ICICI Securities

India | Diversified Financials 23 February 2020 Initiating Coverage

ICICI Securities

Three catalysts and a leader Rating: Buy #Catalyst 1: Financialization of savings Target Price: INR 610 Financialization of savings as a trend is here to stay, with household Upside: 22%

financial savings expected to grow at a CAGR of 11% over FY19-24E. CMP: INR 500 (as on 19 February 2020) We assume that financial savings as a percentage of GDP remains steady at FY19 levels of 6.5%, which peaked at 8.1% in FY16. While Key data falling household financial savings has been cause for concern, our Bloomberg /Reuters Code ISEC IN/ICCI.BO Current /Dil Shares O/S (mn) 322/322 Economist Garima Kapoor’s (refer to the note, Growth Conundrum – Mkt Cap (INR bn/USD mn) 161/2,252 The Unknown, The Emerging and The Known, dated 17 January) Daily Volume (3M NSE Avg) 42,267 inflection data analysis over fiscal 1997-2018 shows disposable income Face Value (INR) 5 growth below 10% sees a savings rate react inversely. With FY20 1 US$= INR 71.6 disposable income growth expected to be below 10% (it was 11% in Note: *as on 19 February 2020; Source: Bloomberg

FY19), financial savings are likely to stabilize. Equities as an asset class would be a key beneficiary, with a conservative expectations of a 27% Price & Volume

CAGR in market volume over FY19-24E vs 45% over FY14-19. 600 8 500 #Catalyst 2: changing regulations benefitting large brokers 6 Changing regulations post the recent misappropriation by a broker in 400 300 4 November, strengthens position of large brokers as customers seek 200 safety and increased regulatory cost provide a floor to pricing. 2 100 Changing regulations have resulted in 35% of active client base up for 0 0 grabs, which clubbed with deepening sub-broker network (8,600+ for Feb-19 Jun-19 Oct-19 Feb-20 ISEC) and strategic shift to open architecture in client acquisition are Vol. in mn (RHS) ICICI Securities (LHS)

working to benefit ICICI Securities (ISEC IN). We see FY20 as the Source: Bloomberg

Global Markets Research Markets Global bottom for revenue, with expectations of a pickup over FY20-22E, with Shareholding (%) Q4FY19 Q1FY20 Q2FY20 Q3FY20 a CAGR of 12% Promoter 79.2 79.2 79.2 79.2 #Catalyst 3: Digitization... & a Leader Institutional Investor 15.2 14.0 14.7 14.6 A digital payment CAGR of 50% over FY14-19, 65% of payments Other Investor 1.5 1.9 1.3 1.6 General Public 4.1 4.9 4.8 4.6 through digital mode and a growing JAM network (Jan Dhan, Aadhar Source: BSE and Mobile) are working toward financialization. A superior platform (90-95% of trade executed online), 4.7mn leadership in the number of Price performance (%) 3M 6M 12M clients, ~9% blended volume market share, a bouquet of financial Sensex 2.1 10.5 16.9 products with the second-largest non-bank MF distributor places ISEC ICICI Securities 63.0 133.0 157.5 IIFL Securities 139.7 - - as the Amazon Prime of the broking Industry. 5paise 21.7 38.1 33.3

Valuation Source: Bloomberg

We initiate coverage of ICICI Securities with a Buy rating and a TP of Price performance INR 610 based on abnormal earnings growth (AEG) model which 280

implies a P/E of 26x. We see moat in the business, reflective in its wide distribution, brand name, strong balance sheet and diversified 230 revenue streams coupled with strong execution. We expect growth 180

to resume over FY21-22, with a revenue CAGR of 12% over FY20- 130 22E, which with tight leash on opex would result in earnings CAGR 100 to Rebased 80 of 21% over same period. High free cash flow generation, with a Feb-19 May-19 Aug-19 Nov-19 Feb-20 steady payout of 60%+, strong balance sheet and parent backing ICICI Securities Sensex

should provide additional comfort to shareholders. Source: Bloomberg Key Financials YE Net Income YoY EBITDA YoY Adj PAT YoY Fully DEPS RoE Cost/Income Div Payout P/E March (INR mn) (%) (INR mn) (%) (INR mn) (%) (INR) (%) (%) (x) (x) FY19 17,270 (7.2) 8,145 (11.2) 4,907 (11.3) 15 46.9 56.2 61.7 32.8 FY20E 16,606 (3.8) 8,648 6.2 5,236 6.7 16 41.9 56.2 61.2 30.8 FY21E 18,523 11.5 10,079 16.5 6,319 20.7 20 42.2 53.9 61.2 25.5 FY22E 21,005 13.4 12,151 20.6 7,715 22.1 24 42.9 50.4 60.5 20.9 Note: pricing as on 19 February 2020; Source: Company, Elara Securities Estimate

Ritika Dua • [email protected]• +91 22 6164 8526 Pratik Poddar • [email protected]• +91 22 6164 8506 Elara Securities (India) Private Limited ICICI Securities

Valuation trigger Investment summary Consistent increase in market . Pickup in financial savings of 700 share on the back of retail 2 households at a CAGR of 11% 600 broking, with corresponding 1 pickup in revenue over FY19-24E, with equity as an 500 asset class a key beneficiary 400 300 . Changing regulations post the Successful strategy execution of Karvy episode are strengthening 200 open architecture laid by

100 incumbent management the position of larger brokers like

0 ISEC

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19 19 20 20 21 21 22

19 19 20 20 21 21

19 20 21

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- . FY19-20 to be the bottom for

Aug Aug Aug

Oct Oct Oct

Jun Jun Jun

Apr Apr Apr

Feb Feb Feb Feb

Dec Dec Dec revenue, which is expected to pick Source: Bloomberg up on the back of increasing market share and growth in

Valuation overview distribution post the impact of TER FY22E cuts over FY19-20. This would

result in a revenue CAGR of 12% EPS (INR) 24 over FY20-22E and operating Current Market Cap (INR Bn) 161 leverage would aid in an earnings Nos of shares (mn) 322 CAGR of 21% over the same Implied Multiple (x) based on AEG 26 period TP (INR) 610 Valuation trigger CMP (INR) 500 Upside (%) 22 1. Consistent increase in market share on the back of retail broking, Source: Elara Securities Research with corresponding pickup in revenue Valuation driver - Earnings CAGR at 21% over FY20-22E 2. Successful strategy execution of 9 70 open architecture laid by 8 60 50 incumbent management

7 40

6 Key risks (%) 30

(INR bn) (INR 20 4 . Entry of Paytm money in the 10 broking industry currently at the 3 0 2 (10) beta stage 1 (20) . 0 (30) Regulations around intraday FY16 FY17 FY18 FY19 FY20E FY21E FY22E margin would have material

PAT Growth impact on market volume

Source: Company, Elara Securities Estimates Our assumptions . A 5% decline in yield and a 20% volume CAGR , coupled with pickup in distribution revenue, would lead to a revenue CAGR of 12% over FY20-22E

. The cost-Income ratio is expected to fall further to 50% for FY22E from 56% in FY19

2 Elara Securities (India) Private Limited

ICICI Securities

Financials (YE March) Income Statement (INR mn) FY19 FY20E FY21E FY22E Revenue & earnings growth trend Income from Operations 17,104 16,118 17,938 20,332 13.4 15 11.5 30 Profit/(loss) on sale of securities (net) 166 487 585 672 10 20 17,270 16,606 18,523 21,005 20.7 22.1 Total net Income 6.7

5 10

Less :- Opex 9,125 7,957 8,444 8,854 (%) (%) EBITDA 8,145 8,648 10,079 12,151 0 0

(11.3) Less:- Depreciation 150 600 569 512 (5) (3.8) (10) 7,996 8,049 9,509 11,638 EBIT (10) (7.2) (20) Less:- Interest 423.4 776 970 1,213 FY19 FY20E FY21E FY22E PBT 7,572 7,273 8,539 10,426 Revenue Growth Earnings growth

Less :- Taxes 2,665 2,036 2,220 2,711 Source: Company, Elara Securities Estimate Reported PAT 4,907 5,236 6,319 7,715 Balance Sheet (INR mn) FY19 FY20E FY21E FY22E Capital 1,611 1,611 1,611 1,611 Profitability

Reserves & Surplus 8,862 10,893 13,346 16,390 60 46.9 48 Net worth 10,473 12,504 14,957 18,001 55.4 46 55 51.3

Borrowings 4,518 16,000 18,400 21,160

(%) 48.5

Current Liabilities & Provisions 31,655 13,844 11,975 11,975 50 (%) Total Liabilities 46,646 42,348 45,332 51,136 42.9 42 42.2 45 41.9 Fixed assets 476 2049 2220 2409 46.3 40 Investments 2,592 5155 5667 6231 40 38 Cash and cash equivalents 31,486 17191 18666 22668 FY19 FY20E FY21E FY22E EBIT Margin ROE

Trade receivables 4,770 2985 1985 1526 Diversified Financials Diversified Current Assets, Loans and advances 7,323 15569 16870 18302 Source: Company, Elara Securities Estimate Total Assets 46,646 42,348 45,332 51,136 Per Share data & Valuation Ratios FY19 FY20E FY21E FY22E EPS- (INR) 15 16 20 24 Payout ratio DPS- (INR) 9 10 12 15 65

P/E- (x) 33 31 25 21 60

Dividend Yield (%) 1.9 2.0 2.4 2.9 (%) 55 Payout (%) 61.7 61.2 61.2 60.5 50 Growth Rates (%)

Revenue Growth (7.2) (3.8) 11.5 13.4 45 EBITDA Growth (11.2) 6.2 16.5 20.6 40 FY19 FY20E FY21E FY22E Earnings growth (11.3) 6.7 20.7 22.1 Payout Profitability Ratios (%)

