ICICI Securities Ltd

A part of ICICI Bank, ICICI Securities (ISec) is a leading technology-based securities firm that offers a wide range of financial services including brokerage, financial product distribution and investment banking. It focuses on both retail and institutional clients and is the largest equity broker in India since fiscal 2014 by brokerage revenue and active customers in equities on the National Stock Exchange. Its retail brokerage business accounted for ~90% of its total brokerage revenue (excluding income earned on ISec’s funds used in the brokerage business) in FY18. As of March 31, 2018, ICICIdirect, the company’s award winning proprietary electronic brokerage platform (www.icicidirect.com), had approximately 40 lakh operational accounts of which 8 lakh had traded on NSE in the preceding 12 months.

The company categorizes its business into three verticals namely brokerage, distribution and investment banking.

Brokerage Business:
Retail
ISec’s retail brokerage service gives its retail customers access to the Indian financial capital markets through its ICICIdirect platform (www.icicidirect.com). This platform provides them with a seamless settlement process through a 3-in-1 account - the company’s electronic brokerage platform is linked to the customer’s savings bank and dematerialised account held with ICICI Bank.

ISec is the largest retail broker in India with a market share of over 9% of Average Daily Turnover on the NSE?. As of March, 2018, ICICIdirect had approximately 40 lakh operational accounts of which 8 lakh had traded on NSE in the preceding 12 months. Since inception, ISec has acquired a total of 46 lakh customers through this platform as of March 31, 2018. Retail accounted for ~90% of brokerage business in FY18.

ISec’s research team provides research based analytical reports of over 230 Indian stocks for its retail customers.

Institutional
ISec provides domestic and foreign institutional investors with brokerage services, corporate access and equity research covering a universe of 210 Indian companies. ISec is empanelled with a large cross-section of institutional clients, including foreign institutional investors, who are serviced through dedicated sales teams. ISec has established a significant presence amongst domestic institutional investors and is increasing its focus on attracting foreign institutional investors. Institutional business accounted for 8.7% of brokerage revenue in FY18.

Financial Products Distribution:
ISec distributes third-party mutual funds, insurance products, fixed deposits, loans and pension products to its retail customers for commission income.

ISec has adopted an “open-source” distribution model with respect to all its distribution products, except insurance products; this implies that ISec does not distinguish between products it directly distributes and those offered by third-party partners whose products it distributes based on affiliation. ISec also provides its customers with recommendations of mutual funds based on various qualitative and quantitative parameters. As a result of these factors, ISec was the second largest non-bank distributor of mutual funds in India in terms of revenues from distribution, in fiscal 2017 (Source: CRISIL). In addition, its retail platform (icicidirect.com) enables customers to manage their investments across multiple asset classes.

In addition to its strong online presence, the distribution business is supported by its nationwide network, consisting of over 200 own branches, 2,600 ICICI bank branches, over 5,400 sub-brokers, authorized persons, Independent Financial Advisors (IFAs) and Investment Advisors (IAs) as on March 31, 2018.

In mutual funds (MFs), ISec distributes funds and Portfolio Management Services (PMS) of various fund houses. However, in insurance, it distributes insurance products of only ICICI Prudential Life in life and ICICI Lombard in non-life insurance.

Under its distribution business, the company gets a commission when the client signs up for a product and gets a regular commission for the term of the client’s association with the AMC or insurer.

Investment Banking:
ISec’s investment banking business offers equity capital markets services and other financial advisory services to corporate clients, the government and financial sponsors. Its services include management of public equity offerings, share buybacks, tender offers and equity private placements. It also provides clients with financial advisory services in relation to domestic and cross-border mergers and acquisitions, private placements and restructuring.

Mode of operation:
ISec operates through its own branches (over 200), 2,600 ICICI bank branches, over 5,400 sub-brokers, authorized persons, Independent Financial Advisors (IFAs) and Investment Advisors (IAs) as on March 31, 2018.

The company also offers Private wealth Management, wherein it helps manage wealth and financial matters of rich executives, entrepreneurs, heirs, business owners and professionals. This also helps the company cross sell its other services.

Investment Rationale:
Though the financial intermediary business is very competitive, ISec has an edge due to a number of factors including its great retail franchise, vast distribution network and better connect with clients.

One of the biggest beneficiaries of increased financial savings:
Being the largest retail broker and a prominent distributor of mutual funds and insurance, ISec stands to benefit immensely from the emerging trend of savings moving towards financial instruments. As the demographic profile on India’s population changes to a greater number of working age people who enter the workforce, the preference for financial assets will increase. Given the unattractiveness of physical assets like real estate and gold after the regulatory curbs imposed by the government, the trend of financialization of savings will get even stronger. As the retail investor becomes better informed about the long-term benefits of investing in equity and the economy gets more formalized, players like ISec will be the biggest beneficiaries given their stronghold in the industry.

Highly scalable business at no or minimal capital expenditure:
As businesses move towards digital, the need for physical branches declines significantly, reducing the need for capital expenditure. ISec leverages its parents’ branch network very well to serve its existing clients and onboard new clients making the process very cost effective. The stable fixed costs structure creates a huge operating leverage, in which major part of additional revenues flow to the bottomline.

Increasing share of fee-based distribution business:
ISec has been focusing more on its distribution business since the broking business is more cyclical. The brokerage business (including income from margin funding) currently forms 65% of the company’s total revenue. The company’s distribution business, which is less cyclical and more sticky in nature, has grown at a CAGR of 24% in the last five years to Rs. 470 crores in FY18, forming 25% of total revenue. This business will further get a boost if the insurance regulator, IRDA (Insurance Regulatory Development Authority of India), relaxes the insurance distribution norms and allows one distributor to sell insurance products from multiple insurers.

Strong parentage:
Having one of the country’s largest private banks as a parent helps the company garner more clients in all of its business verticals. The company also exploits the client base of its parent for prospective clients and leverages the bank’s branch network to service clients. The company also saves itself from setting-up physical branches in tier-2 and 3 towns as the bank’s network is already present in many of these towns.

Steady cash flow:
Given the low fixed cost nature of business, improving business conditions bring in decent cash to the company every year, a majority of which goes towards paying dividends. The company has generated free cash between Rs. 130-210 crores in 5 years to FY17. It invested ~Rs. 1200 crores in working capital to start its margin funding business in FY18, which led to a decline in cash reserves. However, this investment has opened up a new stream of revenue for the company, which will further add to the cash flows going forward.

Key Business Highlights:

Risks:
Sustained risk-off environment in Equity Markets: Significant risk-off environment (volatility) in equity markets may drastically reduce the retail participation in equity markets, which will hurt the company’s performance as it is dependent on retail broking for a large part of its business.

Unforeseen Disruptions: Broking has transformed significantly in the past three decades and is vulnerable to disruption from new-age technology or solutions going forward.