buy - moneycontrol.comstatic-news.moneycontrol.com › static-mcnews › 2018 › 09 ›...

INITIATING COVERAGE 25 SEP 2018

ICICI Securities BUY

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

Resilient in turbulent times!ICICI Securities (ISEC) is one of the strongest retail investing platforms for direct equities (9.2% vol. market share). The company has retained its market leadership position despite intense competition. ISEC has also built a strong financial products distribution business (26.2% of revenues). We believe that ISEC will be a key beneficiary as financialization of savings grows. We initiate with a BUY rating and TP of Rs 352 (+19.1%).

Broking- RoCEs to decline: The Indian broking industry is in the midst of intense competition with the entry of discount brokers. Despite the amplified competition, ISEC has grown its market share to 9.2% in 1QFY19 from ~4.4% in FY13. Compensated by rising volumes, broking revenues grew at a FY13-18 CAGR of 18.8% despite a 25.4% CAGR decline in yields. Over FY18-21E we expect capital investments in the form of collateral requirements at exchanges to grow at 13.3% CAGR while overall broking revenue driven by margin funding to grow at a moderate 6.0% CAGR.

Distribution is relatively non-cyclical: Over time ISEC has transformed itself from being just a broker to a distributor of financial products- 22.8% of revenues in FY13 to 26.2% in FY18. Given the recent reduction in TERs of mutual funds, we expect overall growth in distribution revenues at 9.5% pa over FY18-21E to Rs 6.1bn and contribute 27.9% to total revenues.

Institutional advisory: ISEC has a strong IB practice with FY18 revenues of Rs 1.4bn (FY13-18 CAGR of 15.3%). The company is one of the leaders in ECM while it is strengthening its advisory practice. We

forecast a modest 8.7% CAGR in revenues over FY18-21E.

We believe ISEC to be a strong franchise run by a credible and strong management team. While the near term is particularly challenging for the broking business we build in an overall FY18-21E Revenue/PAT CAGR of 7.3%/10.5%. RoCE for the business is expected to moderate as the company will need to put collateral (still very liquid!) at exchanges in order to enhance trading limits- we forecast an overall ROCE decline from 46.7% in FY18 to 29.4% in FY21E. Our TP for ISEC works out to Rs 352 (16x Sep 20E EPS). We believe a 16x multiple is justified given growth headroom available, market leadership position, and successful diversification into financial products distribution.

Key risks: Macro slowdown in household savings, decline in broking volumes or yields, a higher than anticipated pick up in direct investing or further changes in commission payment regulations for mutual funds or insurance companies.

ISEC: FINANCIAL SUMMARY (Rs Mn) FY17 FY18 FY19E FY20E FY21E Revenues 13,429 17,824 19,014 20,251 21,992 Growth (%) 25.8 32.7 6.7 5.3 9.8 EBITDA 5,049 8,427 9,274 9,957 11,376 EBITDA margin (%) 37.6 47.3 48.8 49.7 51.7 Growth (%) 40.8 66.9 10.0 7.4 14.3 PAT 3,386 5,577 6,181 6,647 7,522 PAT growth (%) 41.8 64.7 10.8 7.5 13.2 EV/EBITDA (x) 19.3 11.8 10.4 10.1 8.8 P/E (x) 28.1 17.1 15.4 14.3 12.7 RoE (%) 76.3 84.3 57.9 46.5 43.9 Source: Company, HDFC sec Inst Research estimates

INDUSTRY RETAIL BROKING CMP (as on 24 Sep 2018) Rs 295 Target Price Rs 352 Nifty 10,967

Sensex 36,305

KEY STOCK DATA

Bloomberg ISEC IN

No. of Shares (mn) 322

MCap (Rs bn) / ($ mn) 95/1,307

6m avg traded value (Rs mn) -

STOCK PERFORMANCE (%)

52 Week high / low Rs 463/290

3M 6M 12M

Absolute (%) (16.0) - -

Relative (%) (18.4) - -

SHAREHOLDING PATTERN (%)

Promoters 79.2

FIs & Local MFs 12.1

FPIs 3.7

Public & Others 5.0 Source : BSE

Madhukar Ladha [email protected] +91-22-6171-7323 Keshav Binani [email protected] +91-22-6171-7325

mailto:[email protected]

ICICI SECURITIES : INITIATING COVERAGE

Page | 2

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: India 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

Mutual Fund 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


Page | 3

Broking Industry: Size, Nature, Broker services, Market participants CRISIL Research estimates the size of the Indian

equity broking (including cash and derivatives) industry to be Rs 140bn (+20% YoY) in FY17. According to CRISIL the industry has grown at a CAGR of 14% between FY12 and FY17 as a result of rising trading turnover and increasing retail investor participation. CRISIL also expects industry broking revenues to grow at 16.5% from FY17 to FY22E to reach Rs 300bn by FY22E.

The broking industry is very fragmented in India with the top 5 brokers accounting for ~19% of total revenues.

Contribution from top 10 brokers has increased from 24% of revenues in FY13 to 30% by Dec 2017.

Broking market has also seen a gradual rise in retail participation from 36% in FY14 to 44% in Dec 2017.

Brokers in India comprise bank owned brokers, traditional brokers and discount brokers. A brief description and comparison of services provided by these categories is given below:

Fragmented industry

Source: NSE handbook, HDFC sec Inst Research

Market segments: Rising retail participation


Broking industry revenues

Source: Crisil estimates, HDFC sec Inst Research

According to CRISIL the industry has grown at a CAGR of 14% between FY12 and FY18 and is further expected to grow at 16.5% from FY17 to FY22E to reach Rs 300bn by FY22E Top 5 brokers account for ~19% of total revenues. Retail participation has increased from 36% in FY14 to 44% in Dec 2017.

17 1712 11 14 11

37 36 37 40

44 4646 4851 49

42 42

0

10

20

30

40

50

60

FY13

FY14

FY15

FY16

FY17

FY18

Institutional(%) Retail(%) Proprietary(%)

14% 14% 15% 18% 18% 20%10% 11% 11% 11% 10% 11%22% 21% 20% 21% 22% 21%

16% 18% 18% 17% 17% 17%

38% 36% 36% 33% 33% 32%

0%

20%

40%

60%

80%

100%

2013

2014

2015

2016

2017

2018

Top 5 Top 6-10 Top 11-25 Top 26-50 Remaining

72

140

300

-

50

100

150

200

250

300

350

2011-12 2016-17 2021-22E

Industry Brokerage Revenue (Rs bn)


Page | 4

Type of brokers Broker type Brief description Trends Examples

Bank led brokerages

Offer a wide range of services such as offline and online trading, demat accounts, investment advisory and other customized services.

Have grown substantially over the years given captive customer base and hold higher revenue market share. Are now targeting wealth advisory services for the mass affluent population segment.

ICICI Securities, HDFC Securities, Kotak Securities etc.

Legacy brokerages

In addition to services provided by bank led brokerages, legacy broking firms also provide wealth management advisory.

Are developing distribution businesses and diversifying into lending businesses.

Motilal Oswal, IIFL, Edelweiss, Geojit etc.