EBIT Margin 46.3 48.5 51.3 55.4 Source: Company, Elara Securities Estimate ROE 46.9 41.9 42.2 42.9

Note: pricing as on 19 February 2020; Source: Company, Elara Securities Estimate

Elara Securities (India) Private Limited 3 ICICI Securities

Broking Industry- Headroom for growth  Headroom for growth in broking with 35% of active client base up for grabs  Changing regulations to keep pricing under check  Trending to one-stop shop

Exhibit 3: Life insurance penetration at a mere 4% of # Catalyst 1- Financial savings CAGR of GDP 11% over FY19-24E 5.5 A thumping victory in 2014 General Elections followed by an uptick in macros set the stage for financialization of 5.0 savings in India, which got bolstered by the government’s demonetization initiative and Digital India drive. 4.5 Compared to a fall in household savings as a percentage tn) (INR 4.0 of GDP to 18% in FY19 from 24% in FY12 (Source: MOSPI), the share of financial savings dropped slightly to 6.5% for 3.5 FY19 from 7.4% in FY12. The contraction was primarily on account of a drop in share of physical savings to 11.5% for 3.0 FY19 from 16.0% in FY12. FY14 FY15 FY16 FY17 FY18 FY19

Exhibit 1: Financial savings holding up well Source: IRDAI, Elara Securities Research 80 Exhibit 4: Market turnover: one-way rally 70 500 60 (%) 50 400 40 300 30

20 200

(INR tn) (INR

100

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Financial Savings as a % of Household Savings 0

Physical savings as % of Household savings

14 15 16 19

13 14 14 15 16 17 18 19 19

13 17 18 17

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- Jul

Source: Reserve Bank of India (RBI), Elara Securities Research Jul

Jan

Sep Sep

Oct

Jun

Apr Apr

Feb Feb

Mar

Dec Dec

Nov May Aug Equities as a key beneficiary Source: Bloomberg, Elara Securities Research Within financial savings, all got their fair share from a Exhibit 5: Share of equity has always been positive 45% CAGR in market volume to 24% CAGR in MF AUM except during times of crisis and a 12.3% CAGR in life insurance premium over FY14- 19. Equity had a disproportionate benefit with its share 12 Shares and debentures 10 10 in incremental savings scaling up to 10% for FY17, last 10 seen only in FY08. 8

8 7

Exhibit 2: MF penetration still low at 12% of GDP 6 5 (%) 4 30,000 MF AUM 3 2 2 2 2 2 0 25,000

20,000 (2) 0

15,000

(INRbn)

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY07 10,000 Source: RBI, Elara Securities Research

5,000 Increased retail participation

14 15 19

13 14 16 18 19

14 15 16 17 19

13 17 18

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- A higher share in equities broadened the capital markets

Jul Jul

Jan

Sep Sep

Oct

Jun

Apr Apr

Feb Feb

Mar

Dec Dec

Nov May Aug with an increased retail participant, visible in absolute

increase in demat accounts by 14mn over FY13-19 on Source: Association of Mutual Funds in India (AMFI), Elara Securities Research

4 Elara Securities (India) Private Limited ICICI Securities

base of 22mn for FY14 and MF folios rising by 39mn over Exhibit 8: Currency in circulation yet to fall as much FY13-19 on base of 38mn for FY14. as nominal GDP growth

Exhibit 6: Financialization improves penetration 80 20 60

100 15

40 (YoY %) 75.3 77.3

80 20 10 (YoY %) (YoY

60 52.3 45.4 5 41.4 39.9 (20) (mn) 38.1 35.9 40 31.9

27.9 (40) 0

25.4

21.0 21.8 23.3

12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19

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20 -

Jun Jun Jun Jun Jun Jun Jun Jun

Dec Dec Dec Dec Dec Dec Dec Dec 0 Currency in Circulation Nominal GDP growth (RHS) FY13 FY14 FY15 FY16 FY17 FY18 FY19 Demat accounts Retail folio count Source: Ministry of Statistics and Programme Implementation (MOSPI), Elara Securities Research Source: SEBI, Elara Securities Research Exhibit 9: Trend resumed in FY20 Increasing retail participation can be seen in the 30 increasing share of retail in terms of market volume. For the derivatives segment, this was a factor of entry of 25 discount brokers like Zerodha and an increasing 20 digitization with internet trading accounting for 30% of

(%) 15 volume for both NSE cash and derivatives for FY19, from 21% and 16% in FY14, respectively. 10 5

Exhibit 7: Retail constitutes 38% of market volume Financials Diversified 60 0 Q4FY19 Q1FY20 Q2FY20 Q3FY20 55 AUM growth Premium growth

50 (%) 45 Source: AMFI, IRDAI Elara Securities Research 40 Our Economist Garima Kapoor says despite disposable 35 income growing at a slower pace (6.7% in FY20 vs 9.8%

30 over FY18-19) households may have begun to

increasingly park their financial savings in the form of

CY14 CY15 CY16 CY17 CY18 CY19

CY13 cash. This explains why currency in circulation has yet to Dec'19 Share in NSE cash market see a sharp slump. She further highlights while Share in NSE derivatives market household savings have been on the decline due to Note: The above is the trend for NSE “others” segment, which also includes weak income growth, an analysis to find out if there is an Retail; Source: SEBI, Elara Securities Research inflection point for growth in disposable income at We expect resumption in financial savings which household financial savings rate stops falling While financial savings as a percentage of GDP has despite lower income growth suggests level for dipped to 6.5% for FY19 from the highs of 8.1% of GDP disposable income growth is ~10%. A fall in disposable in FY16, the growth rates across products have not income growth below 10% sees savings rate react dipped in FY20. This suggests FY19 being the origination inversely. Disposable income growth for FY19 was 11%. of the IL&FS crisis did impact leveraging capability of The sharp deceleration in economic growth suggests households, due to lack of funding from NBFC and risk FY20 may see disposable income growth fall below 10%, averseness meant people continue to hold on to cash. leading to either an increase in the savings rate or at Cash in circulation as a percentage of GDP was at worst the likelihood of sustaining it. 44.04% in September 2019 compared to 41.15% in September 2018 and 38.04% in September 2017

Elara Securities (India) Private Limited 5 ICICI Securities

Financial savings CAGR of 11% over FY19-24E cash turnover, respectively, and 20% & 23% of NSE Assuming financial savings remains constant at 6.5% of GDP options and futures turnover, as on FY19, respectively. or 36% of household savings over FY19-24E, we expect a Exhibit 12: Broking industry - the players CAGR of 11% in financial savings over the same period. Growth in financial savings would be 17% if the incumbent Broking Industry: 9.8mn active government were to reach USD 5tn GDP by FY25E. clients as on January 2020

Exhibit 10: Healthy CAGR of 11% in financial savings over FY19-24E Discount brokers like Full-service brokerage at Zerodha, 5 Paisa, Samco & 20 80% market share Upstox at 21% market share

(%) 10 Bank-backed Brokers with brokers like HDFC, lending business Other Brokers 5 ICICI, Axis & Kotak like JM Financial, such as Angel and at-27-28% market Motilal, Edelweiss, Karvy 0 share IIFL Nominal GDP Household Household savings financial savings Source: NSE, Elara Securities Research FY09-12 FY12-15 FY15-18 FY19-24E Source: Ministry of Statistics and Programme Implementation (MOSPI), Elara Exhibit 13: Increasing share of top 5 brokers Securities Estimate Top 5 Top 6-10 Top 11-25 Top 26-50 Remaining 35% of active client base up for grab NSE cash turnover Consolidation to intensify FY12 15 10 21 16 38 The broking industry has an NSE active client base of FY18 20 11 21 17 32 9.8mn as on January 2020 (active clients are ones who FY19 22 12 20 18 28 have traded at least once in the past year), and has NSE futures grown at a CAGR of 15% over FY14-19 vs an FY12 13 9 7 13 58 outstanding client base at 27mn, grown at a CAGR of FY18 19 11 8 12 50 10% over FY14-19. The differential in growth rates is on FY19 20 11 9 13 48 account of a higher active client rate for discount brokers, such as Zerodha, at 80-90% vs 25-30% for NSE options FY12 22 12 7 11 48 traditional brokers. FY18 20 14 11 15 40 Exhibit 11: Growing pie FY19 23 14 11 15 37 12 Active clients 9.8 Source: NSE, Elara Securities Research 10 8.8 8.3 Despite the rise of discount brokers, bank-backed brokers

8 have been able to defend their turf, with a 27-29% 6.0 market share of active clients as on January 2020, (mn) 6 5.1 5.2 4.3 maintained since FY14, with full-scale brokers and other 4 smaller brokers combined ceding 20% market share to

2 discount brokers. While it is not all a shift of customer base to discount brokers, it is an influx of newer clients 0 post demonetization and digital drive in India since FY17, FY14 FY15 FY16 FY17 FY18 FY19 Jan'20 where smaller brokers have found it difficult to keep up

with the changing needs of clients. NSE has registered Source: National Stock Exchange (NSE), Elara Securities Research 5.6mn investors in FY19, which is 20% of outstanding. Broking fragmented Additionally, the ease of use provided by Zerodha along The broking industry is fragmented with top 5 brokers, with zero transaction cost has changed demographics as which includes Zerodha the largest discount broker, well, with 70% of customer base having an average age accounting for 40% of NSE active clients share. The share of 37 years or younger vs. 40 years for traditional of Next Top 5, excluding Zerodha, is at 33% (Source: brokers. NSE). The volume market share is more fragmented and We expect the trend to continue to be in favor of large tilted toward the top 5 at 24% and 22% of BSE and NSE brokers, given their ability to keep up with changing

6 Elara Securities (India) Private Limited ICICI Securities

dynamics: 1) 30% of NSE trading volume is now on We see adequate headroom for growth in terms of client internet, 2) 8.2% of NSE cash trades on mobile. The base additions, with brokers having technology and recent regulatory lapses at a few smaller brokerages and distribution edge best placed to capture them. We a large one like Karvy coupled with restructuring at two reckon risks remain for the Unknown, which includes, other large brokers like Reliance and Religare have led to Zerodha tapping into +40 year aged customer base of 5.0mn clients or 5% market share up for grabs for traditional brokers and aggression of new entrants, established brokers. Expectations of further tightening namely Paytm and Bajaj Finance into the broking post the Karvy imbroglio, the proposal on upfront business margin for intraday traders and brokers being allowed to fund the same are expected to further strengthen the position of established firms. We see 35% of existing client base an opportunity for growth for established firms over the medium to long term.

