INITIATING COVERAGE 25 SEP 2018

ICICI Securities

BUY INDUSTRY RETAIL BROKING Resilient in turbulent times! CMP (as on 24 Sep 2018) Rs 295 ICICI Securities (ISEC) is one of the strongest retail forecast a modest 8.7% CAGR in revenues over FY18- Target Price Rs 352 investing platforms for direct equities (9.2% vol. 21E. Nifty 10,967 market share). The company has retained its . We believe ISEC to be a strong franchise run by a Sensex 36,305 market leadership position despite intense and strong management team. While the near term is particularly challenging for the broking KEY STOCK DATA competition. ISEC has also built a strong financial products distribution business (26.2% of revenues). business we build in an overall FY18-21E Bloomberg ISEC IN Revenue/PAT CAGR of 7.3%/10.5%. RoCE for the We believe that ISEC will be a key beneficiary as No. of Shares (mn) 322 business is expected to moderate as the company financialization of savings grows. We initiate with a MCap (Rs bn) / ($ mn) 95/1,307 will need to put collateral (still very liquid!) at BUY rating and TP of Rs 352 (+19.1%). exchanges in order to enhance trading limits- we 6m avg traded value (Rs mn) - . Broking- RoCEs to decline: The Indian broking forecast an overall ROCE decline from 46.7% in FY18 STOCK PERFORMANCE (%) industry is in the midst of intense competition with to 29.4% in FY21E. Our TP for ISEC works out to Rs 52 Week high / low Rs 463/290 the entry of discount . Despite the amplified 352 (16x Sep 20E EPS). We believe a 16x multiple is 3M 6M 12M competition, ISEC has grown its market share to 9.2% justified given growth headroom available, market Absolute (%) (16.0) - - in 1QFY19 from ~4.4% in FY13. Compensated by leadership position, and successful diversification rising volumes, broking revenues grew at a FY13-18 into financial products distribution. Relative (%) (18.4) - - CAGR of 18.8% despite a 25.4% CAGR decline in . Key risks: Macro slowdown in household savings, SHAREHOLDING PATTERN (%) yields. Over FY18-21E we expect capital investments decline in broking volumes or yields, a higher than Promoters 79.2 in the form of collateral requirements at exchanges anticipated pick up in direct investing or further FIs & Local MFs 12.1 to grow at 13.3% CAGR while overall broking revenue changes in commission payment regulations for mutual funds or companies. FPIs 3.7 driven by margin funding to grow at a moderate 6.0% CAGR. Public & Others 5.0 ISEC: FINANCIAL SUMMARY . Distribution is relatively non-cyclical: Over time ISEC (Rs Mn) FY17 FY18 FY19E FY20E FY21E Source : BSE has transformed itself from being just a to a Revenues 13,429 17,824 19,014 20,251 21,992 distributor of financial products- 22.8% of revenues in Growth (%) 25.8 32.7 6.7 5.3 9.8 EBITDA 5,049 8,427 9,274 9,957 11,376 FY13 to 26.2% in FY18. Given the recent reduction in TERs of mutual funds, we expect overall growth in EBITDA margin (%) 37.6 47.3 48.8 49.7 51.7 Madhukar Ladha distribution revenues at 9.5% pa over FY18-21E to Rs Growth (%) 40.8 66.9 10.0 7.4 14.3 [email protected] 6.1bn and contribute 27.9% to total revenues. PAT 3,386 5,577 6,181 6,647 7,522 +91-22-6171-7323 PAT growth (%) 41.8 64.7 10.8 7.5 13.2 . Institutional advisory: ISEC has a strong IB practice EV/EBITDA (x) 19.3 11.8 10.4 10.1 8.8 Keshav Binani with FY18 revenues of Rs 1.4bn (FY13-18 CAGR of P/E (x) 28.1 17.1 15.4 14.3 12.7 [email protected] 15.3%). The company is one of the leaders in ECM RoE (%) 76.3 84.3 57.9 46.5 43.9 +91-22-6171-7325 while it is strengthening its advisory practice. We Source: Company, HDFC sec Inst Research estimates

HDFC securities Institutional Research is also available on Bloomberg HSLB & Thomson Reuters

ICICI SECURITIES : INITIATING COVERAGE

Contents Broking Industry: Size, Nature, Broker services, Market participants ...... 3 Type of brokers ...... 4 Broking volumes have moved towards F&O ...... 5 ICICI securities: Solid technology driven online financial savings platform ...... 6 Huge untapped client base of ICICI Bank despite having the highest number of active clients ...... 8 The opportunity: has huge headroom to grow ...... 11 Broking yields are challenged ...... 13 Rise in discount broking ...... 13 Market has become more speculative ...... 17 Strong presence in institutional segment ...... 18 Broking ...... 18 Margin funding book size to increase as volumes increases ...... 19 Distribution: ISEC to gain as Household financial savings grow ...... 20 India developing a financial investing culture: Insurance & MF flows to drive growth ...... 20 Systematic investment plan (SIP) has become a household name ...... 21 Mutual funds in India are still a “push” product and distributors make healthy commissions ...... 21 TERs are regulated: Changes in TERs impact earnings ...... 25 ICICIdirect is one of the leading platforms for distribution of MFs in India ...... 26 Other products ...... 27 Distribution business modeling assumptions ...... 28 Institutional Advisory business ...... 28 Financials ...... 29 Key risk ...... 37

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Broking Industry: Size, Nature, Broker services, Market participants According to CRISIL the industry . CRISIL Research estimates the size of the Indian Market segments: Rising retail participation has grown at a CAGR of 14% equity broking (including cash and derivatives) Institutional(%) Retail(%) Proprietary(%) between FY12 and FY18 and is industry to be Rs 140bn (+20% YoY) in FY17. 60 further expected to grow at According to CRISIL the industry has grown at a CAGR 51 49 50 46 48 46 16.5% from FY17 to FY22E to of 14% between FY12 and FY17 as a result of rising 44 reach Rs 300bn by FY22E trading turnover and increasing retail investor 40 40 42 42 participation. CRISIL also expects industry broking 37 37 30 36 revenues to grow at 16.5% from FY17 to FY22E to 20 17 17 reach Rs 300bn by FY22E. 14 12 11 11 . The broking industry is very fragmented in India with 10 Top 5 brokers account for ~19% the top 5 brokers accounting for ~19% of total of total revenues. revenues. 0

. Contribution from top 10 brokers has increased from FY13 FY14 FY15 FY16 FY17 FY18 24% of revenues in FY13 to 30% by Dec 2017. Source: NSE handbook, HDFC sec Inst Research

. Broking market has also seen a gradual rise in retail participation from 36% in FY14 to 44% in Dec 2017. Retail participation has . Brokers in India comprise bank owned brokers, increased from 36% in FY14 to traditional brokers and discount brokers. A brief 44% in Dec 2017. description and comparison of services provided by these categories is given below: Fragmented industry Broking industry revenues Top 5 Top 6-10 Top 11-25 Top 26-50 Remaining Industry Brokerage Revenue (Rs bn) 100% 350 300 300 80% 38% 36% 36% 33% 33% 32% 250 60% 17% 17% 17% 16% 18% 18% 200 40% 21% 22% 21% 150 140 22% 21% 20% 11% 10% 11% 100 20% 10% 11% 11% 72 14% 14% 15% 18% 18% 20% 50 0% -

2013 2014 2015 2016 2017 2018 2011-12 2016-17 2021-22E

Source: NSE handbook, HDFC sec Inst Research Source: Crisil estimates, HDFC sec Inst Research

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Type of brokers Broker type Brief description Trends Examples Have grown substantially over Largely three type of brokers: the years given captive bank led, legacy and discount Offer a wide range of services such as customer base and hold higher offline and online trading, demat revenue market share. ICICI Securities, HDFC Securities, brokers Bank led brokerages accounts, investment advisory and Kotak Securities etc. other customized services. Are now targeting wealth advisory services for the mass affluent population segment. In addition to services provided by Are developing distribution bank led brokerages, legacy broking Motilal Oswal, IIFL, Edelweiss, Legacy brokerages businesses and diversifying into firms also provide Geojit etc. lending businesses. advisory. Offer services at low and fixed Have grown and continue to brokerage fees, irrespective of size of grow at a rapid pace. order and provide such services via online platforms. has recently started to Discount brokerages provide research from Zerodha, 5PAISA, SAMCO etc. Typically do not provide any cost Thompson Reuters on intensive services such as physical subscription basis and has also offices, research reports and tied up with IDFC Bank for 3 in relationship managers. 1 accounts. Source: Broker websites, HDFC sec Inst Research

Broad comparison of brokers Broker type Bank Based Brokers Traditional brokers Discount Brokers Motilal Oswal, Angel Zerodha, 5 Paisa, Trade Key Players Kotak ,ICICI,HDFC Securities Broking, Smart Basis of comparison

3 in 1 ✔ ✕ ✕ Research/Advisory Services ✔ ✔ Limited Wealth management Services ✔ ✔ ✕ Call & Trade Services ✔ ✔ ✔ Franchisee based Model Limited ✔ ✕ Application for IPO ✔ ✔ ✕ Source: Broker websites, HDFC sec Inst Research

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Broking volumes have moved towards F&O.

. Indian equity markets have witnessed explosive . Further, within derivatives- option volumes have seen Yields are highest on delivery growth in total volumes, especially in the derivatives a spectacular jump. Option volumes have increased based volumes, falling cash segment. from 77.4% of total volumes in FY14 to 86.3% in delivery volumes has put FY19TD implying a CAGR of 44.1%. pressure on total blended yields. . Total ADTV (BSE + NSE) have grown at a FY14-FY19TD CAGR of 40.5%; within which cash market (BSE + NSE) . Increased share of derivative volumes with an even has grown at a FY14-FY19TD CAGR of 24.0% while increasing share in option volumes have meant a Growing option volumes have derivative volumes have grown at a FY14-FY19TD lower yields. Additionally, an even reduced share of further aggravated lower yields. CAGR of 41.4%. delivery volumes in the cash market have resulted in lower yields. . Within cash we can see a move towards lower non- delivery volumes- delivery volumes have come down to 28.1% in FY19TD vs. 31.8% in FY14.