Discount brokerages

Offer services at low and fixed brokerage fees, irrespective of size of order and provide such services via online platforms. Typically do not provide any cost intensive services such as physical offices, research reports and relationship managers.

Have grown and continue to grow at a rapid pace. Zerodha has recently started to provide research from Thompson Reuters on subscription basis and has also tied up with IDFC Bank for 3 in 1 accounts.

Zerodha, 5PAISA, SAMCO etc.

Source: Broker websites, HDFC sec Inst Research Broad comparison of brokers Broker type Bank Based Brokers Traditional brokers Discount Brokers

Key Players Kotak ,ICICI,HDFC Securities Motilal Oswal, Angel Broking, Sharekhan

Zerodha, 5 Paisa, Trade 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

Largely three type of brokers: bank led, legacy and discount brokers


Page | 5

Broking volumes have moved towards F&O.

Indian equity markets have witnessed explosive growth in total volumes, especially in the derivatives segment.

Total ADTV (BSE + NSE) have grown at a FY14-FY19TD CAGR of 40.5%; within which cash market (BSE + NSE) has grown at a FY14-FY19TD CAGR of 24.0% while derivative volumes have grown at a FY14-FY19TD CAGR of 41.4%.

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.

Further, within derivatives- option volumes have seen a spectacular jump. Option volumes have increased from 77.4% of total volumes in FY14 to 86.3% in FY19TD implying a CAGR of 44.1%.

Increased share of derivative volumes with an even increasing share in option volumes have meant a lower yields. Additionally, an even reduced share of delivery volumes in the cash market have resulted in lower yields.

Volume share Delivery volumes

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

32.6 32.9 51.6 49.7 60.5 83.2 28.7

30.7%

31.8% 32.3%

31.6%

33.8%30.4%

28.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

-10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

FY13

FY14

FY15

FY16

FY17

FY18

FY19

YTD

Cash Turnover (in tn) Delivery (%) - RHS

75.9 77.4 78.3 76.6 78.6 83.4 86.3

16.4 16.1 15.4 16.7 15.4 11.8 9.8

7.7 6.6 6.4 6.7 6.0 4.8 3.8

0%10%20%30%40%50%60%70%80%90%

100%

FY13

FY14

FY15

FY16

FY17

FY18

FY19

YTD

Options Futures Cash

Yields are highest on delivery based volumes, falling cash delivery volumes has put pressure on total blended yields. Growing option volumes have further aggravated lower yields.


Page | 6

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) F&O 1,890 3,126 2,806 3,806 6,707 8,488 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 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

Growth in option volumes is highest at 44.1% CAGR during FY14-18.


Page | 7

ICICI securities: Solid technology driven online financial savings platform ICICI securities’ brokerage business is anchored by its

deep retail customer base, to which the company offers electronic trading facility using its “3 in 1 account”.

Through a single step login customers can access trading, demat and bank account to execute trades.

Over 95% of the transactions are customer initiated over the internet either through its icicidirect.com portal or its trading terminals and very few

transactions are executed through call and trade. This has given the business immense scalability.

ISEC is also a full service broker and provides clients with retail research- coverage of 250+ stocks. Additionally, ISEC also provides clients margin funding or BTST order facility.

For 1QFY19 ISEC boasts of an overall no. 1 position with a market share of 9.2% and ADTV of ~Rs 467bn.

Evolution of ICICI Securities

Year Particulars 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 life insurance 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 2011 Launched life time prepaid brokerage plans, facility for filing income tax returns online, my ‘GTC’ (good till cancelled)

2012 Launched SPAN based margining for futures and options in the derivatives market, eLearn for stock market entrants, 2014 Launched equity-linked debentures (structured products), facilities for auto renewal of SIPs, consolidated portfolio

Announced the extension of our Future PLUS 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 sec Inst Research

ISEC provides 3-in-1 account thereby linking demat, trading and bank accounts. ISEC also provides extensive research on Mutual Funds. ISEC active customer base has grown at a CAGR of 12.5% during FY14-18.


Page | 8

Huge untapped client base of ICICI Bank despite having the highest number of active clients Retail ready customers: Long headroom for growth available

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

ISEC has the highest no of retail (trade ready) customer base- 4.2mn; this compares to ~41.5mn debit card holders of ICICI Bank- just 9.6%. This indicates that the company still has huge headroom for growth.

ISEC also has the highest no of active clients (no. of clients who have traded at least once over the last one year)- 0.8mn.

ISEC has grown active client base at 12.5% CAGR over FY14-18.

The rise of Zerodha is also striking in the chart.

Active customers- trend for top players.


2.5 2.8 3.2 3.6 4.0

22.327.6

32.736.9

41.511.2

10.1 9.8 9.8 9.6

9

9

10

10

11

11

12

05

1015202530354045

2014

2015

2016

2017

2018

I-Sec's operational accounts(in mn.)- LHSI-Bank Debit card holders(in mn.)-LHS% - RHS

ISEC is still at just 9.6% of parents customer base. ISEC has maintained leadership position in active customer base. .Zerodha has seen a phenomenal rise in active customers from 18,000 in FY14 to 675,000 as of Jul18.

501 595 560

618

798 820

-100 200 300 400 500 600 700 800 900

FY14 FY15 FY16 FY17 FY18 Jul-18

ICICI SECURITIES LIMITED ZERODHA HDFC SECURITIES LTD.SHAREKHAN LTD. AXIS SECURITIES LIMITED ANGEL BROKING PRIVATE LIMITEDKOTAK SECURITIES LTD. MOTILAL OSWAL SECURITIES LTD. KARVY STOCK BROKING LTD.INDIA INFOLINE LTD. SBI CAP SECURITIES LTD.

in '000


Page | 9

ADTV Comparison

Source: Respective company investor presentation , HDFC sec Inst Research Volume Market Share

Source: Respective company investor presentation , HDFC sec Inst Research

4.5 4.7

6.6

7.8 8.9

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

FY14 FY15 FY16 FY17 FY18

ICICI Securities IIFL Kotak SecuritiesMotilal Oswal Securities Angel broking 5 PaisaGeojit Financial Services JM Financial

%

4465

101

187

372

0

50

100

150

200

250

300

350

400


ICICI Securities IIFL Kotak SecuritiesMotilal Oswal Securities Angel broking 5PaisaGeojit Financial Services JM Financial

Rs bn ISEC continues to be the market leader, clocking volume growth of 71% CAGR during FY14-18. Motilal Oswal, second best has seen volumes rising at 44% CAGR during FY14-18. 5Paisa, only listed discount broker has achieved market share of 1% as of 4QFY18.


Page | 10

Internet trading volume trends Mobile trading statistics

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

22

1112

24 26

29

0

5

10

15

20

25

30

35

0

5

10

15

20

25

FY13

FY14

FY15

FY16

FY17

FY18

Internet Trading Notional Value(bn)

Share in Overall Trading turnover (%) - RHS

0.40.7

1.1

2.2

3.5

0.20.3 0.5 1.0

1.6

00.2

0.5

1.1

2.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY13

FY14

FY15

FY16

Dec-

16

NSE Cash(%) NSE Derivatives(%) BSE Cash(%)

I-Sec is pioneer in internet trading, 95% of its volume is originated on the web.