LIC IPO to be India’s FAANG moment While retail participation has been growing, it remains low and the only way to increase & aspire to reach A 27.5 Mn retail market participant’s vs 80 mn levels seen in developed countries is to have a FAANG individual tax payers vs 59 mn tax filers vs 77 mn retail (Facebook, Apple, Amazon, Netflix and Google) MF folios vs 170 mn EPFO subscribers as of FY19- moment. The listing of the FAANG stocks over the implies market participants can double hereafter. past 5-10 years got more US investors, who used Exhibit 15: Adequate room for growth products and aspired to be shareholder, actually an opportunity to invest. 200 170

150 India’s Union Budget of 2019-20 had started the path Diversified Financials Diversified

for divestment of the government’s stake in the Life 100 77 80 (mn) 59 Insurance Corporation of India (LIC) via an initial 39 50 28 public offering (IPO). The entity is the largest life insurance provider with 300mn policies in force and a

reach which goes beyond the metros. This comes at a

time when geographical penetration is visible, with cities ranked beyond 10 (Source: Economic Times

payers article dated 24 September 2019) accounted for 68%

Individual Individual tax Retail MFfolio Retail

Dematholders of new investor registrations in FY19 and cities ranked

EPFO EPFO subscribers

(97.5% are are (97.5%retail) Individual Individual filers tax Market participants Market beyond 100 accounted for 43% of new investor Source: NSE, employee provident fund organization (EPFO), Economic registrations in FY19. We see bank-backed brokers or Times article dated 24 September 2019, AMFI, Income Tax Elara Securities brokers with already high or increasing sub-broker Research network at an advantage to capture this expanding customer base.

Exhibit 14: MF distribution is reaching beyond top 35 Exhibit 16: Around 43% of new retail registrations cities are from beyond top 100 cities (as on FY19)

100 Mix of incremental retail registrations on NSE

80 Top 10 32% 60 Beyond Top 100

(%) 43% 40

20 Beyond Top 10 and 0 upto Top FY14 FY15 FY16 FY17 FY18 FY19 100 25% Top 35 Others

Source: NSE, Elara Securities Research Source: AMFI, Elara Securities Research

Elara Securities (India) Private Limited 7 ICICI Securities

Exhibit 17: Bank-backed brokers hold turf; market share up for grabs from smaller and troubled brokers Change in (%) FY14 FY15 FY16 FY17 FY18 FY19 Jan'20 market share over FY14- Jan 2020 The rise of Discount brokers 0.52 0.74 1.40 3.13 7.49 12.69 20.99 20.48 discount Zerodha 0.41 0.60 1.20 2.78 6.52 10.35 12.30 11.90 brokers RSKV (Upstox) 0.11 0.14 0.21 0.29 0.53 1.13 5.11 5.00 5 Paisa - 0.00 - 0.06 0.43 1.21 3.58 3.58 Bank-backed brokers 26.78 28.38 29.51 30.31 28.80 29.41 27.28 0.50 Maintain turf ICICI Securities 11.68 11.68 10.84 10.39 9.63 9.61 10.07 (1.61) HDFC Securities 6.50 6.83 7.89 8.12 7.27 7.65 6.76 0.26 Axis Securities 1.80 2.36 3.57 4.35 4.88 4.78 2.88 1.08 Kotak Securities 5.21 5.27 4.78 4.60 4.45 4.99 5.32 0.11 SBI Caps 1.59 2.24 2.43 2.85 2.58 2.38 2.26 0.67 Full-scale brokers 29.31 29.77 28.96 26.01 25.65 24.64 22.42 (6.88) Sharekhan 6.41 6.73 6.50 6.16 6.45 5.80 5.24 (1.16) IIFL 5.49 5.62 5.09 3.33 2.72 2.44 2.07 (3.42) Geojit 3.46 3.11 3.43 2.69 2.21 1.85 1.60 (1.86) Angel 3.27 3.15 3.30 3.87 4.39 4.70 5.00 1.73 Motilal 2.87 3.00 3.21 3.48 3.71 3.63 3.53 0.66 up for grabs Karvy 2.95 3.39 3.23 3.05 2.95 3.03 2.70 (0.25) Religare 2.71 2.55 2.33 2.03 1.74 1.81 1.14 (1.57) Reliance Capital 2.17 2.24 1.88 1.40 1.48 1.37 1.15 (1.02) Losing out Others 43.40 41.11 40.12 40.55 38.05 33.26 29.30 (14.10)

Source: NSE, Elara Securities Research Exhibit 18: Trend continues on an YTD basis (mn) Apr-19 Sep-19 Dec-19 Jan-20 YTD change Discount brokers 1.17 1.56 1.93 2.06 0.89 Zerodha 0.93 1.04 1.16 1.21 0.27 Increasing competition among RSKV (Upstox) 0.13 0.28 0.45 0.50 0.37 discount brokers

5 Paisa 0.11 0.23 0.32 0.35 0.24 Bank backed brokers 2.57 2.56 2.63 2.68 0.11 ICICI securities 0.86 0.91 0.96 0.99 0.13 Introduction of Option 20 and Prime helps ISEC improve HDFC securities 0.66 0.64 0.66 0.66 (0.00) market share Axis securities 0.41 0.34 0.30 0.28 (0.13) Kotak securities 0.43 0.46 0.50 0.52 0.09 SBI Caps 0.21 0.21 0.22 0.22 0.01 Full scale brokers 2.16 2.12 2.18 2.20 0.04 Sharekhan 0.51 0.48 0.50 0.51 0.01 IIFL 0.21 0.20 0.20 0.20 (0.01) Geojit 0.16 0.16 0.16 0.16 (0.00) Angel 0.42 0.43 0.47 0.49 0.07 Motilal 0.32 0.33 0.34 0.35 0.02 Troubled brokers losing market share Karvy 0.26 0.27 0.27 0.26 0.00 Religare 0.16 0.14 0.12 0.11 (0.05) Reliance capital 0.12 0.12 0.12 0.11 (0.01) Loss of market share across Others 2.93 2.76 2.84 2.87 (0.06) smaller brokers Source: NSE, Elara Securities Research

8 Elara Securities (India) Private Limited ICICI Securities

#Catalyst 2: Changing regulations benefitting large brokers

Tightening the screws Despite the growing size of the broking industry, the This too requires strong net worth. Currently, margin regulator has not increased the minimum Networth trade financing is allowed up to 5x of net worth and is requirement for trading and clearing membership (TM likely to impact all including discount brokers.

& CM) in capital market (CM) and futures and options Regulation 3: Proposal to remove use of pool accounts (F&O) segment, which currently stands at INR 30 mn for mutual fund transaction (Source: NSE). The Networth for the large brokers remains high and comfortable (ISEC has a Networth of Impact: The Karvy aftermath has led to the above INR 10bn) and gives them an edge. The changing proposal to ensure safety of client assets. This is a regulations while do not directly increase the negative for non-bank brokers as they would lose requirement, but is pro large brokers as they have sight of customer activity stronger balance sheet. We see possibility of a fourth regulation around Regulation 1: In a circular issued in June 2019, the Settlement of Funds & Securities through Quarterly regulator SEBI made it mandatory for brokers to Settlement transfer pledged securities to their clients' accounts The current regulation: As per SEBI circular MIRSD/ SE within one day of receiving the payment. The brokers /Cir-19/2009 dated December 3, 2009 (Exchange were supposed to release such pledges by August Circular NSE/INSP/13606 dated December 03, 2009), 2019 while the deadline was further extended to the settlement of funds and / or securities shall be September 2019. done within 1 working day of the pay-out, unless The Effect: SEBI passed an ex-parte order against Karvy client specifically authorizes the trading member in

Stock Broking on November 22, 2019 for pledging writing to maintain a running account. Clients whose Financials Diversified and misusing client’s securities with lenders and funds and securities are maintained on a running utilizing them to raise funds for its other subsidiaries. account basis have to be settled by members on a This was not just a sole incidence, with three more monthly / quarterly basis as per the client mandate. large frauds being reported by other brokerages in Members should ensure that there is a gap of FY19. A news article by Business Standard article maximum 30/ 90 days (as per the client mandate) dated 26 November 2019 states, a dozen brokers between two running account settlements. were under SEBI scanner post the incident and Impact: SEBI’s proposal to ensure safety of investor misappropriation of funds could be as high as ~INR money was the origination of the June’19 circular, 100bn. which ring fenced client assets. What is still left is the Impact: Brokerages used this arrangement to boost safety of client money, which could be with broker for their margin funding capabilities and the absence of a month or quarter for customers who choose a the same has already increased their requirement for running account with the broker. Brokers earn float capital, forcing them to scale down due to incapability income on funds lying in pooled assets until the of raising capital. Incrementally, if margin has to be settlement. This is not relevant for ICICI Securities, as funded, cost of funding needs to be either passed on their eATM facility enables a transfer within 30 to customer or will be absorbed by the broker. minutes of trade execution for all client of an amount upto INR 500k and higher for PRIME customers. Float Regulation 2: SEBI has proposed higher margin income could be a material share of revenue for a lot requirement for traders. of brokers, and could hit their margins, if SEBI looks to Impact: This is currently in the proposal stage and as further tighten the screws. per an Economic Times article on 12 February 2020, brokers have made representation to SEBI and exchanges to not go ahead with it as it is detrimental to market volume. Additionally, what is being proposed is to lower leverage capability and allow brokers to part finance initial margin requirements.