Volume share Delivery volumes

Options Futures Cash Cash Turnover (in tn) Delivery (%) - RHS 7.7 6.6 6.4 6.7 6.0 4.8 3.8 90.0 40.0% 100% 80.0 32.3% 33.8% 35.0% 90% 11.8 9.8 31.8% 30.4% 16.1 15.4 16.7 15.4 80% 16.4 70.0 30.0% 30.7% 31.6% 70% 60.0 28.1% 25.0% 60% 50.0 20.0% 50% 40.0 40% 83.4 86.3 15.0% 75.9 77.4 78.3 76.6 78.6 30.0 30% 20.0 10.0% 20% 5.0% 10% 10.0 32.6 32.9 51.6 49.7 60.5 83.2 28.7 0% - 0.0% FY13 FY16 FY18 FY14 FY15 FY17 FY13 FY14 FY15 FY16 FY17 FY18 FY19YTD FY19YTD

Source: NSE, BSE, HDFC sec Inst Research Source: NSE, BSE, HDFC sec Inst Research

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Exchange volumes (Rs bn) FY14 FY15 FY16 FY17 FY18 FY19YTD Cash 133 212 201 244 338 337 Share (%) 6.6 6.4 6.7 6.0 4.8 3.8 Growth (%) 1.8 59.9 (5.2) 21.3 38.5 (0.4) Growth in option volumes is F&O 1,890 3,126 2,806 3,806 6,707 8,488 highest at 44.1% CAGR during Share (%) 93.4 93.6 93.3 94.0 95.2 96.2 Growth (%) 21.7 65.4 (10.3) 35.6 76.2 26.6 FY14-18. Futures 325 513 502 624 830 869

Share (%) 16.1 15.4 16.7 15.4 11.8 9.8 Growth (%) 17.6 57.9 (2.1) 24.2 33.0 4.7 Options 1,565 2,614 2,304 3,182 5,877 7,619 Share (%) 77.4 78.3 76.6 78.6 83.4 86.3 Growth (%) 22.6 67.0 (11.9) 38.1 84.7 29.6 Total 2,022 3,338 3,007 4,050 7,045 8,825 Growth (%) 20 65 (10) 35 74 25 Note: Numbers include proprietary trading turnover Source: NSE, BSE, HDFC sec Inst Research

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ICICI securities: Solid technology driven online financial savings platform

. ICICI securities’ brokerage business is anchored by its transactions are executed through call and trade. This deep retail customer base, to which the company has given the business immense scalability. ISEC provides 3-in-1 account offers electronic trading facility using its “3 in 1 thereby linking demat, trading account”. . ISEC is also a full service broker and provides clients and bank accounts. with retail research- coverage of 250+ stocks. . Through a single step login customers can access Additionally, ISEC also provides clients margin funding trading, demat and bank account to execute trades. or BTST order facility. . Over 95% of the transactions are customer initiated over the internet either through its icicidirect.com . For 1QFY19 ISEC boasts of an overall no. 1 position portal or its trading terminals and very few with a market share of 9.2% and ADTV of ~Rs 467bn.

Evolution of ICICI Securities ISEC also provides extensive Year Particulars research on Mutual Funds. 2000 Launched ICICIdirect 2001 Launched online mutual funds platform 2002 Launched derivatives, Direct Link and ‘Buy Today, Sell Tomorrow’ 2003 Launched GOI bonds on ICICIdirect

2006 Launched distribution of health and products

2008 Launched ‘On-the-move’, a website, Active Trader Services and distribution of online insurance products

2009 Launched online currency derivatives and private wealth management services ISEC active customer base has 2011 Launched life time prepaid brokerage plans, facility for filing income tax returns online, my ‘GTC’ (good till cancelled) grown at a CAGR of 12.5% 2012 Launched SPAN based margining for futures and options in the derivatives market, eLearn for stock market entrants, during FY14-18. 2014 Launched equity- linked debentures (structured products), facilities for auto renewal of SIPs, consolidated portfolio Announced the extension of our Future products with normal margin and stop loss margin for non-resident Indians 2017 Launched investment in AIFs on a private placement basis on ICICIdirect, margin trading facility, funding of employee Introduced ‘One Click Investment’ for investment in mutual funds on ICICIdirect Source: Company, HDFC s ec Inst R esearch

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Huge untapped client base of ICICI Bank despite having the highest number of active clients

Retail ready customers: Long headroom for growth . ISEC has the highest no of retail (trade ready) ISEC is still at just 9.6% of available customer base- 4.2mn; this compares to ~41.5mn parents customer base. I-Sec's operational accounts(in mn.)- LHS debit card holders of ICICI Bank- just 9.6%. This

I-Bank Debit card holders(in mn.)-LHS indicates that the company still has huge headroom

% - RHS for growth.

41.5 45 11.2 12 40 36.9 . ISEC also has the highest no of active clients (no. of 32.7 11 35 clients who have traded at least once over the last 27.6 30 11 one year)- 0.8mn. 25 22.3 9.8 9.8 10 20 10.1 9.6 . 15 10 ISEC has grown active client base at 12.5% CAGR over 10 FY14-18. 2.5 2.8 3.2 3.6 4.0 9 5 0 9 . The rise of Zerodha is also striking in the chart. ISEC has maintained leadership position in active customer base. 2014 2015 2016 2017 2018

Source: ICICI Bank presentations, ISEC presentations, HDFC sec Inst Research

Active customers- trend for top players. .Zerodha has seen a phenomenal ICICI SECURITIES LIMITED ZERODHA HDFC SECURITIES LTD. SHAREKHAN LTD. AXIS SECURITIES LIMITED PRIVATE LIMITED rise in active customers from KOTAK SECURITIES LTD. MOTILAL OSWAL SECURITIES LTD. KARVY STOCK BROKING LTD. 18,000 in FY14 to 675,000 as of LTD. SBI CAP SECURITIES LTD. 900 in '000 Jul18. 798 820 800 700 618 595 600 560 501 500 400 300 200 100 - FY14 FY15 FY16 FY17 FY18 Jul-18

Source: NSE handbook, HDFC sec Inst Research

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ADTV Comparison Rs bn ICICI Securities IIFL Kotak Securities Motilal Oswal Securities Angel broking 5Paisa 400 Geojit JM Financial 372 ISEC continues to be the market 350 leader, clocking volume growth of 71% CAGR during FY14-18. 300

250 187 200

150 Motilal Oswal, second best has 101 100 seen volumes rising at 44% CAGR 65 during FY14-18. 50 44

0 FY14 FY15 FY16 FY17 FY18

Source: Respective company investor presentation , HDFC sec Inst Research

Volume Market Share ICICI Securities IIFL Kotak Securities % 10.0 Motilal Oswal Securities Angel broking 5 Paisa Geojit Financial Services JM Financial 9.0 8.9 7.8 5Paisa, only listed discount 8.0 broker has achieved market 6.6 7.0 share of 1% as of 4QFY18. 6.0 5.0 4.5 4.7 4.0

3.0

2.0

1.0

- FY14 FY15 FY16 FY17 FY18

Source: Respective company investor presentation , HDFC sec Inst Research

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Internet trading volume trends Mobile trading statistics

Internet Trading Notional Value(bn) NSE Cash(%) NSE Derivatives(%) BSE Cash(%) Share in Overall Trading turnover (%) - RHS 4.0 3.5 25 35 3.5 I-Sec is pioneer in internet 29 3.0 trading, 95% of its volume 30 20 24 26 is originated on the web. 25 2.5 2.2 2.2 22 15 20 2.0 1.6 12 1.5 1.1 1.1 10 15 11 1.0 0.7 1.0 10 0.4 0.5 5 0.5 0.3 5 0.2 0.5 0.0 0.2 0

0 0 16 - FY13 FY15 FY16 FY14 Dec FY13 FY14 FY15 FY16 FY17 FY18

Source: NSE handbook,HDFC sec Inst Research Source: NSE handbook,HDFC sec Inst Research

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The opportunity: India has huge headroom to grow

. Like that of other Asian countries, the Indian . Despite this decline household investments in

economy continues to be savings driven with net financial assets have grown at 9.6% CAGR from FY12-

financial savings of the household sector in the range 18 as household savings in financial assets have Driven by household investments of 6.5-8.0% of gross national disposable income since increased from 31% to 42%. in financial assets- we expect FY12. financial savings to grow at . Over FY18-30E we expect a modest growth in FY18-30E CAGR of 9.7%. . As a percentage of GDP household savings have financial savings to continue at a CAGR of 9.7% pa. declined from ~24% in FY12 to ~20% in FY15 to ~16% . RBI data also indicates that households are in FY18. channelizing higher percentages of their savings to financial assets.