Page | 11

The opportunity: India has huge headroom to grow

Like that of other Asian countries, the Indian economy continues to be savings driven with net financial savings of the household sector in the range of 6.5-8.0% of gross national disposable income since FY12.

As a percentage of GDP household savings have declined from ~24% in FY12 to ~20% in FY15 to ~16% in FY18.

Despite this decline household investments in financial assets have grown at 9.6% CAGR from FY12-18 as household savings in financial assets have increased from 31% to 42%.

Over FY18-30E we expect a modest growth in financial savings to continue at a CAGR of 9.7% pa.

RBI data also indicates that households are channelizing higher percentages of their savings to financial assets.

Macro Picture

FY09 FY12 FY15 FY18 FY19E FY20E FY21E FY25E FY30E CAGR

FY12-18 FY18-30E India nominal GDP current prices (Rs bn) 54,592 87,363 124,680 167,517 185,944 206,398 229,101 341,568 550,098 11.5% 10.4%

Growth % 15.7% 11.0% 9.8% 11.0% 11.0% 11.0% 10.5% 10.0% Household savings (as % of GDP) 24% 24% 20% 16% 16% 15% 15% 14% 13% Financial Savings as (% of Household savings) 43% 31% 36% 42% 40% 41% 43% 45% 48% Financial savings (Rs bn) 5,634 6,500 8,977 11,257 11,677 13,032 14,876 21,519 34,326 9.6% 9.7%

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

Driven by household investments in financial assets- we expect financial savings to grow at FY18-30E CAGR of 9.7%.


Page | 12

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 Shares and Debentures 0.2 0.2 0.2 0.2 0.3 0.2 0.9 Claims on Government -0.2 -0.1 0.2 0 0.5 0.4 0 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 accounts base

Source: CDSL, NSDL, HDFC sec Inst Research

Total number of demat accounts in the country are only at 33.4mn in a total population of 1.2 bn. As earnings levels improve this number can move up substantially.

8.3 8.8 9.

6 10.8 12

.3

14.8 15

.8

12.7

13.1 13

.7 14.6 15

.6 17.1

17.6

0.02.04.06.08.0

10.012.014.016.018.020.0

FY13

FY14

FY15

FY16

FY17

FY18

Aug1

8

CDSL NSDLMn

Allocation of incremental financial savings towards shares and debentures has increased in FY18. Total demat account base have increased at a CAGR of 8.73% during FY13-18.


Page | 13

Broking yields are challenged Rise in discount broking

The last few years have seen a dramatic rise in the active customer base of discount brokers. As a percentage of active customers within the top 50 brokers we assess that that discount brokers have taken as much as 17.8% of the incremental active customers on a cumulative basis during FY14-FY18.

Discount brokers are willing to do business at substantially lower charges. We believe that this trend is likely to continue- accordingly we are building in a FY18-21E 11.9% pa decline in yields. Below is a broad comparison of rates amongst few brokerages.

Broking rate comparison Broker ICICI Securities Kotak Securities HDFC Securities Angel Broking Motilal Oswal 5Paisa Zerodha

Equity Equity Intraday 0.12% & Delivery 0.75%

0.06% for Intraday & 0.59% for Delivery - Reduces upto 0.01/0.1 if brokerage paid upfront

0.5% for Delivery & 0.1% for Intraday

0.012% for Intraday & 0.4% for Delivery

0.05% for Intraday & 0.5% for Delivery - Reduces upto 0.015/0.15% if brokerage paid upfront

10 Rs Per executed order

0 for equity delivery & Rs 20/executed order or 0.01% (intraday)

Equity Futures

0.05% of Turnover & Rs 50/lot for second leg in Intraday

0.049% - Reduces upto 0.01% if brokerage paid upfront

0.05% on Turnover

0.03% of Turnover



Rs 20/executed order or 0.01% whichever is lower

Equity Options

Rs 95/lot & Rs 50/lot for second leg in Intraday

Rs 100/lot - Reduces upto Rs 30/lot if brokerage paid upfront

Rs 100/lot Rs 50/lot




Currency Futures

0.05% of Turnover & Rs 10/lot for second leg in Intraday


Rs 23/lot 0.03% of Turnover




Currency Options

Rs 25/lot & Rs 10/lot for second leg in intraday


Rs 20/lot Rs 15/lot Rs 20/lot



Commodity NA


NA 0.03% of Turnover


NA


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

Many brokerages have come up with a prepaid brokerage plan, where brokerage is paid up-front for significantly reduced broking charges. We are building in a FY18-21E 11.9% pa decline in broking yields.


Page | 14

Account opening charges

Broker ICICI Securities Kotak Securities

HDFC Securities Angel Broking Motilal Oswal 5Paisa Zerodha

Trading only NA NA NA NA NA NA Rs 300

Trading & Demat Rs 975 for 3 in 1 Account Rs.750 Rs 999 Rs 600 Free, but with Margin Cheque Rs.750 Rs 200

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

Source: Company investor presentation, HDFC sec Inst Research ISEC has managed to sustain and grow its market

share despite declining yields. Compensated by rising volumes, broking revenues grew at a FY13-18 CAGR of 18.8% despite a 25.4% CAGR decline in yields.

While ISEC continues to maintain its volume market share leadership rank at No.1 its revenue market share has reduced. We are not too perturbed by the 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.

4.5 4.8

2.7

1.7 1.1

3.5 3.4 3.2

3.3

2.7

3.94.0

3.5

3.12.8

5.4

7.2

6.15.6

5.1

0.2 0.20.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0


ICICI Securities Kotak Securities Motilal Oswal Securities Geojit Financial Services 5Paisabps

Discount brokers are ready to work at much lower yields. Yields have fallen significantly for the industry owing to change in market structure and intense competition from discount brokers.


Page | 15

Revenue market share for top 5 brokers

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

5.1%

4.5%

3.7%

3.0%2.5%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%


ICICI Securities Kotak Securities Motilal Oswal HDFC Securities India Infoline

I-sec continues to hold its top position in revenues despite falling yields. ISEC revenue market share has fallen from 6% in FY13 to 5.1% in FY18.


Page | 16

We believe rates offered by discount brokers don’t have much scope of going lower.

5PAISA: For example 5PAISA (only listed discount broker and hence information disclosure is

maximum) has made revenues of Rs 197mn and a PBT loss of Rs 332mn. Calculated yields for the business are at 0.21bps. Broad income statement and financials are presented below:-

5PAISA Income Statement (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

5Paisa losses have grown 2x in FY18.


Page | 17

5PAISA Balance Sheet (Rs mn) FY17 FY18 SOURCES OF FUNDS 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 does not disclose its financials as it is structured as a partnership. Media reports indicate that the company has earned revenues of Rs 4.5bn with a PAT Rs 1.4bn in FY18. The company claims to have a volume market share of ~8-9%. According to media reports the firm is capitalized with over Rs 3bn.

Refer: (1)https://zerodha.com/z-connect/zerodha/bulletin-latest-at-zerodha/we-are-now-the-3rd-largest-stock-broker-in-india

(2) https://yourstory.com/2017/02/zerodha-3/

(3)https://economictimes.indiatimes.com/small-biz/startups/features/the-lone-ranger-how-zerodha-stood-its-own-against-indias-largest-stock-brokerages/articleshow/64215146.cms

Market has become more speculative

As described in the broking industry section on page nos 4 and 5, the market is moving towards non-delivery based trading and derivatives; this phenomenon also results in lower yields for the entire market. See as per rates on page 13 yields are much lower for options and non-delivery cash volumes.