Elara Securities (India) Private Limited 9 ICICI Securities

Changing regulation to keep pricing in Exhibit 20: Increasing share of non-delivery volume check 100 26 The establishment of NSE in 1994 ended the era of open 31 32 32 34 30 outcry and paved the way for screen-based trading. Few 75

large brokers took advantage and went online, with IIFL 50 Securities the first to go online with 5 paisa.com, (%) 74 followed by HDFC Securities, ICICI Securities, Indiabulls 69 68 68 66 70 and Sharekhan. The next wave of disruption took longer, 25 with the advent of discount brokers in CY17. While discount broking arrived in India on 15 August 2010, 0 FY14 FY15 FY16 FY17 FY18 FY19 with the launch of the largest discount broker, Zerodha, Non- Delivery ADTO Delivery ADTO the disruption was felt only post demonetization, which ran parallel with the digitization drive in India. Note; Average daily turnover (ADTO); Source: SEBI, Elara Securities research Trust more important than cost Pricing and technology have become the backbone of discount brokers, and they have been able to garner a Large brokers now have a separate proposition to cater 21% market share in NSE active client base as on January to customers who have shifted to discount brokers, with 2020, growing 7x from 3% in FY17. The market is yet to rack rates lower than earlier but still higher than discount feel the impact of the advent of a new broker, Paytm brokers (except for Axis Securities and Angel Broking, Money, which is currently at the beta stage and known which prima facie have matched it). This implies revenue for its technology prowess and discounted pricing. While might drag in FY20, which as on M9FY20 was down 2% this implies the war for pricing and client acquisition YoY for the top 6 brokers excluding Angel Broking. With continues, we see changing regulations post Karvy rates not expected to come off further as changing imbroglio putting a floor to pricing and rather expect regulations are working in favor of large brokers in terms non-bank or discount brokers increasing pricing due to of client acquisition and pricing, we see FY20 as the increasing net worth requirement. bottom for revenue growth for the sector assuming market volume remains buoyant. We expect an 11% Large brokers weather the storm CAGR in financial savings over FY19-24E and along with Revenue growth for Top 7 brokers accounting for 35% of equities maintaining the share in the savings pie, this NSE active client has increased at a CAGR of 16% over should aid the broking industry report similar revenue FY14-19 on the back of 30% increase in volumes which growth.

implies pricing pressure. This is not only a factor of discount broking but also a shift in market to lower- yielding derivatives and intraday positions.

Exhibit 19: Increasing preference for derivatives

100 4 11 12 11 8 7

(%) 96 89 88 89 92 93

0 FY14 FY15 FY16 FY17 FY18 FY19 Equity derivatives Cash equity

Source: SEBI, Elara Securities research

10 Elara Securities (India) Private Limited ICICI Securities

Exhibit 21: Large brokers weather the storm Revenue (INR mn) FY14 FY15 FY16 FY17 FY18 FY19E 9MFY19 9MFY20 ICICI Securities 4,960 7,554 6,604 7,756 10,243 9,328 7,030 6,604 Kotak Securities 3,439 5,917 5,719 7,424 9,054 8,681 5,961 6,172 Motilal Oswal 2,648 4,449 4,510 5,516 6,895 6,678 5,968 6,201

India Infoline 3,233 4,726 4,254 4,412 5,069 5,048 3,156 2,774

HDFC Securities 2,039 3,374 3,116 4,211 5,960 5,260 3,786 3,918 Angel Broking 2,592 3,330 3,145 3,600 4,785 5,014 NA NA Axis Securities 485 1,010 1,058 1,450 1,706 1,597 1,200 1,016 Top 7 19,396 30,360 28,406 34,369 43,712 41,606 27,100 26,685 Industry 82,743 1,27,628 1,17,068 1,39,800 2,00,000 1,80,000

Source: Company, Angel Broking DRHP, Elara Securities research Exhibit 22: Not much difference in pricing among traditional brokers Broker ISEC HDFC Securities Kotak Securities Bajaj Securities IIFL MOSL Plan I-secure Regular Dynamic Regular Variable Value Cash delivery 0.55 0.50 0.55 0.50 0.55 0.50 Cash intraday 0.28 0.10 0.06 0.10 0.05 0.05 Futures 0.05 0.05 0.05 0.10 0.05 0.05 Futures intraday 0.05 0.03 0.05 0.10 0.05 0.05 Higher of 1% & Higher of 2.5% & Higher of 2% Options INR 95/lot 100/lot INR 70/lot 100/lot 240/lot & 200/lot

Source: Company, Elara Securities Research Diversified Financials Diversified Exhibit 23: Traditional brokers keep rack rates higher than discount brokers for the flat and fixed segment Bajaj Broker Zerodha UpStox 5Paisa Samco Angel ISEC Kotak IIFL Axis Securities iTrade All plans Basic Optimum Basic Prime @900 Fixed Subscription Trade@20 Plan Prime Flat (INR/order) (INR/order) (INR/order) (INR/order) (%) (%) (INR/order) (INR/order) (INR/order) Cash 0 0 20 20 0 0.25 0.49 0.99 0.50 20 delivery Cash 20 20 20 20 20 0.25 0.05 0.99 0.05 20 intraday Futures 20 20 20 20 20 0.03 0.05 5 0.05 20 Futures 20 20 20 20 20 0.03 0.05 5 0.05 20 intraday Higher of Options 20 20 20 20 20 INR 35/lot INR 300/lot 5 1% or INR 20 100/lot Source: Company, Elara Securities Research

Elara Securities (India) Private Limited 11 ICICI Securities

#Catalyst 3: Digitization Trending to be one-stop shop We see Investment’s in MFs a secular trend, with expectation of MF AUM growth at 21% over FY 17-22E A digital payment CAGR of 50% over FY14-19, 65% of (Source CRISIL), aiding distributors. payments through digital mode and a growing JAM network (Jan Dhan, Aadhar and mobile) are working Exhibit 26: Fall in TER reflects in dip in commissions toward financialization. Financial savings as a trend is for FY19 likely to continue, which benefits all products from direct 100 equities to mutual funds and life insurance as customers 85.5 79.5 prefer diversification as per risk appetite. Incrementally, 80

with zero pricing being the buzzword, it is becoming

essential to provide a full suite to retain customers. 60 47.4 50.0 Distribution income also reduces volatility attached 36.6 within the broking business and serves as a cross-sell. (INRbn) 40 23.9 26.0 While mutual funds and life insurance have registered a 18.8 20 CAGR of 24% and 12% over FY14-19, respectively, under penetration is still high at 12% and 4% of GDP, 0 respectively. FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Exhibit 24: All products have their fair share Source: AMFI, Elara Securities Research 600 Exhibit 27: ICICI Securities increasing market share 491 500 (%) FY13 FY15 FY17 FY18 FY19

400 NJ India 5.20 6.39 8.85 9.20 10.16 289 300 HDFC Bank 6.74 6.93 7.93 7.50 6.25 165 179 ICICI Bank 3.63 5.23 5.59 5.50 4.47 200 131 95 Axis Bank 3.52 6.41 4.97 6.29 6.99 100 Kotak Mahindra Bank 3.58 5.37 3.97 3.21 3.21 0 Equity + MF AUM Insurance Citibank 6.92 4.83 3.70 2.91 2.29 Derivative ADTO Premium SBI 1.52 1.46 3.58 6.53 6.13 FY15 FY16 FY17 FY18 FY19 ICICI Securities 2.38 3.35 3.45 3.70 4.01 Note: Rebased FY14 to 100; Source: SEBI, AMFI, IRDAI, Elara Securities IIFL Wealth 2.93 6.03 3.15 2.05 2.22 Research Standard Chartered Bank 3.69 3.03 2.39 2.17 1.90 Exhibit 25: Trend continues in FY20 as well Others 59.89 50.96 52.42 50.94 52.37 30 Source: AMFI Elara Securities Research 25 Growing PMS pie 20

PMS as a product in India has seen significant growth in

(%) 15 last five years aided by, an increase in the number of 10 high net worth individuals (HNIs) and in-turn the need for customized asset allocation. PMS (ex-EPFO/PF) AUM 5 has clocked a CAGR of 27% over the past five years to 0 INR 4.7 tn in FY18. AUM of listed equity PMS grew at Q4FY19 Q1FY20 Q2FY20 Q3FY20 45% CAGR over the past five years and stood at ₹ 1.0 AUM Growth Premium growth trillion as of March 2018. CRISIL Research expects the Source: AMFI, IRDAI, Elara Securities research AUM to grow at a CAGR of 30-35% in next three years to MF distribution industry settled post TER cuts reach ₹ 2386 billion. SEBI regulation of increasing minimum investment limit from INR 2.5mn to INR 5mn While the distributors have taken a hit post the change w.e.f January, 2020 and increased Networth in commission rates announced by SEBI, the industry requirement of portfolio managers to INR 50mn from continues to grow with AUM up 16% as on December INR 20mn works in favour of larger players. ICICI 2019 at INR 26.5tn. ICICI Securities is the second largest securities is scratching the surface with a PMS fund size non-bank MF distributor, with a market share of 4.0% as of INR 1bn, with an increasing focus boding well to on FY19, having nearly doubled from 2.3% in FY12. capitalize the opportunity.