Macro Picture CAGR FY09 FY12 FY15 FY18 FY19E FY20E FY21E FY25E FY30E FY12-18 FY18-30E India nominal GDP 54,592 87,363 124,680 167,517 185,944 206,398 229,101 341,568 550,098 11.5% 10.4% current prices (Rs bn) Growth % 15.7% 11.0% 9.8% 11.0% 11.0% 11.0% 10.5% 10.0%

Household savings (as 24% 24% 20% 16% 16% 15% 15% 14% 13% % of GDP) Financial Savings as (% 43% 31% 36% 42% 40% 41% 43% 45% 48% of Household savings) Financial savings (Rs 5,634 6,500 8,977 11,257 11,677 13,032 14,876 21,519 34,326 9.6% 9.7% bn) Growth (%) -12.9% 11.0% 9.8% 3.7% 11.6% 14.1% 9.7% 9.8%

Source: World Bank, RBI

Financial Savings of the Household Sector (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18 Gross Financial Savings 10.4 10.5 10.4 9.9 10.8 9.1 11.1 Financial Liabilities 3.2 3.2 3.1 3 2.8 2.4 4 Net Financial Savings 7.2 7.3 7.3 6.9 8 6.7 7.1 Note: These are as a % of Gross National Disposable Income (GNDI) Source: CSO, RBI

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Break up of Gross Financial Savings (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18

Currency 1.2 1.1 0.9 1 1.4 -2 2.8 Deposits 6 6 5.8 4.8 4.6 6.3 2.9 Allocation of incremental Shares and Debentures 0.2 0.2 0.2 0.2 0.3 0.2 0.9 financial savings towards shares Claims on Government -0.2 -0.1 0.2 0 0.5 0.4 0 and debentures has increased in FY18. Insurance Funds 2.2 1.8 1.8 2.4 1.9 2.3 1.9 Provident & Pension Funds 1.1 1.5 1.5 1.5 2.1 2 2.1 Total 10.5 10.5 10.4 9.9 10.8 9.2 10.6 Note: These are as a % of Gross National Disposable Income (GNDI) Source: CSO, RBI

Total demat account base have Total demat accounts base . Total number of demat accounts in the country are increased at a CAGR of 8.73% CDSL NSDL only at 33.4mn in a total population of 1.2 bn. As during FY13-18. 20.0 Mn earnings levels improve this number can move up 17.6 18.0 17.1 substantially. 15.8 15.6 14.8 16.0 14.6 13.7 13.1

14.0 12.7 12.3

12.0 10.8 9.6

10.0 8.8 8.3 8.0 6.0 4.0 2.0 0.0

FY13 FY14 FY15 FY16 FY17 FY18

Aug18

Source: CDSL, NSDL, HDFC sec Inst Research

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Broking yields are challenged

Rise in discount broking

. The last few years have seen a dramatic rise in the . Discount brokers are willing to do business at Many brokerages have come up active customer base of discount brokers. As a substantially lower charges. We believe that this with a prepaid brokerage plan, percentage of active customers within the top 50 trend is likely to continue- accordingly we are where brokerage is paid up-front brokers we assess that that discount brokers have building in a FY18-21E 11.9% pa decline in yields. for significantly reduced broking taken as much as 17.8% of the incremental active Below is a broad comparison of rates amongst few charges. customers on a cumulative basis during FY14-FY18. brokerages.

Broking rate comparison Broker ICICI Securities Kotak Securities HDFC Securities Angel Broking Motilal Oswal 5Paisa Zerodha 0.05% for 0.06% for Intraday Intraday & 0.5% 0 for equity & 0.59% for 0.012% for 10 Rs Equity Intraday 0.5% for for Delivery - delivery & Rs Delivery - Reduces Intraday & Per Equity 0.12% & Delivery & 0.1% Reduces upto 20/executed We are building in a FY18-21E upto 0.01/0.1 if 0.4% for executed Delivery 0.75% for Intraday 0.015/0.15% if order or 0.01% 11.9% pa decline in broking brokerage paid Delivery order brokerage paid (intraday) upfront yields. upfront 0.05% of 0.049% - Reduces 0.05% - Reduces 10 Rs Rs 20/executed Turnover & Rs Equity upto 0.01% if 0.05% on 0.03% of upto 0.015% if Per order or 0.01% 50/lot for Futures brokerage paid Turnover Turnover brokerage paid executed whichever is second leg in upfront upfront order lower Intraday Rs 70/lot - Rs 95/lot & Rs Rs 100/lot - 10 Rs Rs 20/executed Reduces upto Rs Equity 50/lot for Reduces upto Rs Per order or 0.01% Rs 100/lot Rs 50/lot 30/lot if Options second leg in 30/lot if brokerage executed whichever is brokerage paid Intraday paid upfront order lower upfront 0.05% of 0.04% - Reduces 0.05% - Reduces 10 Rs Rs 20/executed Turnover & Rs Currency upto 0.01% if 0.03% of upto 0.015% if Per order or 0.01% 10/lot for Rs 23/lot Futures brokerage paid Turnover brokerage paid executed whichever is second leg in upfront upfront order lower Intraday Rs 25/lot & Rs Rs 20/lot - 10 Rs Rs 20/executed Currency 10/lot for Reduces upto Rs Per order or 0.01% Rs 20/lot Rs 15/lot Rs 20/lot Options second leg in 30/lot if brokerage executed whichever is intraday paid upfront order lower 0.05% - Reduces 0.05% - Reduces Rs 20/executed upto 0.01% if 0.03% of upto 0.015% if order or 0.01% Commodity NA NA NA brokerage paid Turnover brokerage paid whichever is upfront upfront lower Source: Respective broker web-sites, HDFC sec Inst Research Page | 13 ICICI SECURITIES : INITIATING COVERAGE

Account opening charges Kotak HDFC Broker ICICI Securities Angel Broking Motilal Oswal 5Paisa Zerodha Securities Securities Trading only NA NA NA NA NA NA Rs 300 Rs 975 for 3 in 1 Discount brokers are ready to Trading & Demat Rs.750 Rs 999 Rs 600 Free, but with Margin Cheque Rs.750 Rs 200 Account work at much lower yields. Commodity NA Rs 250 NA Rs 300 Free, but with Margin Cheque NA Rs 300

Source: Respective broker web-sites and HDFC sec Inst Research

Broking yields

ICICI Securities Kotak Securities Motilal Oswal Securities Geojit Financial Services 5Paisa 8.0 bps 7.2 7.0 6.1 6.0 5.4 5.6 5.1 5.0 4.5 4.8 4.0 4.0 3.9 3.5 3.3 Yields have fallen significantly 3.0 3.5 3.4 3.2 2.8 for the industry owing to change 3.1 2.7 in market structure and intense 2.0 2.7 competition from discount 1.7 brokers. 1.0 1.1 0.2 0.2 0.0 FY14 FY15 FY16 FY17 FY18

Source: Company investor presentation, HDFC sec Inst Research

. ISEC has managed to sustain and grow its market . While ISEC continues to maintain its volume market share despite declining yields. Compensated by rising share leadership rank at No.1 its revenue market volumes, broking revenues grew at a FY13-18 CAGR share has reduced. We are not too perturbed by the of 18.8% despite a 25.4% CAGR decline in yields. loss in revenue market share as we believe it is pertinent to stay competitive in this business and not to price oneself out of it. As market volumes have been on the rise revenues have trended up despite falling yields.

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Revenue market share for top 5 brokers

ICICI Securities Kotak Securities Motilal Oswal HDFC Securities India Infoline 7.0% I-sec continues to hold its top position in revenues despite 6.0% falling yields. 5.0% 5.1% 4.5% 4.0% 3.7%

3.0% 3.0%

2.5%

2.0%

ISEC revenue market share has 1.0% fallen from 6% in FY13 to 5.1% in FY14 FY15 FY16 FY17 FY18

FY18. Source: Respective broker web-sites, Angel broking DRHP, HDFC sec Inst Research

Broking Revenue for top 10 players (Rs bn) Broker FY14 FY15 FY16 FY17 FY18 ICICI Securities 5.0 7.6 6.6 7.8 10.2 Kotak Securities 3.4 5.9 5.7 7.4 9.1 Motilal Oswal 2.6 4.4 4.5 5.0 7.3 HDFC Securities 2.0 3.4 3.1 4.2 6.0 India Infoline 3.2 4.7 4.3 4.4 5.1 Angel Broking 2.6 3.3 3.1 3.6 4.8 Edelweiss Securities 1.3 1.8 1.6 2.0 2.3 Geojit 1.4 2.2 1.7 1.9 2.2 JM Financial 0.9 1.5 1.3 1.6 2.2 Axis Securities 0.5 1.1 1.2 1.6 2.0 Others 60 92 84 100 149 Total 83 128 117 140 200 Source: Respective broker web-sites, Angel broking DRHP, HDFC sec Inst Research

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. We believe rates offered by discount brokers don’t maximum) has made revenues of Rs 197mn and a have much scope of going lower. PBT loss of Rs 332mn. Calculated yields for the business are at 0.21bps. Broad income statement and . 5PAISA: For example 5PAISA (only listed discount financials are presented below:- broker and hence information disclosure is

5Paisa losses have grown 2x in 5PAISA Income Statement FY18. (Rs mn) FY16 FY17 FY18 Revenue from operations -12 75 197 Expenses:

Employee benefits expenses 22 82 193 Other expenses 25 141 321 Total expenses 47 223 514

EBITDA -59 -149 -317

Depreciation and amortization expense 0 3 7 EBIT -59 -151 -324 Finance costs 18 13 8 EBT -77 -164 -332 Total tax expense -22 -47 -79 PAT -55 -117 -253 Note: Revenue in FY16 is negative due to loss from trading in securities. Source: Company Annual Report, HDFC sec Inst Research

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5PAISA Balance Sheet (Rs mn) FY17 FY18 5Paisa is the discount broking SOURCES OF FUNDS arm of IIFL group. Share Capital 127 127 Reserves 755 502

Total Shareholders Funds 882 629

Other Financial Liabilities & Provisions 3 2 TOTAL SOURCES OF FUNDS 886 631 APPLICATION OF FUNDS

Total Non-current Assets 47 347 Total Current Assets 1,045 971 Creditors 5 21 Other Current Liabilities and Provisions 202 666

Total Current Liabilities 207 686

Net Current Assets 838 284

TOTAL APPLICATION OF FUNDS 886 631 Source: Company Annual Report, HDFC sec Inst Research

Zerodha: The market leading discount broker Zerodha (3)https://economictimes.indiatimes.com/small-

does not disclose its financials as it is structured as a biz/startups/features/the-lone-ranger-how-zerodha-

partnership. Media reports indicate that the company has stood-its-own-against--largest-stock- Media reports indicate that earned revenues of Rs 4.5bn with a PAT Rs 1.4bn in FY18. brokerages/articleshow/64215146.cms Zerodha has earned revenues of The company claims to have a volume market share of Rs 4.5bn with a PAT Rs 1.4bn in ~8-9%. According to media reports the firm is capitalized Market has become more speculative FY18. with over Rs 3bn. . As described in the broking industry section on page Refer: (1)https://zerodha.com/z-connect/zerodha/bulletin- nos 4 and 5, the market is moving towards non- latest-at-zerodha/we-are-now-the-3rd-largest-stock-broker-in- delivery based trading and derivatives; this india phenomenon also results in lower yields for the entire market. See as per rates on page 13 yields are (2) https://yourstory.com/2017/02/zerodha-3/ much lower for options and non-delivery cash volumes.