5Paisa is the discount broking arm of IIFL group. Media reports indicate that Zerodha has earned revenues of Rs 4.5bn with a PAT Rs 1.4bn in FY18.

https://zerodha.com/z-connect/zerodha/bulletin-latest-at-zerodha/we-are-now-the-3rd-largest-stock-broker-in-india



https://yourstory.com/2017/02/zerodha-3/

https://economictimes.indiatimes.com/small-biz/startups/features/the-lone-ranger-how-zerodha-stood-its-own-against-indias-largest-stock-brokerages/articleshow/64215146.cms





Page | 18

Strong presence in institutional segment

ISEC also has a strong presence in institutional equities with coverage of ~230 stocks. Additionally it serves foreign institutional investors and has offices in the US and Singapore. Revenues for this line of business have grown at a CAGR of 33% over FY13-18.

Institutional broking revenues

Source: Company financials, HDFC sec Inst Research

Broking

We are building in volume growth CAGR of 18.4% over FY18-21E vs. a decline in yields at a CAGR of 11.9% over FY18-21E. This results in a broking revenues increasing at a CAGR of 4.3% over the same period. This line of business is also return dilutive as in order to maintain this revenue line item the company will have to pledge FDs with exchanges. We have assumed leined FDs to grow at FY18-21E CAGR of 13.3%.

Aggregate Broking Revenues

Source: Company financials, HDFC sec Inst Research estimates

ADTV and yields

Source: Company investor presentation, HDFC sec Inst Research estimates

4.8

5.3

8.1

7.2

8.4

11.3

11.7

12.2

13.4

12.4

51.6

-11.

5

17.8

33.4

3.6

4.8 9.7

-20.0-10.00.010.020.030.040.050.060.0

02468

10121416

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Broking revenues (Rs bn) Growth(%) - RHS

37 44 65 101

187

372 467 537

618 4.8

4.5

4.8

2.7

1.71.1 0.9 0.8

0.80

1

2

3

4

5

6

-

100

200

300

400

500

600

700

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

ADTV (Rs bn)- LHS Yield (bps)- RHS

254339

527 537

740

1,069

0

200

400

600

800

1,000

1,200

FY13

FY14

FY15

FY16

FY17

FY18

Institutional (in mn)

ISEC institutional broking revenues have grown at a CAGR of 33% during FY13-18. With SEBI’s new circular, large listed companies will be required to raise at least 25 percent of their long-term borrowings through corporate bonds This may increase trading volumes in the bond market.


Page | 19

Margin funding book size to increase as volumes increases

We forecast margin funding book to track ADTVs and the company to make an average 15% on this exposure. Average cost of funds for ISEC is ~9% leaving it with a ~6% spread. Average margin book

exposure was about Rs 5.2bn in FY18 which we forecast will increase to Rs 8.2bn by FY21E implying a CAGR of 16.6%.

Margin funding book and net interest income


1,458 1,099

2,120 1,560

3,323

5,184

6,220

7,153

8,226

9 64 75 32 162 297 373 429 494

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Avg. loan book (Rs mn.) Net interest income (Rs mn.)

Going forward, we expect margin funding book to grow in commensurate with ADTV growth. Margin lending book has grown at 28.9% CAGR during FY13-18.


Page | 20

Distribution: ISEC to gain as Household financial savings grow India developing a financial investing culture: Insurance & MF flows to drive growth

As India’s household savings largely get channelized towards financial assets, mutual fund and life insurance intermediaries are set to gain further. Mutual fund assets have grown at a CAGR of 22.6% over FY14-FY18 while total insurance premiums have grown at a CAGR of 9.8% from FY13-17. Despite this growth both asset management and life insurance remain under-penetrated at 4.0% and 2.7% of GDP respectively. We expect AUMs for both these sectors to grow considerably over the next decade.

Total Insurance Premium (Ind. + Group)

Source: Crisil Estimates, HDFC sec Inst Research

Equity Flows in MFs Debt Flows in MFs

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

7900-8100

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19

P

FY20

P

FY21

P

FY22

P

Rs bn

(113

) 809

938

1,07

0 2,60

8

512

281 85

0

(397

) 958

328

366

2,05

6 3,71

5

4,25

5 6,28

3

9,21

9

10,0

98

(2,000)

-

2,000

4,000

6,000

8,000

10,000

12,000

FY14

FY15

FY16

FY17

FY18

YTD1

9

Net inflows MTM Closing AUMin bn

633

226

330 2,

132

(117

)

429 1,

635

(527

)

558

786

720

222

7,24

3

6,94

1

7,82

9 10,7

47

11,3

49

12,0

00

(2,000)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY14

FY15

FY16

FY17

FY18

YTD1

9

Net inflows MTM Closing AUM

in bn

ISEC is the second largest non-bank mutual fund distributor. ISEC currently distributes insurance products only for ICICI Prudential and ICICI Lombard. ISEC also sells loan products from ICICI bank, AIF, NPS and bond offerings.


Page | 21

Systematic investment plan (SIP) has become a household name

The Association of Mutual funds of India (AMFI) has run a successful campaign encouraging retail investors to invest in mutual funds using systematic investment plans (SIPS). Partly as a result of this campaign and partly as a result of the push by asset management companies and intermediaries, SIPs have become a household name with the no of SIP folios at 23.8mn as of Aug, 2018. Currently the mutual fund industry is collecting Rs 76bn/month just in SIP inflows. I-sec’s SIP count stands at 1.1 million.

SIP inflows

Source: AMFI, HDFC sec Inst Research Mutual funds in India are still a “push” product and distributors make healthy commissions Mutual funds in India are largely still a push product

as evidenced by the fact that only about 15% of equity AUMs are direct and not sold through distributors.

Direct plans were introduced in January 2013. The basic idea behind the concept was to allow well-informed investors to buy direct plans of a scheme directly from the mutual fund - via online or through authorized branches – thereby cutting out distributors and saving on commissions.

These savings for equity funds can at times be as high as 1.0-1.3% pa and can have serious compounded return differential over long periods of time.

However, despite direct plans being offered to customers since January 2013 this method of investing has made only a limited impact.

As of June 2018, direct accounts only for 15% (13%- T30, 2%- B30) of total individual equity AUM market share. This augurs well for intermediaries.

Below is the distribution mix of Equity AUM for these listed AMC’s as on June2018.

Source: Company Investor presentation, HDFC sec Inst Research

43 46 47 49 52 55 56 59 62 66 64

71 67

73 76 76

-10 20 30 40 50 60 70 80

Apr-

17M

ay-1

7Ju

n-17

Jul-1

7Au

g-17

Sep-

17O

ct-1

7N

ov-1

7De

c-17

Jan-

18Fe

b-18

Mar

-18

Apr-

18M

ay-1

8Ju

n-18

Jul-1

8

in bn

IFA's39.7%

National Distributors

24.5%

Banks18.5%

Direct17.3%

HDFC AMC

SIP count for ISEC has increased by 70% YoY. Mutual Fund AAUM has also increased 44% YOY. As per AMFI data, aggregate distribution commission payout by the mutual funds industry has increased at a FY14-18 CAGR of 34.6% to Rs 85.3bn.