12 Elara Securities (India) Private Limited ICICI Securities

Life insurance- Distribution is key for secular growth . Bringing clarity in fee payment and introduction of The ambit of life insurance products have widened from upper limit on fees charged to investors savings-linked to market-linked to pure protection. Total . Enhanced eligibility criteria for registration as an insurance premium has grown at a CAGR of 16% since investment adviser, including net worth, FY01 to INR 5tn at the end of FY19. Share of Private has qualification and experience requirements while been on the rise with bancassurance being the key grandfathering existing individual investment

driver for the same. The private players held a premium advisers from complying with enhanced market share of 58% in FY19 with the top three insurers qualification and experience as specified by the viz. HDFC Life, ICICI Pru Life and SBI Life accounting for Board. 30.5% share. . Person dealing in distribution of securities will Budget 2020 has introduced lower tax slabs with no not use the nomenclature “Independent Financial exemptions and deductions which includes a tax payer Adviser (IFA)” or “Wealth Adviser” or any other forgoing investments in 80C. While, the announcement similar name unless registered with SEBI as an is a key negative for the sector as demand may shift from investment adviser. ULIP to mutual funds, although this will not impact pure We are yet to see the impact of these steps on earnings protection plans, which is incremental growth driver. of ICICI Securities, but our discussion with management However, the option to stick to the old regime, which suggest the same will be marginal as they make up a most claiming HRA would stick to, in our view, will not small portion of revenue from the advisory business impact the ULIP. According to CRISIL Research, the total currently. The regulations might involve hiving off the premium in the Indian life insurance industry is expected business into a separate subsidiary and clarity will only to grow at a CAGR of 13-15% from ₹ 4,181 billion in emerge in the medium term. fiscal 2017 to ₹ 7,900-8,100 billion in fiscal 2022. With insurance being a “Push” product bodes well for

distributors. Financials Diversified

Regulator tightening the screws on distributors SEBI has finalized regulation on separation of distribution and advisory businesses and proposed the below:

. Segregation of advisory & distribution activities at the client level to avoid conflict of interest. Further, individual investment adviser will not provide distribution services

. Implementation services (execution) through direct schemes and products in the securities market will be allowed to investment advisers for convenience of investors

. To mandate an agreement between investment adviser and client incorporating key terms and conditions regarding investment advisory services for greater transparency

Elara Securities (India) Private Limited 13 ICICI Securities

Exhibit 28: ISEC – the Amazon Prime of the broking industry Broking Distribution General AI-powered advisory Additional offerings Mutual funds Life insurance LAS DSA insurance Bank-backed brokers Yes Yes Yes Yes Yes Yes Yes ICICI Securities ICICI Lombard, ‘Track and Act’ & Smallcase and 2,500+ MF Star and ICICI Pru ICICI Bank 'Bullet Trade' Sensibull Religare Yes Yes Yes Yes Axis Securities Smallcase 6,000+ MF

Yes Yes Yes Yes Yes Yes Yes HDFC Securities HDFC, TATA AIA, Proterminal Smallcase ABSL Yes Yes Yes Kotak Securities KST & KEAT Pro X Smallcase

Full-scale Brokers

Motilal Oswal Yes Yes Yes Yes

MOSl Edge Sensibull 9,000+ MF

Sharekhan Yes Yes

IIFL Securities Yes Yes Yes Yes Yes

TTEdge Smallcase

Angel Yes Yes Yes

ARQ

Discount Brokers

Zerodha Yes Yes Yes

Sensibull, Smallcase, Kite Streak & GoldenPi Upstox Yes Yes Yes

ProWeb Algo Lab

5Paisa Yes Yes Yes Yes Yes Yes

Sensibull & Smallcase

Source: Company, Elara Securities Estimate Research

14 Elara Securities (India) Private Limited ICICI Securities

ICICI securities- Play the leader  Beneficiary of ongoing trend of consolidation  Amazon Prime of the broking industry: one stop-shop  Tight leash on opex and operating efficiency to further bring down cost-income ratio Leveraging its leadership The biggest moat in financial services in India has always been distribution which serves the dual purpose of client ICICI securities (ISEC) is one of the largest and oldest acquisition and servicing. While the broking industry has equity brokers in India: number 1 position in overall retail moved online with ~30% of NSE cash and derivatives client base at 4.7mn, number 2 by active client base with trade being done via the internet, broking still remains a ~10% market share and number 2 position in market light touch model and being the subsidiary of a bank volume with a ~9% blended market share —- its retail with a 4,874 branch network of which ~50% in semi- volume share is higher than blended share. While the urban and rural areas has its advantages. advent of discount brokers has dented margin, ISEC still is number 2 by revenue market share, with a CAGR of We see enough room for the industry to expand client 14% over FY14-19. base from a mere 27mn retail participants, of which ISEC has 4.7mn on board as on December 2019. Beyond the ISEC is a full-scale broker and provides research, margin natural shift to financialization of savings, which benefits funding and a full bouquet of other financial products the industry at large, ISEC has other advantages, which including mutual funds, life & general insurance and third- include 1) 8,600+ sub-broker network where it is just party loan products. The leadership position extends even scratching the surface, 2) a new referral policy with ICICI to the distribution piece, where ISEC is the second-largest Bank post which it has seen an increase in activation non-bank distributor with a market share of 4% as on rates and incremental addition of customers to the client FY19 as per AMFI. The capital markets business remains its base, 3) breaking out of ICICI Bank account only

crown jewel, with ISEC being number 1 domestic financial Financials Diversified customers and going open market, and 4) using Tab advisor by revenue for FY19, as per Prime Database. faced instant account opening with a monthly run-rate The moat = distribution + innovation + trust of 11,500 vs 9,500 in Q2FY20. As a subsidiary of one of the largest private banks in India, Brand ICICI provides customers the trust, especially Exhibit 30: Adequate room for growth given the recent incidents surrounding client asset 200 170 misappropriation, with client’s custody sitting with the 150 bank. ISEC has been an innovator from the start, with very recently being the first to provide eATM facility to all 100 77 80 (mn) 59 39 clients, where upto INR 500k is transferred to all clients 50 28 within half an hour vs industry practice of T+2 working

days, which can extend to 3-4 days, including weekends.

The eATM facility varies from INR 10mn to INR 100mn for ISEC’s new client segmentation called Prime, depending

on the subscription. It is this trust that ISEC still has a payers

Individual Individual tax Retail MFfolio Retail

sizeable customer base above the 40-year age bracket, Dematholders

EPFO EPFO subscribers

(97.5% are are (97.5%retail) Individual Individual filers tax

which is considered sticky and a segment which to date participants Market has been difficult to crack by discount brokers. Source: NSE, EPFO, Economic Times on 24 September 2019, AMFI, Income Tax Elara Securities research Exhibit 29: Over 40-year old customer segment difficult for discount brokers to crack ISEC has an active client rate of 30%, which implies of the 4.7mn customers, 1.4mn have either traded or bought 100 other financial products over the past 12 month. This 75 leaves room to grow revenue by just ensuring existing

customers transact more on its platform, in turn, raising

50 active client percentage. (%)

0 ISEC Zerodha 5 Paisa <35 >35 Note: data as on FY18; Source: Company, Elara Securities Research

Elara Securities (India) Private Limited 15 ICICI Securities

Exhibit 31: ISEC within ISEC – 1.4mn overall active Exhibit 33: Distribution – exclusive to ISEC

base with retail client base of 4.7mn customers 10,000 8,600 Operational accounts 8,000 4.7mn 6,000 4,548 4,874 Ever traded 3,300 2.9mn 4,000

2,000 Overall active 1.4mn 0 Inactive ICICI bank ICICI bank Sub brokers NSE active client base debit cards branches 0.96mn ('000) (lacs)

Note: as on Dec’19; Source: Company, Elara Securities Research

Exhibit 32: Innovator at heart Year Products Launched 2000 ICICIdirect 2001 Online mutual funds platform 2002 Derivatives, Direct Link and ‘Buy Today, Sell Tomorrow’ 2003 GOI bonds on ICICIdirect 2005 Expanded through ICICIdirect branches 2006 Distribution of health and life insurance products 2007 Overseas trading services 2010 SIP in equity and ‘F&O @ FingerTips’ on ICICIdirect 2011 Life-time prepaid brokerage plans

2012 SPAN-based margin for F&O

2013 Inflation indexed NSC, investment advisory services & flexi cash facilities on ICICIdirect 2014 CIBIL TransUnion Score and the CIBIL report on ICICIdirect 2015 ‘Insta accounts’ facility, ‘Track and Act’ robo advisory platform and ‘bullet trade’ facility 2016 Equity advised portfolio services, portfolio X-ray report Investment in AIF, margin trading facility, funding of employee stock option schemes 2017 Factor based portfolios (developed by MSCI) Introduced ‘One Click Investment’ for investment in mutual funds on ICICIdirect T20 is digital acquisition engine post Aadhaar development 2018 eATM feature A mobile app for their business partners A new prepaid plan and a new Prime brokerage plan New pricing plan (Option 20) being piloted for Options SIP Protect 2019 ETF Intelligent portfolios (EIP) iCommunity Chatbot and WhatsApp - Provide 24/7 active customer assistance using artificial intelligence (AI) Launched own PMS

Source: Company, Elara Securities Research

16 Elara Securities (India) Private Limited ICICI Securities

Exhibit 34: The MOAT

No 1 equity franchise (based Over 95% equity on revenue for FY19) and 92% mutual fund No 1 bank- transactions backed broker in performed active NSE online clients

ECM market No 2 broker in share at 41% in active NSE FY19 from 30% clients in FY14

MF revenue market share at No 2 non-bank 4.5% in FY19 MF distributor from 2.9% in Financials Diversified FY14

Blended market No 1 in IPO share at 8.7% in league table by FY19 from 4.5% value in FY14 No 1 among domestic financial advisors (by deals, merger market league table)