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Strong presence in institutional segment Aggregate Broking Revenues Broking revenues (Rs bn) Growth(%) - RHS . ISEC also has a strong presence in institutional 16 60.0 equities with coverage of ~230 stocks. Additionally it 14 51.6 50.0 ISEC institutional broking serves foreign institutional investors and has offices 12 40.0 revenues have grown at a CAGR in the US and . Revenues for this line of 10 30.0 business have grown at a CAGR of 33% over FY13-18.

8 33.4 20.0

of 33% during FY13-18. 9.7 12.4 4.8 6 3.6 10.0 Institutional broking revenues 17.8 11.5 4 - 0.0 Institutional (in mn) 1,200 2 -10.0 11.3 11.7 12.2 13.4 1,069 4.8 5.3 8.1 7.2 8.4 0 -20.0 1,000 FY13 FY14 FY15 FY16 FY17 FY18

740 FY19E FY20E FY21E 800 Source: Company financials, HDFC sec Inst Research estimates 527 537 600 400 339 254

200 With SEBI’s new circular, large ADTV and yields listed companies will be required 0 ADTV (Rs bn)- LHS Yield (bps)- RHS to raise at least 25 percent of 700 6 their long-term borrowings FY13 FY14 FY15 FY16 FY17 FY18 618 600 4.8 4.8 5 through corporate bonds 500 537 This may increase trading Source: Company financials, HDFC sec Inst Research 4.5 4 467 volumes in the bond market. 400 372 2.7 3 Broking 300 1.7 2 200 . We are building in volume growth CAGR of 18.4% 187 1.1 0.9 0.8 1 over FY18-21E vs. a decline in yields at a CAGR of 100 37 44 65 101 0.8 11.9% over FY18-21E. This results in a broking - 0 revenues increasing at a CAGR of 4.3% over the same FY13 FY14 FY15 FY16 FY17 FY18 period. This line of business is also return dilutive as FY19E FY20E FY21E in order to maintain this revenue line item the Source: Company investor presentation, HDFC sec Inst Research company will have to pledge FDs with exchanges. We estimates have assumed leined FDs to grow at FY18-21E CAGR of 13.3%.

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Margin funding book size to increase as volumes increases

. We forecast margin funding book to track ADTVs and exposure was about Rs 5.2bn in FY18 which we

the company to make an average 15% on this forecast will increase to Rs 8.2bn by FY21E implying a Going forward, we expect exposure. Average cost of funds for ISEC is ~9% CAGR of 16.6%. margin funding book to grow in leaving it with a ~6% spread. Average margin book commensurate with ADTV growth. Margin funding book and net interest income

9,000 Avg. loan book (Rs mn.) Net interest income (Rs mn.) 8,226 8,000 7,153 7,000 6,220

6,000 5,184

5,000

4,000 3,323 Margin lending book has grown 3,000 2,120 2,000 1,458 1,560 at 28.9% CAGR during FY13-18. 1,099 1,000 297 373 429 494 9 64 75 32 162 - FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Source: Company financials, HDFC sec Inst Research estimates

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Distribution: ISEC to gain as Household financial savings grow

India developing a financial investing culture: Insurance & MF flows to drive growth ISEC is the second largest non- . As India’s household savings largely get channelized Total Insurance Premium (Ind. + Group) bank mutual fund distributor. towards financial assets, mutual fund and life 9,000 Rs bn insurance intermediaries are set to gain further. 7900-8100 8,000 Mutual fund assets have grown at a CAGR of 22.6%

over FY14-FY18 while total insurance premiums have 7,000

grown at a CAGR of 9.8% from FY13-17. Despite this 6,000

growth both asset management and life insurance 5,000

remain under-penetrated at 4.0% and 2.7% of GDP 4,000 respectively. We expect AUMs for both these sectors 3,000 to grow considerably over the next decade. ISEC currently distributes 2,000 insurance products only for ICICI 1,000 Prudential and ICICI Lombard. -

FY13 FY14 FY15 FY16 FY17 FY18

FY19P FY20P FY21P FY22P

Source: Crisil Estimates, HDFC sec Inst Research

Equity Flows in MFs Debt Flows in MFs ISEC also sells loan products Net inflows MTM Closing AUM Net inflows MTM Closing AUM from ICICI bank, AIF, NPS and 12,000 in bn bond offerings. 10,098 in bn

9,219 14,000 10,000 12,000 11,349

12,000 10,747 8,000

6,283 10,000 7,829 7,243 6,000 8,000 6,941 4,255 3,715 4,000 6,000 2,608

2,056 4,000 2,132 1,635 1,070 958 938 850 2,000 809 512 786 720 366 633 328 558 281 2,000 226 222 330 429 (397) (113) (117) - - (527) (2,000) (2,000) FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 YTD19 YTD19

Source: AMFI, SEBI handbook of statistics, HDFC sec Inst Research Source: AMFI, SEBI handbook of statistics, HDFC sec Inst Research

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Systematic investment plan (SIP) has become a . Direct plans were introduced in January 2013. The household name basic idea behind the concept was to allow well- informed investors to buy direct plans of a scheme . The Association of Mutual funds of India (AMFI) has directly from the mutual fund - via online or through run a successful campaign encouraging retail SIP count for ISEC has increased authorized branches – thereby cutting out investors to invest in mutual funds using systematic by 70% YoY. distributors and saving on commissions. investment plans (SIPS). Partly as a result of this campaign and partly as a result of the push by asset . These savings for equity funds can at times be as high management companies and intermediaries, SIPs as 1.0-1.3% pa and can have serious compounded have become a household name with the no of SIP return differential over long periods of time. folios at 23.8mn as of Aug, 2018. Currently the . However, despite direct plans being offered to mutual fund industry is collecting Rs 76bn/month just in SIP inflows. I-sec’s SIP count stands at 1.1 million. customers since January 2013 this method of investing has made only a limited impact. SIP inflows . As of June 2018, direct accounts only for 15% (13%- in bn 76 76 80 71 73 T30, 2%- B30) of total individual equity AUM market 66 67 70 62 64 share. This augurs well for intermediaries. 56 59 60 52 55 47 49 Mutual Fund AAUM has also 50 43 46 increased 44% YOY. 40 30 Below is the distribution mix of Equity AUM for 20 these listed AMC’s as on June2018. 10 HDFC AMC - Direct 17 18 17 17 17 18 18 17 17 17 18 18 18 17 17 18 ------17.3%

Jul Jul Jan Jun Jun Oct Apr Apr Sep Feb Dec Aug Nov Mar May May IFA's 39.7% Source: AMFI, HDFC sec Inst Research Banks

18.5% Mutual funds in India are still a “push” product As per AMFI data, aggregate distribution commission payout and distributors make healthy commissions by the mutual funds industry has . Mutual funds in India are largely still a push product National as evidenced by the fact that only about 15% of Distributors increased at a FY14-18 CAGR of 24.5% 34.6% to Rs 85.3bn. equity AUMs are direct and not sold through distributors. Source: Company Investor presentation, HDFC sec Inst Research

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RNAM AMC Equity AUM Distribution Direct B30- Direct(%) B30- Distributors(%) 14.0% T30- Direct(%) T30- Distributors(%) ISEC has significant presence in 70 65 61 60 Tier-II and Tier-III cities. IFA's 60 42.1% 50 Banks 40 27.5% 30 25 25 20 20 National 11 12 13 10 Distributors 3 3 2 16.3% 0 Dec-17 Mar-18 Jun-18

Source: Company Investor presentation, HDFC sec Inst Research Source: AMFI,HDFC sec Inst research

. Retail individual money continues to flow in mutual . The asset management industry spends substantially funds and such flows are believed to more sticky. to garner AUMs. This is seen in the distribution revenues earned by the largest distributors in the

Flows from B-30 cities are country. believed to be stickier which in- turn provides consistency in Below is the distribution mix for Individual assets Top 10 MF Distributor commission distribution trail commission for the MF industry. Company (Rs bn.) FY14 FY15 FY16 FY17 FY18 received by ISEC. in (%) Dec-17 Mar-18 Jun-18 NJ India Invest 1.5 3.0 3.3 4.4 7.9 B30- Direct 3 3 2 HDFC Bank Ltd 1.6 3.3 2.6 4.0 6.4 B30- Distributors 25 25 20 State 0.3 0.7 0.7 1.8 5.6 T30- Direct 11 12 13 Ltd 0.9 3.0 1.4 2.5 5.4 T30- Distributors 61 60 65 ICICI Bank Ltd 1.2 2.5 1.7 2.8 4.7 Total Distributors 86 85 85 ICICI Securities Ltd 0.8 1.6 1.1 1.7 3.2 Total Direct 14 15 15 1.0 2.6 1.7 2.0 2.7 Source: AMFI, HDFC sec Inst research Citibank N.A. 1.8 2.3 1.4 1.9 2.5

