Stock corner: Maintain ‘buy’ on ICICI Securities with target price of Rs 340

ICICI Securities’ (I-Sec) net profit of `130 crore, a flattish y-o-y, was in line with estimates. Profit was aided by a lower tax rate which compensated for a weak revenue growth which led to an 11% y-o-y fall in pre-tax profit. I-Sec is taking initiatives to penetrate deeper into ICICI Bank’s (parent) client base and improve engagement with clients through a combination of the revenue sharing arrangement and new products like Prime. A successful ramp-up here will support revenue and profit, but we would watch out for the ramp-up of its Esop financing business. We raise our earnings a bit to factor in a better topline and see a 15% CAGR over FY19-22. We maintain our ‘buy’ rating and roll forward our target price from `320 to `340.

During Q2, I-Sec’s pre-tax profit was down largely due to weaker trends in revenue, which was down 9% y-o-y. The contraction in revenue reflects a combination of weaker trading activity, the compression of brokerage fees and lower distribution fees (partly due to regulatory changes). Even as PBT was down, a lower tax rate helped keep net profit flat, and we expect the benefit to be higher from Q3 onwards.
During Q2, I-Sec had 0.9 million clients (active on NSE), up 12% y-o-y, and turnover market share of 7%. I-Sec is taking initiatives to improve active client growth and to improve engagement which should lift its growth outlook.

It entered a revenue sharing arrangement with ICICI Bank and this rollout seems to be moving well. Also, new products like Prime (offers better liquidity to broking clients) have seen an encouraging off-take from clients, and should improve revenue. While the management is looking to scale up the Esop financing business, we remain sceptical as it is not really a domain of expertise for the company and can raise potential asset quality risk. We raise our earnings a bit to factor in a better topline and see a 15% CAGR over FY19-22.

Its valuation is reasonable and an improvement in its growth outlook could drive a rerating. We maintain our ‘buy’ rating based on a 16x September 21CL PE.