Source: Company, Elara Securities research

Elara Securities (India) Private Limited 17 ICICI Securities

Beneficiary of consolidation trend Exhibit 37: PRIME launch in three categories PRIME Subscription Brokerage (bp) eATM (INR mn) A growing client base (2x over FY14-January 2020) and revenue pie (16% CAGR over FY14-19) are testament of 1 900 0.25 1 ISEC weathering the storm called discount broking, 2 4,500 19 2.5 which heightened since FY17. Although revenue did 3 9,000 15 10

take a beating at a 64% CAGR in average daily turnover Source: Company, Elara Securities Research (ADTO) vs revenue growth of 16% over FY14-19, Of 230,000 PRIME customers, 90% are currently in the although not all was because of pricing but also a shift to first category, as per management. While volume has derivatives and intraday trading. held up for 60% for M9FY20, broking revenue was down Different strokes 2% YoY, which we ascribe to the launch of PRIME at the start of FY20. We currently do not build in any material Recognizing the needs of new age customers and shift of customers to PRIME, and expect FY20E brokerage aggressive competition, Management led by Vijay revenue to settle at 2% YoY. Chandok has taken steps to bridge gaps in pricing and products. ISEC launched a separate membership plan Margin trade financing too has picked up with a QoQ called PRIME, where it has reduced the rack rates, jump in book to INR 11.0bn from INR 6.8bn in Q2FY20. although they are still higher than those of discount Management sees this is as a stable source of revenue. brokers. The steps have been well received with 5% of Given its strong balance sheet has the ability to grow this customer base shifting to PRIME, which has resulted in 4x at the current net worth of INR 10bn. increased activation rates. This has been clubbed with Tightening regulations positive for pricing product OPTION 20 where customers pay flat INR 20 per order in Options and only INR 5 per lot. As per the Despite the growing size of the broking industry, the company’s website ICICI Direct, on a 4 lot Nifty future regulator has not increased the minimum Networth contract i.e. 300 quantity, pay only INR 40 as brokerage requirement for trading and clearing membership (TM & for the entire order vs 380 earlier. CM) in capital market (CM) and futures and options (F&O) segment, which currently stands at INR 30 mn Exhibit 35: Market share trending up post PRIME and (Source: NSE). The Networth for the large brokers OPTION 20…. remains high and comfortable (ISEC has a Networth of 1.2 12 INR 10bn) and gives them an edge. The changing 1.0 regulations while do not directly increase the

0.8 requirement, but is pro large brokers as they have

(%) (mn)

0.6 10 stronger balance sheet.

0.4 Broking revenue CAGR of 12% over FY19-22E 9 0.2 We see tightening regulations working toward the

0.0 8

benefit of large brokers and increasing net worth 20

- requirement putting a floor to the price war. While a

FY14 FY15 FY16 FY17 FY18 FY19

Jan stricter implementation on margin funding will be Active clients Market share detrimental for the industry at large, other regulations to

reduce settlement frequency from quarterly currently Source: Company, Elara Securities Research and inability to use client assets post Karvy episode work Exhibit 36… as well as market volume share in favor of ISEC. We expect a 27% CAGR in market 10 volume over FY19-24E, with ISEC growing higher at 28% as we build in market share gains. We have been 8 conservative in our market share gains assumptions (%) which could be sharp due to reducing competition, but 6 keep them conservative, given uncertainty around margin funding. We expect a 12% CAGR in broking 4 revenue over FY20-22E on the back of a 20% CAGR in market volume and a slight dip in yield to account for the 2 impact of PRIME and OPTION20. FY14 FY15 FY16 FY17 FY18 FY19 9MFY20 Blended market share

Source: Company, Elara Securities Research

18 Elara Securities (India) Private Limited ICICI Securities

Amazon Prime of broking industry Exhibit 40: TER cuts impact to settle in FY20 ISEC historically has had a diversified revenue mix, with 3,000 ICICI Securities 1.4 distribution being an integral part at 23-26% of revenue. 2,500 1.2 1.0

This makes the business part offset cyclicality of the 2,000 (bp) 0.8

broking business. Management’s long-term objective 1,500

(INR bn) (INR 0.6 remains to have a 50:50 broking and non-broking share, 1,000 0.4 which currently stands at 57:43. 500 0.2

0 0.0

Exhibit 38: Distribution is an integral part of strategy

FY15 FY16 FY17 FY18 FY19 ICICI Securities FY14

100 9MFY20 Mutual fund revenue Commission (RHS)

75 Source: Company, Elara Securities Research

Exhibit 41: Increasing market share 50 (%) 5 ICICI Securities

25 4

0 3

FY14 FY15 FY16 FY17 FY18 FY19 9MFY20 (%) 2 Brokerage income Distribution income 1 Corporate finance Interest and other operating income 0 FY14 FY15 FY16 FY17 FY18 FY19

Source: Company, Elara Securities Research Financials Diversified MF distribution commission market share MF revenue to revive in FY21 The largest pie in the distribution piece is mutual fund Source: Company, Elara Securities Research distribution, where ISEC has an open architecture with Distribution CAGR of 12% over FY19-22E 2,500 +mutual fund schemes at the disposal of the client Being a one-stop shop, insurance also is part of the base. With an MF AUM CAGR at 24% over FY14-19, ISEC bouquet of services although unlike MF, the tie-up is only has seen its client MF post an AUM CAGR of 35% over with group companies on the life (LI) and general the same period, with market share in commissions up insurance fronts, while for health, it has tie ups with two from 2.3% in FY14 to 4.0% for FY19. The recent TER cuts standalone health insurers. Management is looking to go have dragged MF revenue down 3.0% for FY19, with the the open architecture route here too, which could be an full impact in M9FY20 down 24% YoY. We expect MF additional growth lever. Revenue for the LI business revenue to fall by 16% YoY for FY20E, with growth have been flat in M9FY20, due to subdued performance resuming over FY21-22. by ICICI Life Insurance with Annualized premium Exhibit 39: MF AUM CAGR at 35% over FY14-19 equivalent (APE) up just 1.2% for M9FY20. We see it improving once ICICI Prudential Life picks up steam. ICICI Securities 400 375 347 Exhibit 42: Slower growth by group companies…

302 10,000 300 ICICI securities 8,000

212 (INR bn) (INR 200 160 6,000

120 (INRmn) 100 76 4,000

2,000 0 FY14 FY15 FY16 FY17 FY18 FY19 9MFY20 0 FY14 FY15 FY16 FY17 FY18 FY19 9MFY20 Overall AUM

Life insurance premium Source: Company, Elara Securities Research Source: Company, Elara Securities Research

Elara Securities (India) Private Limited 19 ICICI Securities

Exhibit 43: … drags FY20 revenue Wealth management- The Dark Horse

800 ICICI Securities Long entrenched relationship are the back bone of wealth management, with ICICI securities boasting of > 600 65% of revenue contribution by customers who have been associated for more than 5 years. ISEC classifies its 400 (INR mn) (INR wealth clients as having Asset under Advice (AUA) of more than INR 10 Mn and currently stands at an 200 aggregate of INR 1 trn spread over 30,000 strong client base. Given limited disclosures, the potential from this pie 0 FY14 FY15 FY16 FY17 FY18 FY19 9MFY20 could range from 12% to 30% of revenue, and is a secular piece of the business. We see this piece gaining Life insurance revenue increased focus under the new management and could Source: Company, Elara Securities Research be a significant value driver. ISEC has other distribution products, including National

Pension Scheme (NPS), Alternative Investment Fund (AIF), portfolio management services (PMS) and fixed deposit (FD), which contribute 28% of distribution revenue.

We expect distribution income to bottom out in FY20 for the combined impact of TER cuts and slower growth by ICICI Prudential Life. We see distribution income at a

CAGR of 13% over FY20-22E.

20 Elara Securities (India) Private Limited ICICI Securities

The Dark Horse: ICICI Wealth Management

Exhibit 45: India’s savings shifting into financial Exhibit 46: 50% of India’s wealth managed by 9 assets firms

Savings distribution (USD bn) FY12 FY18 CAGR (%) Kotak Edelweiss 11% 5% Currency 15.2 67.6 28

IIFL Wealth Deposits 77.8 71.9 (1) 9% JM Financial Claims on government (3.2) 11.8 NA Others 2% 50% Insurance funds 28.2 47 9 ICICI Securities 5% Shares and debentures 2.4 21.7 44 Motilal Oswal Provident and pension funds 13.8 50.3 24 1% Axis Bank BNP Paribas 5% ICICI Bank Total 134.2 270.3 12 4% 8%

Source: RBI, Elara Securities Research Source: Company, Elara Securities Research

Exhibit 47: We estimate ICICI Securities conservatively draws 12% of revenue from wealth management AUM Revenue Revenue/AUM PAT RM Customers Mix of assets (%) (INR bn) (INR mn) (%) (INR mn) (Nos) (Nos) IIFL Wealth 1,789 8,986 0.50 3626 288 5,600 families 46% distribution and 64% advisory Edelweiss 1,112 NA NA NA 912 552,469 74% distribution and 26% advisory ICICI Securities 1,000 NA NA NA 1600 30,000 NA

JM Financial 468 1,390 0.3 NA NA NA NA Financials Diversified Motilal Oswal 189 1,003 0.6 63 134 NA 60 % equity in advised assets

Source: Company, Elara Securities Research

Exhibit 44: Wealth management an ~USD 1tn opportunity by FY25E FY19 FY25E 1.7x GDP USD 3.0tn USD 5tn

