735 941 73 100 120 79

Source: KRChoksey Research, Factset NA- Not Available

b) Financial Statements

PROFIT & LOSS ACCOUNT (INR Crores) FY 2018 FY 2019 FY 2020 FY 2021E FY 2022E FY 2023E

Total Revenue 18610.1 17045.7 17062.2 20068.7 21573.9 23411.7

Operating expenses 9377.7 9098.1 8242.2 7378.7 8673.8 9619.9

EBITDA 9232.4 7947.6 8820.0 12690.0 12900.0 13791.7

Depreciation and Amortization 153.0 149.5 614.0 590.5 541.8 532.9

EBIT 9079.4 7798.1 8206.0 12099.5 12358.2 13258.9

Interest Expenses 495.0 423.4 863.9 1332.3 1775.0 2304.2

Other income -60.5 197.6 187.2 0.0 0.0 0.0

Profit before tax 8523.9 7572.3 7529.3 10767.2 10583.3 10954.6

Tax expenses 2989.2 2665.0 2109.3 2713.3 2667.0 2760.6

Net Income 5534.7 4907.3 5420.0 8053.9 7916.3 8194.1

Source: KRChoksey Research, Company reports

BALANCE SHEET (INR Crores) FY 2018 FY 2019 FY 2020 FY 2021E FY 2022E FY 2023E

SOURCES OF FUNDS

Share capital 1610.7 1610.7 1610.7 1610.7 1610.7 1610.7

Reserves & surplus 6866.4 8862.0 10484.7 13918.8 17026.2 20244.7

Shareholders' funds 8477.1 10472.7 12095.4 15529.5 18636.9 21855.4

Borrowings 6724.2 4473.0 14975.3 21514.6 25817.5 28399.3

Other liabilities & provisions 13535.8 31700.2 17357.5 16259.2 16998.4 20275.0

TOTAL LIABILITIES & EQUITY 28737.1 46645.9 44428.2 53303.3 61452.8 70529.7

USES OF FUNDS

Cash and Bank 15459.7 31486.2 24114.0 23770.0 23472.4 21232.4

Investments 39.2 28.5 24.7 27.2 24.5 22.0

Advances 5782.3 4032.7 5708.7 9133.9 13700.9 20551.3

Fixed & other assets 7454.5 11098.4 14580.8 20372.2 24255.1 28723.9

TOTAL ASSETS 28735.7 46645.8 44428.2 53303.2 61452.8 70529.7

Source: KRChoksey Research, Company reports

KEY RATIOS FY 2018 FY 2019 FY 2020 FY 2021E FY 2022E FY 2023E

Growth rates

Revenue (%) 32.5% -8.4% 0.1% 17.6% 7.5% 8.5%

EBITDA (%) 63.0% -13.9% 11.0% 43.9% 1.7% 6.9%

PAT (%) 63.5% -11.3% 10.4% 48.6% -1.7% 3.5%

Total Assets (%) 40.1% 62.3% -4.8% 20.0% 15.3% 14.8%

Other Ratios

Cost/income (%) 53.9% 56.7% 57.0% 46.3% 50.9% 53.2%

Opex/ average assets (%) 38.7% 24.5% 19.4% 16.3% 16.1% 15.4%

Debt/Equity 0.79 0.43 1.24 1.39 1.39 1.30

Profitability

ROAA (%) 22.5% 13.0% 11.9% 16.5% 13.8% 12.4%

ROAE (%) 82.3% 51.8% 48.0% 58.3% 46.3% 40.5%

Per share data / Valuation

EPS (INR) 17.2 15.2 16.8 25.0 24.6 25.4

BV (INR) 26.3 32.5 37.5 48.2 57.8 67.8

P/E (x) 25.7x 15.9x 16.5x 18.5x 18.8x 18.1x

P/BV (x) 16.8x 7.5x 7.4x 9.6x 8.0x 6.8x

Source: KRChoksey Research, Company reports

Business Segment Products and Services Equities and Allied: Full suite of investment and trading solution across asset classes including Equity, Derivatives, Retail Equity Currency, Margin Trading Funding, etc. • Equity brokerage service for domestic and international institutional clients Institutional Equity • A range of value-added products and services including Block Deal, Algo Trading, Corporate Access, Investor Meets, and Equity Research MF (Mutual Fund), Gold Bonds, ETFs (Exchange Traded Funds), NPS (National Pension Scheme), Distribution of Retail Corporate FDs (Fixed Deposits) and Bonds, Insurance (Life, General and Business), Credit (Home Financial Products Loans, Loan against Securities / Property / FD /Bonds / MF), Rental Discounting, Asset Financing, Overdraft Issuer Services and Full service investment bank providing the entire spectrum of services including Equity Capital Advisory (Corporate Market, debt advisory, Mergers & Acquisitions, Advisory, Private Equity Services, Structured Finance) Products, and Restructuring

• Investment solutions like Equity, Fixed Income, Offshore and Alternate Investments; value- Private Wealth added services like Protection, Mortgages & Loans, Tax Advisory, Estate Planning & Real Estate Management • Engagement with customers on their business needs like raising equity capital, debt syndication and monetising assets

b) Management and Board of Directors

Management Designation Experience Managing Director & He has been with ICICI Group for over 25 years. He is currently a member Mr. Vijay Chandok CEO of various Advisory committees of NSE, BSE and SEBI. He has been a Director on the board since May 2011. He has +25 years of Mr. Ajay Saraf Executive Director experience and has been with company for +8 years.