Standard Chartered Bank 0.9 1.4 0.9 1.2 1.9 IIFL Wealth Management Ltd 1.3 2.9 1.4 1.6 1.8 Source: AMFI, HDFC sec Inst research

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Yield as % of AAUM comparison of top 10 MF distributors Distributor FY14 FY15 FY16 FY17 FY18 NJ India Invest 1.25 1.68 1.36 1.43 1.57 0.75 1.10 0.69 0.87 1.01 Yields are typically more for ICICI Bank Ltd 0.32 0.68 0.51 0.90 1.31 equity products. I-sec continues Axis Bank Ltd 0.99 2.09 0.70 0.70 1.17 to grow its AUM without taking ICICI Securities Ltd 0.98 1.35 0.71 1.00 1.23 a hit on its overall yields. Bank 0.93 1.30 0.70 0.85 1.06 HDFC Bank Ltd 0.54 1.07 0.57 0.73 0.68 Citibank N.A. 1.16 1.03 0.58 0.71 0.83 Kotak Mahindra Bank 0.93 1.19 0.65 0.85 1.05 IIFL Wealth Management Ltd 1.02 1.40 0.55 0.62 0.57 During FY14-18, ISEC has Average Yield 0.88 1.28 0.71 0.87 1.08 consistently maintained better Source: AMFI, HDFC sec Inst Research yields than the average yield of top 10 distributors. . I-sec has continued to maintain higher yield than the Direct is gaining prominence with offerings from average yield of top 10 distributors. Even on the AUM PayTM, Coin, Kuvera, Kotak securities and other front ICICI Bank and ICICI Securities combined aggregators. continue as leaders. I-sec is also the second largest . While direct plans have been offered since January non bank Mutual fund distributor. 2013 the marketing of these plans has just started to get aggressive. Several online aggregators such as Coin, Kuvera, PayTM etc. Additionally, registrar and transfer agents such as Cams and Karvy are also offering these services online.

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Average Expense Ratio Charged (Equity Diversified) Average Expense Ratio Charged (Equity Balanced)

Regular(%) Direct(%) Difference(%) Regular(%) Direct(%) Difference(%) 3.0 3.0 2.68 2.63 2.57 2.49 2.52 2.52 2.51 2.44 2.52 2.47 2.5 2.5 2.12 2.01 2.06 1.89 2.0 1.73 2.0 1.74 1.62 1.55 1.53 1.3 1.5 1.5 1.17 0.89 0.89 0.99 1.0 0.79 1.0 0.83 0.63 0.62 0.48 0.51 0.5 0.5 0.0 0.0 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Difference between TER of Source: RNAM DRHP, HDFC sec Inst Research Source: RNAM DRHP, HDFC sec Inst Research regular and direct plan is rising.

TERs: Direct vs. Regular AUM(Rs bn) Direct (%) Regular (%) Difference (%)

ICICI Prudential Bluechip Fund 198.4 1.11 2.13 1.02 ICICI Prudential Value Discovery Fund 173.3 1.21 2.19 0.98 SBI Blue Chip Fund 202.7 1.35 2.37 1.02 Aditya Birla Sun Life Equity Hybrid 95 Fund 148.4 1.14 2.17 1.03 Aditya Birla Sun Life Frontline Equity Fund 213.8 1.31 2.11 0.80 HDFC Balanced Advantage Fund 353.9 0.95 2.25 1.30 HDFC Equity Fund 156.7 1.13 1.98 0.85 Note: Above TER are as on 12th September 2018. Source: Respective AMCs TER disclosures, HDFC sec Inst Research

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Mutual Fund TERs are regulated: Changes in TERs impact earnings

SEBI regulates maximum expenses (TER- Total . Given the large reduction in the ability of AMCs to

expense ratio) chargeable by an AMC to different make payouts, we believe part of this TER reduction

schemes. will be passed on to distributors. Given that it is too ICICI direct has an excellent DIY th early to call out how much of the TER reduction will platform to research funds . On 18 September 2018 in a decision taken at its be passed on to distributors, we are building in about across various parameters as- Board meeting, SEBI has proposed a reduction in TERs a 20bps overall reduction in TERs for ISEC distributed performance, categorization, which AMCs charge to schemes. The reduction dents ability of AMCs to pay commissions to distributors, equity funds and an overall 10bps reduction in holding period, stars etc. commission for ISEC FY20E onwards. Overall we eg. the reduction in TER for an equity fund of ~Rs 200bn will be about 25bps. Currently even the model drop in MF distribution yields by 6.1% CAGR resulting in FY18 MF distribution revenues of Rs timeline of implementation of this policy change is 6.1bn. unclear.

It also provides its own rating on Proposed TER funds depending on various TER for other schemes(excl. Index, ETFs parameters. AUM Slab (Rs bn) TER for equity oriented schemes and Fund of Funds)

0-5 2.25% 2.00%

5-7.5 2.00% 1.75%

7.5-20 1.75% 1.50% 20-50 1.60% 1.35% 50-100 1.50% 1.25% 100-5000 TER reduction of .05% for every increase in AUM by TER reduction of .05% for every increase in Early implementation of the 50bn or part thereof AUM by 50bn or part thereof revised TER regulations can >5000 1.05% 0.80% negatively impact FY19 MF Note: Additional 30bps and 5bps can be charged as per regulation 52(6A)(b) and 52(6A)(c). Source: SEBI, HDFC sec Inst Research distribution revenues.

Equity AUM and corresponding reduction in TER Scheme AUM (Rs bn) Reduction in TER (bps) 100 17 200 25 300 31 400 36 500 41 Source: SEBI, HDFC sec Inst Research

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. Past instance of TER change: From April, 2018, SEBI . ISEC has earned Rs 2.84bn in mutual fund had changed TER regulations by allowing additional commissions in FY18. expense of upto 30bps to schemes collecting assets I-sec’s MF distribution revenue from B-30 towns (areas which are outside the top 30 ISEC revenue from distribution of towns). MF revenue (Rs mn.) MF AAUM (Rs bn.) - RHS insurance products fell from Rs 4,000 3,744 600 . Earlier this additional expense was allowed to be 3,500 3,246 3,322 713mn in FY17 to Rs 460mn in 500 charged for B-15 towns (towns outside the top 15 2,847 FY18 due to disallowance of 3,000 towns). Changes in regulations such as this one 484 400 marketing fees by IRDAI, which 2,500 421 results in downward pressures on commissions for ISEC would have otherwise 2,000 1,540 1,657 366 300 305 mutual fund distributors as fund houses re-negotiate 1,500 received from IPRU. 1,117 200 commissions and try and pass on these reductions to 789 1,000 595 212 distributors. 160 100 500 120 67 76 Icicidirect is one of the leading platforms for 0 0 distribution of MFs in India FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E . ICICI direct is an excellent DIY platform to research Source: Company Investor presentation, HDFC sec Inst Research funds across various parameters as- performance, We are building in a 15% CAGR categorization, holding period, stars etc. Investors . Life insurance distribution revenues impacted by for FY18-21E for life insurance can then invest online in schemes of their choice. commission payment regulations of IRDAI- Marketing distribution revenues. ISEC employs its own mutual fund research staff to fees has been disallowed by the regulator study and rank mutual funds. The company also allows investors portfolio analytic tools where . The second largest stream of income on the investors can better understand and track their distribution side is commission on sale of life investments. ISEC also has advisors which its insurance, from which the company has generated customers can approach for advise on avenues to income of Rs 460mn (-35.5% YoY). Decline in invest. ISEC has tied up with over 5400 sub-brokers, revenues was as a result of disallowance of marketing IFAs and IAs for mutual fund advisory and the fees by IRDAI, which ISEC would have received from company also earns commissions through them. Over IPRU. 90% of transactions are executed online via the . We believe that as sale of life insurance grows website. revenues from this line of business are set to improve. We are building in growth of 15% CAGR for FY18-21E.

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I-sec’s insurance distribution revenue Other products Insurance dist. Revenue (Rs mn.) Insurance Premium (Rs mn.) . Other products distributed by ISEC include PMS, AIF, Yield (%) - RHS IPO, general insurance, debt products etc. Total other 16,000 10.4% 12.0% 14,000 distribution income is Rs 1.4bn for FY18 (+21% YoY). 9.0% 8.6% 10.0% 12,000 8.3% 8.5% We are building a 7.6% CAGR for FY18-21E. 10,000 8.0%

8,000 5.1% 5.0% 5.0% 6.0% 6,000 5.0% 4.0% 4,000 2,000 371 371 465 586 713 460 520 598 687 2.0% 0 0.0% FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Source: Company Investor presentation, HDFC sec Inst Research

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Distribution business modeling Institutional Advisory business

assumptions . With revenues of Rs 1.4bn in FY18 (FY13-18 CAGR of 15.3%), ISEC has a sizable presence in the institutional . MF: We are forecasting an AUM growth CAGR of ISEC Continues to be among the investment banking business. The company is one of 16.6% pa over FY18-21E with a 6.1% pa decline in top-5 Indian players in advisory the leaders in ECM while it is strengthening its yields mainly as a result of the proposed change in business. advisory practice. Profitability of this segment is TERs by SEBI. This results in MF distribution revenues volatile as costs are high. In periods of high revenue CAGR of 9.6% pa with revenues reaching Rs 3.7bn by growth profitability shoots up- FY18 EBT margin of FY21E. 47.1% vs. FY14 EBT margin of -12.7%.

. Life insurance: We expect life insurance premium . SEBI in its board meeting recently has approved a

collection (new plus renewal) to grow at 15% pa and revised borrowing format for large listed companies.

yields to remain constant at ~5.0%. This results in life Such Companies will soon be required to raise at least

insurance distribution revenues growing at 14.3% pa 25 percent of their long-term borrowings through

to Rs 687mn by FY21E. corporate bonds. This is expected to increase total Strengthening relationship with DCM issuance and is expected to support growth in private equity funds and advice . Others: We are building in a 7.6% FY18-21E CAGR in this business vertical. on promoter financing. other distribution revenues.