2.0x Stock of Wealth USD 10.0tn USD 20tn

Household USD 4.0tn 2.0x USD 8tn financial assets

Advised USD 0.3tn 3.3x USD 1tn Wealth

Source: Company, Elara Securities Research

Elara Securities (India) Private Limited 21 ICICI Securities

Capital market activity to look up Exhibit 50: … as corporates return to the market FY16-18 were the best years for investment banking 200 activity, with ISEC reporting INR 1.4bn in revenues for 157 160 FY18, at a CAGR of 31% over FY15-18. FY19 was hurt by the IL&FS crisis, which combined with the fall in 113 120 97

consumption reflecting in macro and GDP growth rate bn) (INR 87 76 74 plummeting to 4.5% for Q2FY20. 80 66

With GDP growth expected to have bottomed out and 40 corporate leverage and capex at the bottom, we expect 0 capital market activity to revive in the medium term. FY13 FY14 FY15 FY16 FY17 FY18 FY19 Additionally, the government’s INR 2tn divestment target ECM issuance count will be a key driver to revive capital market activities. ISEC remains the largest domestic financial advisor by revenue Source: Company, Elara Securities Research and a high share in public issuances will enable it to Exhibit 51… Enabling revival in capital market capture the above opportunity. revenues for ISEC

Exhibit 48: Corporate leverage and capex at the 1,600 1,440 bottom.. 1,198 1,200 50 16 991 14 834 40 12 800 666

(INRmn) 593 638

30 10 (%)

(%) 20 6 400 10 4 2 0

0 0

FY14 FY15 FY16 FY17 FY18 FY19 9MFY20

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY01 Corporate finance revenue Net debt/ Assets Source: SEBI, Elara Securities Research Total Debt/Assets Capex/Total assets (%) (RHS) Similar to China, there is an increasing trend of domestic Source: Bloomberg, Elara Securities Research investment bankers regaining prominence, and with few large domestic investment banks in India, ISEC, Kotak Exhibit 49: … should kick start deal activity

Mahindra, Axis Capital and JM Financial, have increased 2,000 1,899 their chances to ride the next wave of revival.

1,600 Exhibit 52: India could go the China way by strengthening the case for domestic bankers 1,200

(INR bn) (INR Share of investment banking revenue 800 643 547 579 536 569 100 337 400 75

0 50 FY13 FY14 FY15 FY16 FY17 FY18 FY19 (%) ECM issuance mobilized 25 Source: SEBI, Elara Securities research 0 FY14 FY19 China Foreign

Source: Financial Times, Elara Securities Research

22 Elara Securities (India) Private Limited ICICI Securities

We are conservative in our projections of overall revenue Exhibit 54: Revenue more sensitive to volumes CAGR of 12% over FY20-22E on the back of 12% CAGR (INR mn) Turnover in broking revenue and 13% for non-broking. We % (20) (10) 0 10 20 currently project a 20% CAGR in market volume over

(20) (38.2) (30.5) (21.0) (15.0) (6.5) FY20-22E vs 68% over FY17-19 and our expectations of further moderation in pricing due to adoption of PRIME (10) (30.5) (21.8) (11.1) (4.4) 5.1 and OPTION20. 0 (21.8) (12.0) 11,996 7.5 18.3

10 (15.0) (4.4) 8.6 16.8 28.5 Exhibit 53: Revenue CAGR of 12% over FY20-22E Brokerage(bp) 20 (6.5) 5.1 19.5 28.5 41.4 25 60 50 Source: Elara Securities Estimate 20

40 15 30

20 (%)

(INR bn) (INR 10 10 0 5 (10)

0 (20)

FY14 FY15 FY16 FY17 FY18 FY19

FY20E FY21E FY22E

Revenue Growth

Source: Company, Elara Securities Estimate Diversified Financials Diversified

Elara Securities (India) Private Limited 23 ICICI Securities

More room for operating efficiency Exhibit 57: More room for rationalizing network 198 198 192 188 Profitability of the capital markets businesses is volatile, 200 187 187 184 181 178 due to the cyclical nature of business, which coupled

160 with high cost, primarily employee cost makes it a highly 120 operating leverage play. For ISEC, PBT margin has been (nos) moving from the lows of FY14 to 44% for FY19 and it has 80

been maintained during M9FY20. This is a result of: 40

. Tight leash on other opex, up by a mere 3% CAGR 0

19 19

- -

over FY14-19, which is result of the strategic shift in -

Jul

Sep

Oct Jun

closing down branches. Management says direct Apr

Dec

Nov

May Aug cost toward branches is INR 96mn or 10% of FY19 Branches

overall cost, and, thus, has further scope for Source: Company, Elara Securities Research rationalization as it closes more branches Exhibit 58: Cost-income ratio falling to 50% by FY22E . Giving increasing use of digital as a platform, ISEC 90 82 has broadly maintained headcount, but wage 75 67 inflation has meant employee cost rising at a CAGR 63 63 56 56 60 54 54 50 of 11% over FY14-19. Management only looks to fill (%) vacancies which are crucial, else the headcount is 45 expected to rationalize further 30 . Management has a target to reduce cost-income 15

ratio further to 50% by FY22E, which we see possible 0

on the back of revival in revenue and a still

FY14 FY15 FY16 FY17 FY18 FY19

FY21E FY22E controlled headcount FY20E Cost/Income ratio Exhibit 55: Employee cost accounts for 62% of opex Source: Company, Elara Securities Estimate 100 Exhibit 59: Operating expense CAGR of 6% over 75 FY20-22E, after having fallen over FY19-20

120 20

(%) 100 15

25 80 10 (%)

60 0 (INRmn) 5 FY14 FY15 FY16 FY17 FY18 FY19 9MFY20 40 Employee benefits expenses Operating expenses 20 0 Other expenses

0 (5)

Source: Company, Elara Securities Research

FY14 FY15 FY16 FY17 FY18 FY19

FY21E FY22E Exhibit 56: Rationalization will continue FY20E Operating expenses Growth

5,000 Source: Company, Elara Securities Estimate 4,061 4,180 4,051 3,780 3,909 3955 4,000 3,653 Exhibit 60: High on operating leverage 9M 9M (%) FY14 FY15 FY16 FY17 FY18 FY19 (nos) 3,000 FY19 FY20 Investment & 54 44 37 49 42 52 59 5 2,000 trading Broking & 19 38 34 38 46 44 44 45 1,000 commission Advisory (6) 18 17 30 46 25 43 33 services 0 FY14 FY15 FY16 FY17 FY18 FY19 9MFY20 ISEC 18 37 33 37 46 44 44 44 Employees Source: Company, Elara Securities Research

Source: Company, Elara Securities Research

24 Elara Securities (India) Private Limited ICICI Securities

Room for secular growth  Big to get Bigger  Strong execution led by incumbent management  Initiate with Buy and a TP of INR 600 One-stop shop extensive internal assessment to bridge product gaps, further strengthen the core and plug excesses in cost. He We see merit in financialization of savings as a theme intends to transform the business into a one-stop shop and expect financial savings to post a CAGR of 11% over and convert to an Amazon PRIME of the broking industry. FY19-24E. With financial services being ever competitive The new launches via PRIME, and OPTION 20 is already and disruption from new entrants, we suggest playing visible in a 133,000 increase in active client share over the the leaders, as they have weathered the storm and stand past 10-11 months to 988,000 for January 2020, with tall with a strong balance sheet (ISEC net worth of INR blended volume market share also moving up from 8.1% 100bn which is more than combined net worth of 400 to 8.9% as on December 2019. Management looks to small brokers). adopt open architecture in distribution of life & general ISEC ticks off all the boxes, with leadership position insurance segments and acquire non-ICICI bank customers across clients, revenue & distribution and entrenched as well to broaden customer base. We see strategies with a strong brand, which instills trust. The organization playing out well with Chandok at the helm until FY24. has a lot of firsts to its credit and continues to innovate under the aegis of a new management, which we Initiate with Buy and a TP of INR 610 believe is of utmost important, given competition from We initiate coverage of ICICI Securities with a Buy rating fintech. Another advantage to ISEC would be continued and a TP of INR 610 based on abnormal earnings growth consolidation into larger brokers, with ISEC well model which implies a P/E of 26x. We see moat in the

positioned to capture the same and visible in the business, reflective in its wide distribution, brand name, Financials Diversified increasing market share. A diversified business model strong balance sheet and diversified revenue streams and expectation of further diversification bode well to coupled with strong execution. We expect growth to reduce cyclicality where we expect FY20 to be a bottom resume over FY21-22, with a revenue CAGR of 12% over for revenue growth and expect it to pick up to 12% FY20-22E, which with tight leash on opex would result in CAGR over FY20-22E, which clubbed with an 6% CAGR earnings CAGR of 21% over same period. High free cash in opex would result in an earnings CAGR at 21% over flow generation, with a steady payout of 60%+, strong FY20-22E. balance sheet and parent backing should provide additional comfort to shareholders. Big to get Bigger Exhibit 61: Earnings CAGR of 21% over FY20-22E We see changing regulations post regulatory lapses by 9 70 few brokers, working in favor of large brokers, as small 8 60 brokers will find it difficult to sustain incrementally. This 7 50 6 40 opens up 35% of market share gains for large brokers, 30 5 (%) along with under penetration in equities, acquisition via 20

4 open architecture (non-ICICI bank customers) provides (INRbn) 10 3 0 enough headroom for growth. Risks from the entry of 2 (10) another large firm such as Paytm remains, but after 1 (20)

0 (30)

having weathered the onslaught from the largest

FY17 FY18 FY19

discount broker with continued increase in market share FY16

FY20E FY21E FY22E is a testimony of the organization. A one- stop shop for PAT Growth all financial products from equities, to MF, insurance, PMS, AIF, NPS provides stickiness and is expected to Source: Company, Elara Securities Research provide delta to earnings and reduce cyclicality of Key risks to our call business. . We assume increasing regulation to provide a floor Strong management execution to pricing – revenue is highly sensitive to pricing with a 10% fall in price and volume impacting ISEC has been an innovator at its core. With the change in revenues by 21.8% management with Vijay Chandok joining as MD & CEO in May 2019, the company has further strengthened its . A stricter regulation on intraday margin would offerings. The incumbent management undertook an impact volume materially for the industry