Page | 22

Source: Company Investor presentation, HDFC sec Inst Research Retail individual money continues to flow in mutual

funds and such flows are believed to more sticky.

Below is the distribution mix for Individual assets for the MF industry. in (%) Dec-17 Mar-18 Jun-18 B30- Direct 3 3 2 B30- Distributors 25 25 20 T30- Direct 11 12 13 T30- Distributors 61 60 65 Total Distributors 86 85 85 Total Direct 14 15 15 Source: AMFI, HDFC sec Inst research

Equity AUM Distribution

Source: AMFI,HDFC sec Inst research

The asset management industry spends substantially to garner AUMs. This is seen in the distribution revenues earned by the largest distributors in the country.

Top 10 MF Distributor commission Company (Rs bn.) FY14 FY15 FY16 FY17 FY18 NJ India Invest 1.5 3.0 3.3 4.4 7.9 HDFC Bank Ltd 1.6 3.3 2.6 4.0 6.4 State Bank of India 0.3 0.7 0.7 1.8 5.6 Axis Bank Ltd 0.9 3.0 1.4 2.5 5.4 ICICI Bank Ltd 1.2 2.5 1.7 2.8 4.7 ICICI Securities Ltd 0.8 1.6 1.1 1.7 3.2 Kotak Mahindra Bank 1.0 2.6 1.7 2.0 2.7 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

3 3 2

25 2520

11 12 13

61 6065

0

10

20

30

40

50

60

70

Dec-17 Mar-18 Jun-18

B30- Direct(%) B30- Distributors(%)T30- Direct(%) T30- Distributors(%)

IFA's42.1%

National Distributors

16.3%

Banks27.5%

Direct14.0%

RNAM AMC ISEC has significant presence in Tier-II and Tier-III cities. Flows from B-30 cities are believed to be stickier which in-turn provides consistency in distribution trail commission received by ISEC.


Page | 23

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 State Bank of India 0.75 1.10 0.69 0.87 1.01 ICICI Bank Ltd 0.32 0.68 0.51 0.90 1.31 Axis Bank Ltd 0.99 2.09 0.70 0.70 1.17 ICICI Securities Ltd 0.98 1.35 0.71 1.00 1.23 Standard Chartered 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 Average Yield 0.88 1.28 0.71 0.87 1.08 Source: AMFI, HDFC sec Inst Research I-sec has continued to maintain higher yield than the

average yield of top 10 distributors. Even on the AUM front ICICI Bank and ICICI Securities combined continue as leaders. I-sec is also the second largest non bank Mutual fund distributor.

Direct is gaining prominence with offerings from PayTM, Coin, Kuvera, Kotak securities and other aggregators.

While direct plans have been offered since January 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.

Yields are typically more for equity products. I-sec continues to grow its AUM without taking a hit on its overall yields. During FY14-18, ISEC has consistently maintained better yields than the average yield of top 10 distributors.


Page | 24

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

Source: RNAM DRHP, HDFC sec Inst Research Source: RNAM DRHP, HDFC sec Inst Research 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

2.49 2.52 2.52 2.51 2.44

2.01 1.891.73 1.62 1.55

0.480.63

0.79 0.89 0.89

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2013 2014 2015 2016 2017

Regular(%) Direct(%) Difference(%)

2.63 2.68 2.57 2.52 2.47

2.12 2.061.74

1.531.3

0.51 0.620.83

0.991.17

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2013 2014 2015 2016 2017

Regular(%) Direct(%) Difference(%) Difference between TER of regular and direct plan is rising.


Page | 25

Mutual Fund TERs are regulated: Changes in TERs impact earnings SEBI regulates maximum expenses (TER- Total expense ratio) chargeable by an AMC to different schemes. On 18th September 2018 in a decision taken at its

Board meeting, SEBI has proposed a reduction in TERs which AMCs charge to schemes. The reduction dents ability of AMCs to pay commissions to distributors, eg. the reduction in TER for an equity fund of ~Rs 200bn will be about 25bps. Currently even the timeline of implementation of this policy change is unclear.

Given the large reduction in the ability of AMCs to make payouts, we believe part of this TER reduction will be passed on to distributors. Given that it is too early to call out how much of the TER reduction will be passed on to distributors, we are building in about a 20bps overall reduction in TERs for ISEC distributed equity funds and an overall 10bps reduction in commission for ISEC FY20E onwards. Overall we model drop in MF distribution yields by 6.1% CAGR resulting in FY18 MF distribution revenues of Rs 6.1bn.

Proposed TER

AUM Slab (Rs bn) TER for equity oriented schemes TER for other schemes(excl. Index, ETFs 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

50bn or part thereof TER reduction of .05% for every increase in

AUM by 50bn or part thereof >5000 1.05% 0.80%

Note: Additional 30bps and 5bps can be charged as per regulation 52(6A)(b) and 52(6A)(c). Source: SEBI, HDFC sec Inst Research 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

ICICI direct has an excellent DIY platform to research funds across various parameters as- performance, categorization, holding period, stars etc. It also provides its own rating on funds depending on various parameters. Early implementation of the revised TER regulations can negatively impact FY19 MF distribution revenues.


Page | 26

Past instance of TER change: From April, 2018, SEBI had changed TER regulations by allowing additional expense of upto 30bps to schemes collecting assets from B-30 towns (areas which are outside the top 30 towns).

Earlier this additional expense was allowed to be charged for B-15 towns (towns outside the top 15 towns). Changes in regulations such as this one results in downward pressures on commissions for mutual fund distributors as fund houses re-negotiate commissions and try and pass on these reductions to distributors.

Icicidirect is one of the leading platforms for distribution of MFs in India

ICICI direct is an excellent DIY platform to research funds across various parameters as- performance, categorization, holding period, stars etc. Investors can then invest online in schemes of their choice. ISEC employs its own mutual fund research staff to study and rank mutual funds. The company also allows investors portfolio analytic tools where investors can better understand and track their investments. ISEC also has advisors which its customers can approach for advise on avenues to invest. ISEC has tied up with over 5400 sub-brokers, IFAs and IAs for mutual fund advisory and the company also earns commissions through them. Over 90% of transactions are executed online via the website.

ISEC has earned Rs 2.84bn in mutual fund commissions in FY18.

I-sec’s MF distribution revenue

Source: Company Investor presentation, HDFC sec Inst Research Life insurance distribution revenues impacted by

commission payment regulations of IRDAI- Marketing fees has been disallowed by the regulator

The second largest stream of income on the distribution side is commission on sale of life insurance, from which the company has generated income of Rs 460mn (-35.5% YoY). Decline in revenues was as a result of disallowance of marketing fees by IRDAI, which ISEC would have received from IPRU.

We believe that as sale of life insurance grows revenues from this line of business are set to improve. We are building in growth of 15% CAGR for FY18-21E.

