ICICI Securities impacted by weak market sentiment, competition

Valuation of 16x its FY20 earnings a key factor in favour of stock

The ICICI Securities stock lost 5.2 per cent in trade on Tuesday, on the back of poor December quarter results. 

The company, which was reportedly unseated by low-cost broker Zerodha as the largest online trading platform in terms of customers, saw revenues fall 18 per cent year-on-year (YoY) to Rs 396 crore. The bottom line, too, was down 34 per cent at Rs 101 crore. 

However, Managing Director Shilpa Kumar isn’t too worried. She said there is not much difference between ICICI Sec and Zerodha regarding number of customers. In fact, ICICI Securities is still the sector leader in broking revenues, she added.

This confidence may be the reason the Street is not entirely negative on the company. While HDFC Securities has downgraded the stock from ‘buy’ to ‘neutral’ citing across-the-board weakness, those at CLSA have only altered their price target expectation by 5 per cent to Rs 360 a piece and remain positive on the stock.

The cautious outlook on equity markets has hampered growth. With retail participation still on the sidelines, total broking income fell 17 per cent. The December quarter (Q3) witnessed higher volumes in derivatives and non-delivery segment, which offset the 60 per cent YoY increase in volumes during the quarter.

However, the retail segment — accounting for 87 per cent of broking income — posted a sequential revenue fall of 10 per cent, and was a bigger drag for ICICI Sec. The apex court’s verdict restricting the usage of Aadhaar resulted in a newly launched broking product ‘T20’ not kicking off as anticipated. Having remade the product with modifications, Q4 may be better sequentially.

Nonetheless, until the outlook turns entirely positive for equities, investors should not have high hopes from the company’s stock, as other businesses are also dependent on equities.

This explains why revenues for the investment banking division (largely comprising initial public offerings) and advisory business were down 38 per cent and 11 per cent YoY, respectively.

As for the distribution business, the change in regulatory norms pertaining to total expenses ratio for the mutual funds industry — which spoilt the show in Q2 — remained a drag in Q3 and the management has stated that yields for the business may remain under stress in FY20 too.

For now, undemanding valuation of 16x its FY20 earnings is the key factor favouring the stock.