Institutional Advisory operational performance Revenue(in mn.)-LHS EBT(in mn.)-LHS Investment banking business has EBT Margins(%)-RHS seen sharp rise in EBT margins 1,600 60.0% with rise in revenues. Margins 1,400 50.0% have improved from 16.9% in 1,200 40.0% 1,000 FY16 to 47.1% in FY18. 30.0% 800 20.0% 600 10.0% 400 200 0.0% - -10.0% (200) -20.0% FY13 FY14 FY15 FY16 FY17 FY18

Source: Company financials , HDFC sec Inst Research

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Financials

Kotak Sec has the highest . ISEC’s cost structure substantially higher than . This results in substantially higher operating leverage revenue per active client- competition as a result operating leverage is high. for ISEC and swings in revenues will have a deeper Rs24.5K; this may be result of impact on the profitability of the company. higher contribution from . Absolute total costs for ISEC are substantially higher institutional business than that for other brokerages. For example ISEC’s . According to ISEC management about 70% of total total employee costs and total expenses for FY18 are costs are fixed. about 3.8x that of HDFC Securities. ISEC has reduced its cost per Broker Financials active client significantly, but is ICICI Securities Kotak Securities HDFC Securities Axis Securities Rs mn still substantially higher than FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 that of HDFC sec. Revenue 11,226 14,029 18,593 8,104 11,921 16,076 3,939 5,396 7,693 5,514 7,475 9,406 Expenses 7,112 8,392 9,397 6,050 6,988 8,186 1,874 2,093 2,490 4,983 6,670 8,415 Employee cost 3,924 4,736 5,453 2,563 2,737 3,194 1,055 1,222 1,437 4,373 5,951 7,615 With increased revenues and Other expenses 3,188 3,656 3,944 3,487 4,251 4,991 819 871 1,052 610 718 800 high operating leverage margins EBITDA 4,114 5,637 9,197 2,054 4,934 7,891 2,066 3,303 5,203 531 805 991 for ISEC have improved EBITDA % 37% 40% 49% 25% 41% 49% 52% 61% 68% 10% 11% 11% substantially. Depreciation 159 155 153 200 222 234 123 144 151 82 100 123 EBIT 3,955 5,483 9,044 1,854 4,711 7,657 1,943 3,158 5,052 450 705 868 Interest cost 254 283 495 264 527 1,063 - - 0 6 5 38 ISEC has the best RoE at 84.6% Other income 9 10 - 2,220 1,248 1,365 76 136 190 104 87 99 for FY18. PBT 3,710 5,210 8,549 3,811 5,433 7,960 2,019 3,294 5,242 549 786 929 Tax 1,353 1,834 2,971 1,303 1,820 2,650 686 1,136 1,797 192 271 325 PAT 2,357 3,376 5,577 2,508 3,613 5,310 1,333 2,158 3,444 357 515 604

Equity employed 3,942 4,851 8,342 26,347 29,959 35,269 6,660 8,074 10,007 1,971 2,273 2,642 RoE (%) 63.2 76.8 84.6 10.0 12.8 16.3 21.6 29.3 38.1 19.0 24.3 24.6

Active clients 560,438 618,359 798,355 246,945 273,895 368,638 408,059 483,244 602,493 184,325 259,006 404,769 Broking Revenue per 11,784 12,543 12,830 23,160 27,105 24,560 7,636 8,713 9,893 5,738 5,600 4,214 active client (Rs)

Cost per active client (Rs) 12,690 13,571 11,770 24,497 25,512 22,205 4,592 4,331 4,132 27,034 25,752 20,789 Source: Respective company annual reports, HDFC sec Inst Research

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Angel Broking Geojit 5Paisa Rs mn Driven by favorable market FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 conditions Angel and Geojit have Revenue 4,474 5,369 7,648 2,588 2,854 3,443 (12) 75 197 both reported healthy numbers. Expenses 3,617 4,370 5,165 1,960 1,995 2,378 47 223 514 Employee cost 1,055 1,249 1,245 926 965 1,112 22 82 193 Other expenses 2,561 3,121 3,920 1,034 1,030 1,266 25 141 321 EBITDA 857 1,000 2,483 628 858 1,065 (59) (149) (317) EBITDA % 19% 19% 32% 24% 30% 31% -483% -199% -162%

Depreciation 130 135 145 130 142 143 0 3 7

EBIT 727 864 2,338 498 717 923 (59) (151) (324)

Interest cost 357 539 947 8 6 7 18 13 8 Total expenses per active Other income 149 154 196 132 204 237 - - - customer suggest lower PBT 519 479 1,587 622 914 1,152 (77) (164) (332) expenses for discount brokers. Tax 202 169 508 179 302 376 (22) (47) (79) PAT 317 310 1,079 442 613 776 (55) (117) (253)

Equity employed 3,693 3,894 4,749 4,900 5,120 5,574 121 882 629 RoE (%) 8.9 8.2 25.0 7.8 11.2 13.7 (45.3) (23.3) (33.5)

Active clients 170,808 230,194 363,663 177,397 160,317 183,466 NA 3,652 36,034 Broking Revenue per 18,392 15,613 13,157 9,487 11,541 12,189 NA 4,521 4,199 active client (Rs) Cost per active client (Rs) 21,173 18,982 14,202 11,049 12,444 12,959 NA 61,114 14,264 Source: Respective company annual reports, HDFC sec Inst Research

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Margins to stay stable over FY18-21E but return Return ratios ratios set to decline as core capital employed Core ROCE (%) - RHS ROCE (%) - RHS RoE (%) - RHS increases 90.0 84.3 76.3 . Given a challenged yield environment we forecast 80.0 Capital employed will continue overall revenues to grow at a relatively muted CAGR 70.0 63.6 to rise as more FDs will be of 7.3% over FY18-21E to Rs 22.0bn. 60.0 56.5 57.9 53.7 required to be placed with 50.6 . Costs are expected to grow at FY18-21E CAGR of 4.2% 50.0 46.5 exchange to fuel rise in trading resulting in overall EBITDA of Rs 11.4bn by FY21E. 44.5 43.9 40.0 46.1 46.7 36.5 volumes. . We expect EBITDA margins to remain stable in FY19E 42.1 32.7 and FY20E but to eventually come in at 51.7% in 30.0 35.5 30.6 29.4 FY21E. 20.0 . Finally, we expect a net income CAGR of 10.5% to Rs FY16 FY17 FY18 7.5bn by FY21E. FY19E FY20E FY21E . While revenues and PAT are expected to grow at a Source: Company financials ,HDFC sec Inst Research estimates CAGR of 7.3/10.5%, core capital employed in the business will grow at a much higher pace as the company will need still need to pledge fixed deposits

with exchanges for trading limits.

. This will result in a lowering of return ratios- we expect core RoIC of the business to reduce from Liened Margin FDs are liquid in 53.7% in FY18 to 32.7% in FY21E. The saving grace is nature and can be liquidated in that this capital is cash and can be liquidated case trading volumes fall. whenever trading volumes decline. However one must note that the capital required to run this business is increasing considerably. Operational performance Return ratios Revenues EBITDA Core Capital Employed Capital Employed Net income EBITDA margin % - RHS Net income margin % - RHS Total Shareholders Funds Core ROCE (%) - RHS Rs mn ROCE (%) - RHS RoE (%) - RHS 25,000 60.0 30.0 90.0 50.0 80.0 20,000 25.0 40.0 70.0 15,000 20.0 60.0 30.0 50.0 10,000 15.0 20.0 40.0 10.0 30.0 5,000 10.0 20.0 5.0 0 0.0 10.0 0.0 0.0 FY16 FY17 FY18 FY19E FY20E FY21E

FY16 FY17 FY18 FY19E FY20E FY21E

Source: Company financials ,HDFC sec Inst Research estimates Source: Company financials ,HDFC sec Inst Research estimates

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ISEC has been able to de-risk business . Operating revenues including interest income on substantially by adding more secular revenue leined FDs but excluding broking income has streams gradually inched up from 45% in FY14 to 77.5% in FY18. We expect this number to further go up to Distribution business as % of . Over time ISEC has been able to de-risk its business 92.9% by FY21E total revenue has increased from by adding revenues from distribution of financial 23% in FY13 to 26% in FY18. products to its topline. Broking (ex. liened FD interest Lower dependence on broking income) was 59.1% in FY18 down from 63.7% in FY14. Operating revenues ex. broking % of total cost - RHS 12.0 Rs mn 92.9 100.0 We expect broking (ex. liened FD interest income) it 85.8 88.9 77.5 90.0 to go down further to 55.1% by FY21E. 10.0 80.0 65.7 8.0 56.9 70.0 . As a percentage of total costs broking revenues (ex. 53.9 60.0 45.0 interest on liened FDs) were 79.2% in FY14, 112.2% in 6.0 50.0 Growth in distribution business 40.0 FY18 to 114.2% in FY21E. 4.0 30.0 has outpaced the growth in 2.0 20.0 broking business during FY13-18. Broking income analysis 10.0 Broking income ex. Interest on liended FDs(Rs mn) 0.0 0.0 % of total income - RHS FY14 FY15 FY16 FY17 FY18 % of total cost - RHS 110 FY19E FY20E FY21E 14.0 112 109 114 120.0 107 Source: Company financials, HDFC sec Inst Research estimates 12.0 94 95 100.0 10.0 79 80.0 Rise of ex-broking revenues 8.0 67 62 59 59 56 55 60.0 reduces risk of cyclicality as 6.0 64 55 40.0 other operating revenues now 4.0 cover 77.5% of total cost and we 2.0 20.0 expect to increase it to 93.5% by 0.0 0.0 FY21E. FY14 FY15 FY16 FY17 FY18

FY19E FY20E FY21E

Source: Company financials, HDFC sec Inst Research estimates

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ISEC has been able to control costs in years of revenue decline . Historically the company has been able to control by 0.5% YoY ensuring EBITDA decline was restricted costs in period of revenue declines. to 6.5% YoY. ISEC has been able to curtail its expenses in years of downturn, . This can be seen in FY13 when revenues declined . Again in FY16 revenues declined by 6.9% YoY, in FY13 operating exp fell from 1.1% YoY the company controlled costs by reducing however total costs also declined by 0.5% YoY and Rs 1112mn to Rs 750mn. operating expenses. Total expenses were higher just EBITDA declined by 17.4% YoY.