595 789

1,5401,117

1,657

2,8473,246 3,322

3,744

67 76120

160212

305366

421484

0

100

200

300

400

500

600

0500

1,0001,5002,0002,5003,0003,5004,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

MF revenue (Rs mn.) MF AAUM (Rs bn.) - RHS

ISEC revenue from distribution of insurance products fell from Rs 713mn in FY17 to Rs 460mn in FY18 due to disallowance of marketing fees by IRDAI, which ISEC would have otherwise received from IPRU. We are building in a 15% CAGR for FY18-21E for life insurance distribution revenues.


Page | 27

I-sec’s insurance distribution revenue

Source: Company Investor presentation, HDFC sec Inst Research

Other products

Other products distributed by ISEC include PMS, AIF, IPO, general insurance, debt products etc. Total other distribution income is Rs 1.4bn for FY18 (+21% YoY). We are building a 7.6% CAGR for FY18-21E.

371 371 465 586 713 460 520 598 687

10.4%9.0%

8.3% 8.6% 8.5%

5.1%

5.0%

5.0% 5.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

02,0004,0006,0008,000

10,00012,00014,00016,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Insurance dist. Revenue (Rs mn.)Insurance Premium (Rs mn.)Yield (%) - RHS


Page | 28

Distribution business modeling assumptions MF: We are forecasting an AUM growth CAGR of

16.6% pa over FY18-21E with a 6.1% pa decline in yields mainly as a result of the proposed change in TERs by SEBI. This results in MF distribution revenues CAGR of 9.6% pa with revenues reaching Rs 3.7bn by FY21E.

Life insurance: We expect life insurance premium collection (new plus renewal) to grow at 15% pa and yields to remain constant at ~5.0%. This results in life insurance distribution revenues growing at 14.3% pa to Rs 687mn by FY21E.

Others: We are building in a 7.6% FY18-21E CAGR in other distribution revenues.

Institutional Advisory business With revenues of Rs 1.4bn in FY18 (FY13-18 CAGR of

15.3%), ISEC has a sizable presence in the institutional investment banking business. The company is one of the leaders in ECM while it is strengthening its advisory practice. Profitability of this segment is volatile as costs are high. In periods of high revenue growth profitability shoots up- FY18 EBT margin of 47.1% vs. FY14 EBT margin of -12.7%.

SEBI in its board meeting recently has approved a revised borrowing format for large listed companies. Such Companies will soon be required to raise at least 25 percent of their long-term borrowings through corporate bonds. This is expected to increase total DCM issuance and is expected to support growth in this business vertical.

Institutional Advisory operational performance

Source: Company financials , HDFC sec Inst Research

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

(200)-

200 400 600 800

1,000 1,200 1,400 1,600

FY13

FY14

FY15

FY16

FY17

FY18

Revenue(in mn.)-LHS EBT(in mn.)-LHSEBT Margins(%)-RHS

ISEC Continues to be among the top-5 Indian players in advisory business. Strengthening relationship with private equity funds and advice on promoter financing. Investment banking business has seen sharp rise in EBT margins with rise in revenues. Margins have improved from 16.9% in FY16 to 47.1% in FY18.


Page | 29

Financials ISEC’s cost structure substantially higher than

competition as a result operating leverage is high.

Absolute total costs for ISEC are substantially higher than that for other brokerages. For example ISEC’s total employee costs and total expenses for FY18 are about 3.8x that of HDFC Securities.

This results in substantially higher operating leverage for ISEC and swings in revenues will have a deeper impact on the profitability of the company.

According to ISEC management about 70% of total costs are fixed.

Broker Financials

Rs mn ICICI Securities Kotak Securities HDFC Securities Axis Securities

FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 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 Other expenses 3,188 3,656 3,944 3,487 4,251 4,991 819 871 1,052 610 718 800 EBITDA 4,114 5,637 9,197 2,054 4,934 7,891 2,066 3,303 5,203 531 805 991 EBITDA % 37% 40% 49% 25% 41% 49% 52% 61% 68% 10% 11% 11% 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 Other income 9 10 - 2,220 1,248 1,365 76 136 190 104 87 99 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 active client (Rs) 11,784 12,543 12,830 23,160 27,105 24,560 7,636 8,713 9,893 5,738 5,600 4,214

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

Kotak Sec has the highest revenue per active client- Rs24.5K; this may be result of higher contribution from institutional business ISEC has reduced its cost per active client significantly, but is still substantially higher than that of HDFC sec. With increased revenues and high operating leverage margins for ISEC have improved substantially. ISEC has the best RoE at 84.6% for FY18.


Page | 30

Rs mn Angel Broking Geojit 5Paisa

FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 Revenue 4,474 5,369 7,648 2,588 2,854 3,443 (12) 75 197 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 Other income 149 154 196 132 204 237 - - - PBT 519 479 1,587 622 914 1,152 (77) (164) (332) 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 active client (Rs) 18,392 15,613 13,157 9,487 11,541 12,189 NA 4,521 4,199

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

Driven by favorable market conditions Angel and Geojit have both reported healthy numbers. Total expenses per active customer suggest lower expenses for discount brokers.


Page | 31

Margins to stay stable over FY18-21E but return ratios set to decline as core capital employed increases Given a challenged yield environment we forecast

overall revenues to grow at a relatively muted CAGR of 7.3% over FY18-21E to Rs 22.0bn.

Costs are expected to grow at FY18-21E CAGR of 4.2% resulting in overall EBITDA of Rs 11.4bn by FY21E.

We expect EBITDA margins to remain stable in FY19E and FY20E but to eventually come in at 51.7% in FY21E.

Finally, we expect a net income CAGR of 10.5% to Rs 7.5bn by FY21E.

While revenues and PAT are expected to grow at a 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 53.7% in FY18 to 32.7% in FY21E. The saving grace is that this capital is cash and can be liquidated whenever trading volumes decline. However one must note that the capital required to run this business is increasing considerably.

Operational performance

Source: Company financials ,HDFC sec Inst Research estimates

Return ratios


Return ratios


0.0

10.0

20.0

30.0

40.0

50.0

60.0

0

5,000

10,000

15,000

20,000

25,000

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Revenues EBITDANet income EBITDA margin % - RHSNet income margin % - RHS

Rs mn

50.656.5

53.7

44.536.5

32.742.146.1 46.7

35.530.6 29.4

63.6

76.384.3

57.9

46.5 43.9

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Core ROCE (%) - RHS ROCE (%) - RHS RoE (%) - RHS

0.010.020.030.040.050.060.070.080.090.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Core Capital Employed Capital EmployedTotal Shareholders Funds Core ROCE (%) - RHSROCE (%) - RHS RoE (%) - RHS

Capital employed will continue to rise as more FDs will be required to be placed with exchange to fuel rise in trading volumes. Liened Margin FDs are liquid in nature and can be liquidated in case trading volumes fall.


Page | 32

ISEC has been able to de-risk business substantially by adding more secular revenue streams

Over time ISEC has been able to de-risk its business by adding revenues from distribution of financial products to its topline. Broking (ex. liened FD interest income) was 59.1% in FY18 down from 63.7% in FY14. We expect broking (ex. liened FD interest income) it to go down further to 55.1% by FY21E.