Mr. Harvinder Jaspal Chief Financial Officer He has been associated with ICICI Securities since 2017.

Mr. Raju Nanwani Company Secretary He has been associated with ICICI Securities since 2018.

Board of directors Designation Experience Chairman & He has been a director on the board since October 2014. One of the Mr. Vinod Kumar Dhall Independent Director leading Indian experts in competition policy and law. He has been a director on the board since August 2016. He has Mr. Ashvin Parekh Independent Director experience across industries like banking, insurance, pension and capital markets both in domestic and global markets.

He has been a director on the board since November 2017. He has been Mr. Subrata Mukherji Independent Director the Managing Director and Chief Executive Officer of ICICI Securities Ltd from 2004 to 2007. He has been a director on the board since November 2017. She has previously served as an Executive Director of Central Bank of India and Ms. Vijayalakshmi Iyer Independent Director the Chairperson and Managing Director of Bank of India. She was also a Whole Time Member in the IRDAI. He has been a director on the board since October 2018. He represents Mr. Anup Bagchi Non-executive Director the ICICI Group in various regulatory committees of key bodies such as RBI and SEBI.

Source: Company reports KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 HOR: Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS www.krchoksey.com Associate: Priyanka Baliga, [email protected], +91-22-6696 5408 Thomson Reuters, Factset and Capital IQ India Equity Institutional Research II Initiating Coverage II 9th December, 2020 Page 23 ICICI Securities Ltd.

Peer Comparison

Listed brokers: As on FY20 financials Revenue CAGR PAT CAGR Market Cap CAGR INR millions 3 Yr 5 Yr 3 Yr 5 Yr 3 Yr 5 Yr ICICI Securities 7% 7% 17% 13% NA NA Axis Securities -34% -13% -33% -19% 30% 12% HDFC Securities 17% 16% 21% 18% 35% 6% Kotak Securities 22% 20% 14% 13% 52% -10% Motilal Oswal 1% 21% -20% 5% 182% 25% JM Financial Ltd 13% 19% 5% 11% NA NA Edelweiss Financial Services -12% 19% -250% -244% 212% 82% Indiabulls Ventures Ltd 92% 49% -65% -51% NA NA IIFL Securities Ltd 3% NA 9% NA NA NA Aditya Birla Money 8% 6% 18% 15% 10% -19% Geojit Financial Services 0% -1% -6% -9% 43% -12% Centrum Capital Limited -59% -32% -22% -10% 13% -2% Share India Securities Ltd NA NA NA NA 25% -15% Indianivesh Limited NA NA NA NA 27% 35% Emkay Global Financial 6% 2% -201% -4% 33% -4% 5Paisa Capital 158% NA -24% NA NA NA Dolat Investments 24% 40% 274% 84% NA NA Source: KRChoksey Research, Company reports NA- Not Available NSE active clients (‘000) FY16-17 FY17-18 FY18-19 FY19-20 As on Oct'20 Overall NSE active clients 5,951 8,290 8,782 10,796 14,784 Full Service brokerages ICICI Securities Ltd 618 798 844 1,076 1,216 HDFC Securities Ltd 483 602 672 720 813 KOTAK Securities Ltd 274 369 438 572 685 Sharekhan Ltd 366 535 510 550 613 MOFSL 207 308 319 377 461 IIFL Securities Ltd 198 225 214 219 258 Geojit Financial Services Ltd 160 183 163 164 180 SMC Global Securities Ltd 74 103 106 114 123 Reliance Securities Ltd 83 123 120 119 122 Nirmal Bang Securities Pvt Ltd 73 96 94 96 113 Emkay Global Financial Services Ltd 15 17 15 14 13 Discount brokers ZERODHA 166 541 909 1,414 2,603 RKSV Securities India Pvt Ltd (Upstox) 17 44 100 619 1,389 5paisa Capital Ltd 4 36 106 434 735 Samco Securities Ltd 18 30 39 51 70 Hybrid brokerage Angel Broking Ltd 230 364 413 576 1,069 AXIS Securities Ltd 259 405 419 270 394 Edelweiss Securities Ltd 75 105 120 130 144 Swastika Investmart Ltd 17 26 26 35 46 Source: KRChoksey Research, NSE

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