Operational performance FY12 FY13 FY14 FY15 FY16

Operating revenues 7,182 7,101 7,882 11,467 10,672 Expenses:

Employee benefits expenses 2,651 2,883 3,346 3,921 4,014 Operating expenses 1,112 750 1,010 1,045 1,015 Other expenses 1,731 1,891 1,988 2,158 2,058 Total expenses 5,495 5,524 6,344 7,124 7,087 EBITDA 1,687 1,577 1,538 4,343 3,586

Growth %

Revenues -1.1 11.0 45.5 -6.9

Employee benefits expenses 8.7 16.1 17.2 2.4

Operating expenses -32.6 34.7 3.5 -2.9

Other expenses 9.3 5.1 8.6 -4.6

Total expenses 0.5 14.8 12.3 -0.5

EBITDA -6.5 -2.5 182.4 -17.4

Source: Company financials, HDFC sec Inst Research

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Sensitivities to broking volumes and yields . Earnings for the business are most sensitive to volumes/yields to impact earnings by 4.3%/5.5% to broking volumes and yields. We estimate +5% FY20E EPS. Below is the sensitivity table:

ISEC topline will be affected by ADTV growth and total blended FY20E EPS sensitivity table ADTV change (%) yield change. 0% 5% 10% 15% 20%

-25% 15.0 15.8 16.5 17.2 18.0

-20% 16.0 16.8 17.6 18.4 19.1 -15% 17.0 17.8 18.7 19.5 20.3 -10% 18.0 18.9 19.8 20.6 21.5 -5% 19.0 19.9 20.8 21.8 22.7

(%) change Yield 0% 20.0 20.9 21.9 22.9 23.9 5% 21.0 22.0 23.0 24.0 25.1 Source: Company financials, HDFC sec Inst Research

Valuation discussion and comps

ISEC is the leading platform in the retail savings space . We like ISEC’s performance in the face of heightened with ~9.2% market share in direct equities and a mutual industry competition: funds distributor AuM of Rs 305bn. Given its leadership ISEC has a 9.2% (1QFY19) market share in direct position and strong headroom available for growth we o ISEC has been able to grow equities which it has grown from 4.4% in FY13. active customers and total value the company at 16x Sep 20E EPS of Rs 22.0 setting a ISEC also has a 4.6% market share (on the basis of operationally ready customers at target price of Rs 352 (+19.1%). o 12.5% CAGR over FY14-18. folios) in mutual funds SIPs. We are comfortable with a 16x multiple given: o ISEC has been able to grow active customers and . Strong growth potential: total operationally ready customers at 12.5% o We estimate that household savings inflow into CAGR over FY14-18 despite intense price financial savings is set to grow at CAGR of 9.7% competition in the industry. over FY18-30E. o Despite significantly lower yields broking o Number of Individual investors to direct equities revenues have grown FY13-18 CAGR of 18.8%. is still low considering that the total no of demat o ISEC has been able to grow its relatively less accounts in India is just at 33.4mn. cyclical revenue streams i.e. distribution o Mutual fund penetration is still just 4.0% revenues from Rs 1.6bn/23% of total revenues in FY13 to Rs 4.6bn/26% in FY18; thereby reducing volatility in the business.

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o RoE’s for FY18 at 84.3% will go down to 43.9% by These factors make us confident of assigning a 16x FY21E; although capital requirements are set to multiple. We believe long term investors should make increase, the capital consumed in this business is handsome returns from here on as yields stabilize. fairly liquid.

Comps Price Mkt Cap. EPS P/E ROE Company FY End (LC) (US$ mn) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E India

Edelweiss Financial Services Mar 216 2,772 13.0 16.5 21.6 16.6 13.1 10.0 16.6 18.3 19.8 ICICI Securities Mar 296 1,313 19.2 20.6 23.4 15.4 14.3 12.7 57.9 46.5 43.9 IIFL Holdings Ltd Mar 555 2,439 35.3 41.2 50.0 15.7 13.5 11.1 19.3 19.1 19.9 JM Financial Ltd Mar 99 1,145 8.8 10.7 12.7 11.2 9.2 7.8 17.7 18.3 17.3 Motilal Oswal Financial Services Mar 730 1,460 39.5 42.8 51.4 18.5 17.1 14.2 23.0 20.9 21.1 Geojit Financial Services Mar 53 175 3.1 4.2 NA 17.2 12.7 NA 12.4 15.3 NA Average 16.0 13.4 11.3 17.8 18.4 19.5

Median 16.6 13.3 11.1 17.7 18.3 19.8

Source: Bloomberg, HDFC sec Inst Research

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Management Shareholding pattern

. Chairperson and nominee director- Chanda Kochhar . ICICI bank holds ~79.2% stake as the promoter of Promoter holding stands at is the Chairperson and Nominee Director of ICICI ISEC. Mutual funds own about 10.7% while other 79.2%. Bank. She has been the MD and CEO of ICICI Bank non-institutional shareholders own ~5%. since 2009. Shareholding pattern . MD & CEO- Shilpa Kumar is the MD and CEO of our Financial Others ISEC since November 3, 2016. She has previously institutions FPIs 5.0 worked with ICICI Bank for over 27 years in the areas 0.3 3.7 of planning, project finance, corporate banking and treasury at ICICI Bank. She holds a post graduate AIFs diploma in management from Indian Institute of 1.1 Management Calcutta. Mutual . funds Executive director- Ajay Saraf is the ED at ISEC. He 10.7 currently heads the investment banking and institutional broking divisions at ISEC. He has over 24 ICICI Bank years of experience and has been associated with 79.2 ISEC for over six years. He has previously worked with ICICI Bank for approximately nine years in corporate banking, and Small and Medium Enterprises banking Source: NSE, HDFC sec Inst Research verticals. Top 10 Institutional shareholders Holder Stake (%) . CFO- Harvinder Jaspal is the CFO at ISEC. He joined ICICI Prudential Asset Management Co Ltd. 2.39 ISEC on 1st September, 2017 and was previously IDFC Mutual Fund 1.45 working with ICICI Prudential Life Insurance Company Limited for approximately 10 years in the finance and Artisan Partners LP 1.00 accounts function. L&T Mutual Fund 1.00 HDFC Asset Management Co Ltd 0.97

Reliance Capital Trustee Co Ltd 0.96 Sundaram Asset Management Co Ltd 0.81 Aditya Birla Sunlife Asset Management 0.63 DSP Investement Managers Pvt Ltd 0.48 SBI Funds Management Pvt Ltd 0.44 Source: Bloomberg, HDFC sec Inst Research

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Key risk Broking- Competition and cycles accelerated adoption of direct will have a negative ISEC operates on a high cost impact earnings impact on distribution income. Lastly flows into base resulting in higher savings products such as mutual funds and life operating leverage. . The broking industry is currently facing significant insurance are cyclical, thus a downcycle may result in pressures on account of increased competition from redemptions/surrenders of old investments and discount brokers. While the capital market cycle over slowdown in additional investments impacting the last few years has been positive and volumes commissions for distributors. Also after the recent have compensated for declining yields, a reversal of reduction in TERs by SEBI, AMCs will pass on such investments into financial assets will have a reduction to distributors by decreasing the significantly negative impact on both asset prices and commission payouts. This will negatively impact MF trading volumes, which in-turn will significantly distribution revenues and will lead to fall in yields. impair broking revenues and earnings. The extent of pass on by AMCs will be the key risk Accelerated adoption of direct and will have to be monitored going forward. MF investment platforms by Distribution- Investors moving direct, reduction High fixed costs are a double edged sword investors continues to be a in commission payouts due to decrease in TERs threat. . Direct investing is gaining market share; additionally . As discussed previously ISEC operates on a high cost several platforms are now offering direct investing to base resulting in higher operating leverage. In good customers. We believe that over the long term direct times this would mean high earnings but in bad times will increasingly take more market share and thus any earnings would also get significantly dented.

We have factored in a 6% CAGR fall in MF distribution yield during FY 18-21E.