As a percentage of total costs broking revenues (ex. interest on liened FDs) were 79.2% in FY14, 112.2% in FY18 to 114.2% in FY21E.

Broking income analysis


Operating revenues including interest income on leined FDs but excluding broking income has gradually inched up from 45% in FY14 to 77.5% in FY18. We expect this number to further go up to 92.9% by FY21E

Lower dependence on broking


64

67 62 5959 56 55

55

79

10794 95

112 109 110 114

0.0

20.0

40.0

60.0

80.0

100.0

120.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Broking income ex. Interest on liended FDs(Rs mn)% of total income - RHS% of total cost - RHS

45.053.9 56.9

65.777.5

85.8 88.9 92.9

0.010.020.030.040.050.060.070.080.090.0100.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Operating revenues ex. broking % of total cost - RHSRs mn

Distribution business as % of total revenue has increased from 23% in FY13 to 26% in FY18. Growth in distribution business has outpaced the growth in broking business during FY13-18. Rise of ex-broking revenues reduces risk of cyclicality as other operating revenues now cover 77.5% of total cost and we expect to increase it to 93.5% by FY21E.


Page | 33

ISEC has been able to control costs in years of revenue decline

Historically the company has been able to control costs in period of revenue declines.

This can be seen in FY13 when revenues declined 1.1% YoY the company controlled costs by reducing operating expenses. Total expenses were higher just

by 0.5% YoY ensuring EBITDA decline was restricted to 6.5% YoY.

Again in FY16 revenues declined by 6.9% YoY, however total costs also declined by 0.5% YoY and 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

ISEC has been able to curtail its expenses in years of downturn, in FY13 operating exp fell from Rs 1112mn to Rs 750mn.


Page | 34

Sensitivities to broking volumes and yields

Earnings for the business are most sensitive to broking volumes and yields. We estimate +5%

volumes/yields to impact earnings by 4.3%/5.5% to FY20E EPS. Below is the sensitivity table:

FY20E EPS sensitivity table

ADTV change (%)

0% 5% 10% 15% 20%

Yiel

d ch

ange

(%)

-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 0% 20.0 20.9 21.9 22.9 23.9 5% 21.0 22.0 23.0 24.0 25.1


Valuation discussion and comps ISEC is the leading platform in the retail savings space with ~9.2% market share in direct equities and a mutual funds distributor AuM of Rs 305bn. Given its leadership position and strong headroom available for growth we value the company at 16x Sep 20E EPS of Rs 22.0 setting a target price of Rs 352 (+19.1%). We are comfortable with a 16x multiple given: Strong growth potential:

o We estimate that household savings inflow into financial savings is set to grow at CAGR of 9.7% over FY18-30E.

o Number of Individual investors to direct equities is still low considering that the total no of demat accounts in India is just at 33.4mn.

o Mutual fund penetration is still just 4.0%

We like ISEC’s performance in the face of heightened industry competition: o ISEC has a 9.2% (1QFY19) market share in direct

equities which it has grown from 4.4% in FY13. o ISEC also has a 4.6% market share (on the basis of

folios) in mutual funds SIPs. o ISEC has been able to grow active customers and

total operationally ready customers at 12.5% CAGR over FY14-18 despite intense price competition in the industry.

o Despite significantly lower yields broking revenues have grown FY13-18 CAGR of 18.8%.

o ISEC has been able to grow its relatively less cyclical revenue streams i.e. distribution revenues from Rs 1.6bn/23% of total revenues in FY13 to Rs 4.6bn/26% in FY18; thereby reducing volatility in the business.

ISEC topline will be affected by ADTV growth and total blended yield change. ISEC has been able to grow active customers and total operationally ready customers at 12.5% CAGR over FY14-18.


Page | 35

o RoE’s for FY18 at 84.3% will go down to 43.9% by FY21E; although capital requirements are set to increase, the capital consumed in this business is fairly liquid.

These factors make us confident of assigning a 16x multiple. We believe long term investors should make handsome returns from here on as yields stabilize.

Comps

Company FY End Price (LC)

Mkt Cap. (US$ mn)

EPS P/E ROE 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


Page | 36

Management

Chairperson and nominee director- Chanda Kochhar is the Chairperson and Nominee Director of ICICI Bank. She has been the MD and CEO of ICICI Bank since 2009.

MD & CEO- Shilpa Kumar is the MD and CEO of our ISEC since November 3, 2016. She has previously worked with ICICI Bank for over 27 years in the areas of planning, project finance, corporate banking and treasury at ICICI Bank. She holds a post graduate diploma in management from Indian Institute of Management Calcutta.

Executive director- Ajay Saraf is the ED at ISEC. He currently heads the investment banking and institutional broking divisions at ISEC. He has over 24 years of experience and has been associated with 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 verticals.

CFO- Harvinder Jaspal is the CFO at ISEC. He joined ISEC on 1st September, 2017 and was previously working with ICICI Prudential Life Insurance Company Limited for approximately 10 years in the finance and accounts function.

Shareholding pattern

ICICI bank holds ~79.2% stake as the promoter of ISEC. Mutual funds own about 10.7% while other non-institutional shareholders own ~5%.

Shareholding pattern

Source: NSE, HDFC sec Inst Research Top 10 Institutional shareholders Holder Stake (%) ICICI Prudential Asset Management Co Ltd. 2.39 IDFC Mutual Fund 1.45 Artisan Partners LP 1.00 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

ICICI Bank79.2

Mutual funds10.7

AIFs1.1

FPIs3.7

Financial institutions

0.3

Others5.0

Promoter holding stands at 79.2%.


Page | 37

Key risk Broking- Competition and capital market cycles impact earnings

The broking industry is currently facing significant pressures on account of increased competition from discount brokers. While the capital market cycle over the last few years has been positive and volumes have compensated for declining yields, a reversal of investments into financial assets will have a significantly negative impact on both asset prices and trading volumes, which in-turn will significantly impair broking revenues and earnings.

Distribution- Investors moving direct, reduction in commission payouts due to decrease in TERs

Direct investing is gaining market share; additionally several platforms are now offering direct investing to customers. We believe that over the long term direct will increasingly take more market share and thus any

accelerated adoption of direct will have a negative impact on distribution income. Lastly flows into savings products such as mutual funds and life insurance are cyclical, thus a downcycle may result in redemptions/surrenders of old investments and slowdown in additional investments impacting commissions for distributors. Also after the recent reduction in TERs by SEBI, AMCs will pass on such reduction to distributors by decreasing the commission payouts. This will negatively impact MF distribution revenues and will lead to fall in yields. The extent of pass on by AMCs will be the key risk and will have to be monitored going forward.

High fixed costs are a double edged sword

As discussed previously ISEC operates on a high cost base resulting in higher operating leverage. In good times this would mean high earnings but in bad times earnings would also get significantly dented.

ISEC operates on a high cost base resulting in higher operating leverage. Accelerated adoption of direct MF investment platforms by investors continues to be a threat. We have factored in a 6% CAGR fall in MF distribution yield during FY 18-21E.


Page | 38

Assumptions Particulars FY17 FY18 FY19E FY20E FY21E Broking income Broking Revenues 7,759 10,243 10,287 10,647 11,631 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

ISEC ADTV growth has outperformed market ADTV growth during FY13-18.


