Diversification on the cards: ISEC is under transition, whereby the company is implementing several strategic initiatives across segments to emerge as a comprehensive financial solutions provider across customer cohorts. The margin norms, the last leg of which was implemented from September 1, 2021, impacted ISEC’s market share. These norms are now behind and the cash volumes have started trending higher (Oct’21 cash ADTO for the industry was higher by 16% MoM). Momentum in client acquisition is expected to continue as ~10m individuals will get added to India’s working population annually. For ISEC, 50-60% of incremental customers are in the age bracket of 18-25 years, and two-thirds are from Tier II and III towns. In the past six quarters, ISEC’s Retail Brokerage revenue have been in the Rs 3-3.5b range, in spite of a strong growth in client addition. Considering allied revenue, which includes Prime subscription, Neo subscription, MTF, and other charges, the traction has been healthy, with total brokerage + allied revenue increasing to Rs 5b in 2QFY22 from Rs 3.5b in 1QFY21. We expect the momentum in Prime and Neo subscription to improve, with a targeted marketing approach. MTF revenue will have a linkage to market movement. Technology investments are at the core of the current transitional phase for ISEC. It is building a new app for trading, which will appeal to Gen Z and millennial customers. It is developing its Money App to enhance its product offerings in insurance, MFs, fixed income, and loans. The management’s focus has been on growing its Distribution income, wherein the respective heads of MF, insurance, and loans are accountable for customer acquisition, revenue, and technological developments.
Valuation and view: The fintech revolution in India will continue to drive the millennial and Gen Z population towards online broking. With the management’s focus on customer addition, technology development, and increasing wallet share, its revenue traction should improve going forward. We have raised our estimates for Brokerage revenue to 8% CAGR from 5% CAGR over the next three years, while increasing our cost estimates, given that the company is an investment phase, leading to no change in our PAT estimates. We expect 16%/15% revenue/PAT CAGR over FY21-24E. The stock currently trades at 14.9x FY24E P/E. We retain our ‘Buy’ rating on the stock with a one-year TP of Rs 970 (21x FY23E EPS).