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Assumptions Particulars FY17 FY18 FY19E FY20E FY21E Broking income ISEC ADTV growth has outperformed market ADTV Broking Revenues 7,759 10,243 10,287 10,647 11,631 growth during FY13-18. Growth (%) 17.4 32.0 0.4 3.5 9.3 I-sec ADTO 187 372 467 537 618 Growth (%) 85.6 98.6 25.5 15.0 15.0 Total market ADTO (ex-prop) 2,413 4,184 5,021 5,774 6,641 Calculated market share 7.8% 8.9% 9.3% 9.3% 9.3% Yield (bps) 1.67 1.11 0.89 0.80 0.76

Growth (%) (37.0) (33.5) (20.0) (10.0) (5.0)

NII on margin funding book 162 297 373 429 494 Avg. loan book (Rs mn.) 3,323 5,184 6,220 7,153 8,226 Growth (%) 113.0 56.0 20.0 15.0 15.0

Interest on liened FD 524 729 1,016 1,157 1,296 Interest on FDs 7.5% 7.5% 8.0% 8.0% 8.0% Lien with exchanges 7,668 11,759 13,641 15,277 17,111 Growth (%) 21.5 53.4 16.0 12.0 12.0

Distribution MF AAUM (Rs bn.) - RHS 212 305 366 421 484 Growth (%) 32.5 43.9 20.0 15.0 15.0 Yield (%) 0.78% 0.93% 0.89% 0.79% 0.77% MF revenue (Rs mn.) 1,657 2,847 3,246 3,322 3,744 Growth (%) 48.3 71.8 14.0 2.3 12.7

Insurance Premium (Rs mn.) 8,390 9,038 10,394 11,953 13,746 Growth (%) 23.1 7.7 15.0 15.0 15.0 Yield (%) - RHS 8.5% 5.1% 5.0% 5.0% 5.0% Insurance dist. Revenue (Rs mn.) 713 460 520 598 687 Growth (%) 21.7 (35.5) 13.0 15.0 15.0

Other Dist. Revenue 1,131 1,368 1,505 1,625 1,706 Growth (%) 34.9 21.0 10.0 8.0 5.0

Investment Banking Investment banking revenues 1,195 1,430 1,573 1,699 1,834 Growth (%) 43.3 19.7 10.0 8.0 8.0 Source: Company financials, HDFC sec Inst Research estimates Page | 38 ICICI SECURITIES : INITIATING COVERAGE

Overall business performance Net Revenues (Rs mn) EBITDA (Rs mn) PAT (Rs mn) Revenue growth (%) PAT growth (%) 25,000 250% ISEC has managed to clock 21,992 20,021 200% Revenue/EBITDA/PAT growth of 20,000 19,014 20.2/39.8/50.7% CAGR during 17,824 FY13-18. 150% 15,000 13,429 11,467 10,672 100% 10,000 7,882 7,101 50%

5,000 0%

- -50% FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Source: Company financials, HDFC sec Inst Research estimates

Share(%) in total revenues Other Investment banking Distribution Interest on Exchange liened FDs NII on margin funding Broking revenues

120.0

0.3 1.0 0.5 1.2 2.1 2.5 2.7 2.7 100.0 2.6 5.6 9.9 7.5 7.8 8.9 8.0 8.3 8.5 8.3 23.3 80.0 22.8 23.7 23.8 26.1 26.2 27.7 27.7 27.9 4.1 3.9 4.1 0.7 5.0 60.0 0.1 0.8 3.9 4.1 5.3 5.8 5.9 0.3 1.2 1.7 2.0 2.1 2.2 40.0 63.0 62.9 65.9 61.9 57.8 57.5 54.1 53.2 52.9 20.0

- FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Source: Company financials, HDFC sec Inst Research estimates

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Income statement Balance sheet (Rs mn) FY17 FY18 FY19E FY20E FY21E (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Revenues 13,429 17,824 19,014 20,021 21,992 SOURCES OF FUNDS

Growth (%) 25.8% 32.7% 6.7% 5.3% 9.8% Share Capital 1,611 1,611 1,611 1,611 1,611 Employee benefits expenses 4,847 5,453 5,585 5,764 6,053 Reserves 3,285 6,731 11,399 13,953 17,074 Operating expenses 1,290 1,683 1,872 1,971 2,165 Total Shareholders Funds 4,896 8,342 13,010 15,564 18,685 Other expenses 2,244 2,260 2,283 2,328 2,398 Long-term Debt - - - - - EBITDA 5,049 8,427 9,274 9,957 11,376 Short-term Debt 3,954 6,725 7,000 8,000 9,000 EBITDA Margin (%) 37.6 47.3 48.8 49.7 51.7 Total Debt 3,954 6,725 7,000 8,000 9,000 EBIDTA Growth (%) 41% 67% 10.0% 7.4% 14.3% Other Financial Liabilities & 389 535 590 645 705 Depreciation 155 153 167 185 200 Provisions EBIT 4,894 8,274 9,107 9,771 11,176 Other Non Current Liabilities 827 1,008 1,159 1,275 1,402 Other Income (includes treasury ) 277 289 322 331 243 Net Deferred Tax Liability (578) (736) (751) (766) (781) Interest & Financial Charges (49) 14 64 31 22 TOTAL SOURCES OF FUNDS 9,488 15,873 21,007 24,717 29,010 APPLICATION OF FUNDS PBT 5,220 8,549 9,365 10,071 11,398 Tax 1,835 2,971 3,184 3,424 3,875 Net Block 346 382 501 556 599 RPAT 3,386 5,577 6,181 6,647 7,522 CWIP 28 39 - - - APAT 3,386 5,577 6,181 6,647 7,522 Loans & Deposits 1,362 1,435 1,450 1,464 1,479 APAT Growth (%) 42% 65% 10.8% 7.5% 13.2% Other Non Current Assets - - - - - AEPS 10.5 17.3 19.2 20.6 23.4 Total Non-current Assets 1,737 1,857 1,951 2,020 2,077 EPS Growth (%) 42% 65% 11% 8% 13% Liened FDs (ST + LT) 8,324 13,236 15,354 17,196 19,259 Source: Company financials, HDFC sec Inst Research Debtors 7,101 3,101 3,126 3,291 3,615 Cash & Equivalents 1,643 2,167 5,875 2,389 3,689 Loans & Advances 359 6,316 7,579 8,716 10,023 Other Current Assets 734 1,389 781 823 904 Total Current Assets 18,160 26,209 32,714 32,414 37,490 Creditors 8,699 10,077 11,461 7,373 8,089 Other Current Liabilities 1,710 2,115 2,197 2,344 2,468 Total Current Liabilities 10,409 12,193 13,658 9,717 10,557 Net Current Assets 7,751 14,016 19,056 22,697 26,933 TOTAL APPLICATION OF FUNDS 9,488 15,873 21,007 24,717 29,010 Source: Company, HDFC sec Inst Research

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Cash Flow Key Ratios (Rs mn) FY17 FY18 FY19E FY20E FY21E FY17 FY18 FY19E FY20E FY21E PROFITABILITY (%) Reported PBT 5,220 8,549 9,365 10,071 11,398 GPM Non-operating & EO Items - 1 - - - EBITDA Margin 37.6 47.3 48.8 49.7 51.7 Interest Expenses (49) 14 64 31 22 EBIT Margin 36.4 46.4 47.9 48.8 50.8 Depreciation 155 153 167 185 200 APAT Margin 25.2 31.3 32.5 33.2 34.2 Working Capital Change (1,265) (735) 963 (5,143) (715) RoE 76.3 84.3 57.9 46.5 43.9 Tax Paid (1,835) (2,971) (3,184) (3,424) (3,875) Core RoCE 56.5 53.7 44.5 36.5 32.7 OPERATING CASH FLOW ( a ) 2,227 5,011 7,375 1,721 7,029 RoCE 46.1 46.7 35.5 30.6 29.4 EFFICIENCY Net Capex (151) (200) (247) (240) (242) (Purchase)/sale of net operating financial Tax Rate (%) 35.1 34.8 34.0 34.0 34.0 (1,925) (4,912) (2,118) (1,842) (2,064) assets Asset Turnover (x) 38.3 48.9 43.0 37.9 38.1 Inventory (days) Free Cash Flow (FCF) 151 (100) 5,010 (362) 4,723 Investments - - - - - Debtors (days) 193 64 60 60 60 Other Current Assets (days) 256 429 455 487 501 Non-operating Income Payables (days) 236 206 220 220 220 INVESTING CASH FLOW ( b ) (2,076) (5,111) (2,365) (2,083) (2,305) Other Current Liab & Prov 48 46 47 47 47 Debt Issuance/(Repaid) 2,226 2,771 275 1,000 1,000 (days) Interest Expenses 49 (14) (64) (31) (22) Working Capital (days) 165 240 248 280 294 FCFE 2,425 2,657 5,220 607 5,701 Debt/EBITDA (x) 0.78 0.80 0.75 0.80 0.79 Proceeds From Issue of Share Capital Net D/E 0.5 0.5 0.1 0.4 0.3

Dividend (2,472) (2,133) (1,513) (4,093) (4,401) Interest Coverage (100.4) 572.5 141.8 313.3 510.7 PER SHARE DATA Others - - - - - AEPS (Rs/sh) 10.5 17.3 19.2 20.6 23.4 FINANCING CASH FLOW ( c ) (197) 624 (1,302) (3,124) (3,423) CEPS (Rs/sh) 11.0 17.8 19.7 21.2 24.0 NET CASH FLOW (a+b+c) (47) 524 3,708 (3,486) 1,300 DPS (Rs/sh) 6.4 9.4 10.6 11.3 12.8 Opening Cash & Equivalents 1,690 1,643 2,167 5,875 2,389 BV (Rs/sh) 15.2 25.9 40.4 48.3 58.0 Closing Cash & Equivalents 1,643 2,167 5,875 2,389 3,689 VALUATION

Source: Company financials, HDFC sec Inst Research P/E 28.1 17.1 15.4 14.3 12.7 P/BV 19.4 12.4 7.3 6.1 5.1 EV/EBITDA 19.3 11.8 10.4 10.1 8.8 OCF/EV (%) 2.3 5.0 7.7 1.7 7.0 FCF/EV (%) 0.2 (0.1) 5.2 (0.4) 4.7 FCFE/MCAP (%) 2.5 2.8 5.5 0.6 6.0 Dividend Yield (%) 2.2 3.2 3.6 3.8 4.3 Source: Company financials, HDFC sec Inst Research

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RECOMMENDATION HISTORY Date CMP Reco Target Isec TP 550 25-Sep-18 295 BUY 352 500 450 400 350 300 250 Rating Definitions 200 BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period 18 18 18 18 18 18 ------

Jul NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period Jun Apr Sep Aug May SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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Disclosure: We, Madhukar Ladha, CFA & Keshav Binani, CA authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. The area of operations of the above company mentioned in the report are similar to that of the research entity. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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