Page | 39

Overall business performance

Source: Company financials, HDFC sec Inst Research estimates Share(%) in total revenues


7,101 7,882

11,467 10,672

13,429

17,824 19,014

20,021 21,992

-50%

0%

50%

100%

150%

200%

250%

-

5,000

10,000

15,000

20,000

25,000

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Net Revenues (Rs mn) EBITDA (Rs mn) PAT (Rs mn)Revenue growth (%) PAT growth (%)

63.0 62.9 65.9 61.9 57.8 57.5 54.1 53.2 52.9

0.1 0.8 0.7 0.3 1.2 1.7

2.0 2.1 2.2

3.9 4.1 4.1 5.0 3.9 4.1 5.3 5.8 5.9

22.8 23.7 23.3 23.8 26.1 26.2 27.7 27.7 27.9

9.9 7.5 5.6 7.8 8.9 8.0 8.3 8.5 8.3

0.3 1.0 0.5 1.2 2.1 2.5 2.6 2.7 2.7

-

20.0

40.0

60.0

80.0

100.0

120.0

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Other Investment banking Distribution Interest on Exchange liened FDs NII on margin funding Broking revenues

ISEC has managed to clock Revenue/EBITDA/PAT growth of 20.2/39.8/50.7% CAGR during FY13-18.


Page | 40

Income statement (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Revenues 13,429 17,824 19,014 20,021 21,992 Growth (%) 25.8% 32.7% 6.7% 5.3% 9.8% Employee benefits expenses 4,847 5,453 5,585 5,764 6,053 Operating expenses 1,290 1,683 1,872 1,971 2,165 Other expenses 2,244 2,260 2,283 2,328 2,398 EBITDA 5,049 8,427 9,274 9,957 11,376 EBITDA Margin (%) 37.6 47.3 48.8 49.7 51.7 EBIDTA Growth (%) 41% 67% 10.0% 7.4% 14.3% Depreciation 155 153 167 185 200 EBIT 4,894 8,274 9,107 9,771 11,176 Other Income (includes treasury ) 277 289 322 331 243 Interest & Financial Charges (49) 14 64 31 22 PBT 5,220 8,549 9,365 10,071 11,398 Tax 1,835 2,971 3,184 3,424 3,875 RPAT 3,386 5,577 6,181 6,647 7,522 APAT 3,386 5,577 6,181 6,647 7,522 APAT Growth (%) 42% 65% 10.8% 7.5% 13.2% AEPS 10.5 17.3 19.2 20.6 23.4 EPS Growth (%) 42% 65% 11% 8% 13% Source: Company financials, HDFC sec Inst Research

Balance sheet (Rs mn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital 1,611 1,611 1,611 1,611 1,611 Reserves 3,285 6,731 11,399 13,953 17,074 Total Shareholders Funds 4,896 8,342 13,010 15,564 18,685 Long-term Debt - - - - - Short-term Debt 3,954 6,725 7,000 8,000 9,000 Total Debt 3,954 6,725 7,000 8,000 9,000 Other Financial Liabilities & Provisions 389 535 590 645 705

Other Non Current Liabilities 827 1,008 1,159 1,275 1,402 Net Deferred Tax Liability (578) (736) (751) (766) (781) TOTAL SOURCES OF FUNDS 9,488 15,873 21,007 24,717 29,010 APPLICATION OF FUNDS Net Block 346 382 501 556 599 CWIP 28 39 - - - Loans & Deposits 1,362 1,435 1,450 1,464 1,479 Other Non Current Assets - - - - - Total Non-current Assets 1,737 1,857 1,951 2,020 2,077 Liened FDs (ST + LT) 8,324 13,236 15,354 17,196 19,259 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


Page | 41

Cash Flow (Rs mn) FY17 FY18 FY19E FY20E FY21E Reported PBT 5,220 8,549 9,365 10,071 11,398 Non-operating & EO Items - 1 - - - Interest Expenses (49) 14 64 31 22 Depreciation 155 153 167 185 200 Working Capital Change (1,265) (735) 963 (5,143) (715) Tax Paid (1,835) (2,971) (3,184) (3,424) (3,875) OPERATING CASH FLOW ( a ) 2,227 5,011 7,375 1,721 7,029 Net Capex (151) (200) (247) (240) (242) (Purchase)/sale of net operating financial assets (1,925) (4,912) (2,118) (1,842) (2,064)

Free Cash Flow (FCF) 151 (100) 5,010 (362) 4,723 Investments - - - - - Non-operating Income INVESTING CASH FLOW ( b ) (2,076) (5,111) (2,365) (2,083) (2,305) Debt Issuance/(Repaid) 2,226 2,771 275 1,000 1,000 Interest Expenses 49 (14) (64) (31) (22) FCFE 2,425 2,657 5,220 607 5,701 Proceeds From Issue of Share Capital Dividend (2,472) (2,133) (1,513) (4,093) (4,401) Others - - - - - FINANCING CASH FLOW ( c ) (197) 624 (1,302) (3,124) (3,423) NET CASH FLOW (a+b+c) (47) 524 3,708 (3,486) 1,300 Opening Cash & Equivalents 1,690 1,643 2,167 5,875 2,389 Closing Cash & Equivalents 1,643 2,167 5,875 2,389 3,689 Source: Company financials, HDFC sec Inst Research

Key Ratios FY17 FY18 FY19E FY20E FY21E PROFITABILITY (%) GPM EBITDA Margin 37.6 47.3 48.8 49.7 51.7 EBIT Margin 36.4 46.4 47.9 48.8 50.8 APAT Margin 25.2 31.3 32.5 33.2 34.2 RoE 76.3 84.3 57.9 46.5 43.9 Core RoCE 56.5 53.7 44.5 36.5 32.7 RoCE 46.1 46.7 35.5 30.6 29.4 EFFICIENCY Tax Rate (%) 35.1 34.8 34.0 34.0 34.0 Asset Turnover (x) 38.3 48.9 43.0 37.9 38.1 Inventory (days) Debtors (days) 193 64 60 60 60 Other Current Assets (days) 256 429 455 487 501 Payables (days) 236 206 220 220 220 Other Current Liab & Prov (days) 48 46 47 47 47

Working Capital (days) 165 240 248 280 294 Debt/EBITDA (x) 0.78 0.80 0.75 0.80 0.79 Net D/E 0.5 0.5 0.1 0.4 0.3 Interest Coverage (100.4) 572.5 141.8 313.3 510.7 PER SHARE DATA AEPS (Rs/sh) 10.5 17.3 19.2 20.6 23.4 CEPS (Rs/sh) 11.0 17.8 19.7 21.2 24.0 DPS (Rs/sh) 6.4 9.4 10.6 11.3 12.8 BV (Rs/sh) 15.2 25.9 40.4 48.3 58.0 VALUATION 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



Page | 42

RECOMMENDATION HISTORY

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 25-Sep-18 295 BUY 352

200250300350400450500550

Apr-

18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Isec TP


Page | 43

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. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

mailto:[email protected]


Page | 44

HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com

buy - moneycontrol.comstatic-news.moneycontrol.com › static-mcnews › 2018 › 09 ›...

Documents