Elara Securities (India) Private Limited 25 ICICI Securities

Company Description ICICI Securities (ISEC IN) is a subsidiary of ICICI Bank. The company was founded in May 1995 and continues to grow its operations by expanding its client base and providing varied services. ICICI Securities uses technology to offer financial services, including investment banking, institutional & retail broking, private wealth management, and financial product distribution. ISEC operates www.icicidirect.com and offers clients investments, protection & borrowing. Through its three lines of businesses — broking, distribution of financial products and investment banking — the company serves retail & institutional investors, corporate, high net worth individuals to the government. ISEC is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE)

Board of Directors & Management Vijay Chandok, MD & CEO Kedar Deshpande, EVP - Retail Distribution, Product & Services Group Vijay Chandok joined the ICICI Group in 1993. He has been a member of ICICI Securities Board since May 7, Kedar Deshpande has two decades of experience in the 2019. Prior to joining ICICI Securities, Mr Chandok served financial sector. He began his career with a market as Executive Director of ICICI Bank, responsible for the research company called ORG-MARG. In 2000, he joined international banking, small and medium enterprises ICICI which later became a part of ICICI Direct. He has (SME) businesses, global markets and commercial also worked in the Treasury middle office group of ICICI banking businesses. He also served as Director on the Bank. He moved to Edelweiss in 2007 to set up Edelweiss boards of ICICI Bank UK PLC and ICICI Bank Canada. He Broking; in 2011, he moved to Karvy Stock Broking. In has worked across corporate, retail & rural banking and 2013 and started his own venture, a finishing school for also served as Vice Chairman of ICICI Home Finance. He sales personnel, called “College of Sales”. Prior to joining is on the advisory committee of NSE & BSE. ICICI Securities, Mr Deshpande was heading Karvy Capital, which is a fund management company with PMS Ajay Saraf, Executive Director and AIF license, having products across equity, debt & Ajay Saraf is an Executive Director of ICICI Securities. He real estate markets. is a member of the Institute of Chartered Accountants of Anupam Guha, EVP - PWM & Equity Advisory Group India (ICAI) and Institute of Cost and Works Accountants

of India (ICWAI). He currently heads investment banking Anupam Guha is head of Private Wealth Management and institutional broking divisions at ICICI Securities. Mr (PWM) and Equity Advisory Group (EAG). He has been Saraf has 26 years of experience and has been associated with the ICICI Group for 20 years across retail, with the company for eight years. He previously worked institutional and international businesses, which includes with ICICI Bank for nine years in corporate and SME 15 years in the private banking business, both in India banking verticals. Prior to ICICI Bank, he worked with and overseas. He is one of the founding members of the American Express Bank. He has been a member of ICICI private wealth management business at ICICI Securities. Securities Board since May 25, 2011. Harvinder Jaspal, Chief Financial Officer Vishal Gulechha, EVP - Equity Product Group, Online Harvinder Jaspal has previously worked with ICICI Advisory Group & Channel Sales Prudential Life Insurance for 10 years in the finance and Vijay Gulechha heads equity business and has been accounts division. He has experience across expense instrumental in growing the brokerage business and its management, business planning & analysis, balance market leadership. He is a Chartered Accountant by score card, business MIS, investor relations, financial profession and has been in the capital markets space for accounting and reporting, treasury and investment 21 years. He conceived a number of path-breaking operations, financials controls, sales commercials and products, pricing and distribution initiatives, which has regulatory reporting as well as corporate helped ICICIDIRECT to attain market leadership and communications. Previously, he has worked with maintain its position for years. Hindustan Unilever. He has been associated with ICICI Securities since September 1, 2017.

26 Elara Securities (India) Private Limited ICICI Securities

Ketan Karkhanis, Head – Retail Sales, Active Trader Exhibit 62: Shareholding pattern as on December Service, Equity Relationship Services 2019

Ketan Karkhanis heads retail distribution, active trader Mutual Alternate services and equity relationship services. He is an Funds Investment 10.91% Funds industry veteran with 25 years’ experience in the capital 0.55% Foreign Portfolio markets. Mr Karkhanis has been associated with ICICI Investors Securities for 18 years handling responsibilities in 2.74%

Financial product, equity sales and third party product distribution. ICICI Bank Institutions 79.22% Prior to joining ICICI Securities, he has worked in / Banks organizations like ABN AMRO Asia Equities, MF Global 0.30% and Stock Holding Corporation. Qualified Non- Institutional Institutions Buyers 6.19% 0.09%

Source: Company, Elara Securities Research Diversified Financials Diversified

Elara Securities (India) Private Limited 27 ICICI Securities

Coverage History

550

500 1

450

400

350

300

250

200

150

100

19 19 19 19 19 19

19 19 19 19 19 19 19 19 19 19 20 20 20 20

19 19 19 19 19

19 19

------

- - - - -

- -

Jul Jul

Jan Jan

Sep Sep Sep

Oct Oct

Jun Jun

Apr Apr Apr

Feb Feb Feb

Mar Mar

Dec Dec

Nov Nov

May May

Aug Aug Not Covered Covered

Date Rating Target Price Closing Price 1 19-Feb-2020 Buy INR 610 INR 500

Guide to Research Rating

BUY Absolute Return >+20% ACCUMULATE Absolute Return +5% to +20% REDUCE Absolute Return -5% to +5% SELL Absolute Return < -5%

28 Elara Securities (India) Private Limited Elara Securities (India) Private Limited

Disclosures & Confidentiality for non U.S. Investors

The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara Securities (India) Private Limited or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Elara Securities (India) Private Limited or any of its affiliates have not independently verified all the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this information. Elara Securities (India) Private Limited or any of its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for or solicit investment banking or other business from any company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This Note is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Elara Securities (India) Private Limited or any of its affiliates to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This Information is subject to change without any prior notice. Elara Securities (India) Private Limited or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Elara Securities (India) Private Limited is under no obligation to update or keep the information current. Neither Elara Securities (India) Private Limited nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an indication that there has been no change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed to Elara Securities (India) Private Limited. It is important to note that any dispute with respect to this research report, would not have access to stock exchange investor redressal forum or arbitration mechanism. Research Markets Global

Elara Securities (India) Private Limited was incorporated in July 2007 as a subsidiary of Elara Capital (India) Private Limited.

Elara Securities (India) Private Limited is a SEBI registered Stock Broker in the Capital Market and Futures & Options Segments of National Stock Exchange of India Limited [NSE], in the Capital Market Segment of BSE Limited [BSE] and a Depository Participant registered with Central Depository Services (India) Limited [CDSL].

Elara Securities (India) Private Limited’s business, amongst other things, is to undertake all associated activities relating to its broking business.

The activities of Elara Securities (India) Private Limited were neither suspended nor has it defaulted with any stock exchange authority with whom it is registered in last five years. However, during the routine course of inspection and based on observations, the exchanges have issued advise letters or levied minor penalties on Elara Securities (India) Private Limited for minor operational deviations in certain cases. Elara Securities (India) Private Limited has not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has the certificate of registration been cancelled by SEBI at any point of time.

Elara Securities (India) Private Limited offers research services primarily to institutional investors and their employees, directors, fund managers, advisors who are registered or proposed to be registered.

Details of Associates of Elara Securities (India) Private Limited are available on group company website www.elaracapital.com

Elara Securities (India) Private Limited is maintaining arms-length relationship with its associate entities.

Research Analyst or his/her relative(s) may have financial interest in the subject company. Elara Securities (India) Private Limited does not have any financial interest in the subject company, whereas its associate entities may have financial interest. Research Analyst or his/her relative does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Elara Securities (India) Private Limited does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Associate entities of Elara Securities (India) Private Limited may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relative or Elara Securities (India) Private Limited or its associate entities does not have any other material conflict of interest at the time of publication of the Research Report.

Research Analyst or his/her relative(s) has not served as an officer, director or employee of the subject company.

Research analyst or Elara Securities (India) Private Limited have not received any compensation from the subject company in the past twelve months. Associate entities of Elara Securities (India) Private Limited may have received compensation from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities have not managed or co-managed public offering of securities for the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associates have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company or third party in connection with the Research Report in the past twelve months.

29 Elara Securities (India) Private Limited

Disclaimer for non U.S. Investors

The information contained in this note is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Disclosures for U.S. Investors

The research analyst did not receive compensation from ICICI Securities Limited.

Elara Capital Inc.’s affiliate did not manage an offering for ICICI Securities Limited.

Elara Capital Inc.’s affiliate did not receive compensation from ICICI Securities Limited in the last 12 months.

Elara Capital Inc.’s affiliate does not expect to receive compensation from ICICI Securities Limited in the next 3 months.

Disclaimer for U.S. Investors

This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it should not be relied upon as such.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These “forward-looking statements” are not guarantees of future performance and are based on numerous current assumptions that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these “forward-looking statements” and financial information.

30 Elara Securities (India) Private Limited Elara Securities (India) Private Limited

India Europe USA Asia / Pacific Elara Securities (India) Pvt. Ltd. Elara Capital Plc. Elara Securities Inc. Elara Capital (Asia) Pte.Ltd. Indiabulls Finance Centre, Tower 3, 6th Floor, The Grove, 950 Third Avenue, Suite 1 Raffles Place, #42-03 21st Floor, Senapati Bapat Marg, 248A Marylebone Road, 1903, New York, NY 10022, One Raffles Place Elphinstone Road (West) London, NW1 6JZ USA Singapore 048616 Mumbai – 400 013, India United Kingdom Tel: +1 212 430 5870 Tel : +65 6692 0174

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