Verdict: I C it as an expensive Security

IPO Snapshot:

ICICI Securities is entering the primary market on Thursday 22^nd March 2018, with an offer for sale (OFS) of up to 7.82 crore equity shares of Rs. 5 each by promoter ICICI Bank, in the price band of Rs. 519 to Rs. 520 per share. Representing 23.98% of the post issue paid-up share capital, ICICI Bank will rake in Rs. 4,017 crore at the upper end of the price band, which will help it partly off-set higher loss provisions. Issue is closing on Monday 26^th March and listing is likely on 5^th April.

Company Overview:

ICICI Securities, a wholly owned capital market arm of ICICI Bank, offers broking (through ICICIdirect.com), investment banking, portfolio management services (PMS) and financial products distribution (mutual fund and insurance) to retail and institutional customers, through its marketing network of 200 own branches, 2,600+ branches of ICICI Bank, 4,600+ sub-brokers and independent financial associates. The technology, whether broking or mutual fund distribution is a ‘me-too’ or easily replicable, and most other full-fledged broking firms like Motilal Oswal or a discount broker such as Zerodha or many fin-tech start-ups in mutual fund distribution have similar offerings. Hence, its technological capabilities are not out-of-the-world and are simply keeping up with the changing times. Approximately 60% of income is generated through broking, 10% from investment banking, 15% from mutual fund distribution and balance through distribution fee of insurance and other products.

Financial Performance:

Company can be termed as a play on capital markets and can not be really considered a financial power house. It has lagged in tapping newer opportunities of ARC, or higher growth businesses such as home loans and consumer lifestyle financing are housed under the parent bank. Due to operation being heavily concentrated on stock market activities, unlike some of the peers with more diversified presence, company’s results are highly cyclical and volatile in nature.

While total revenue has risen at 19% CAGR from Rs. 796 crore to Rs. 1,404 crore during FY13-17%, with higher PAT CAGR at 47% from Rs. 71 crore to Rs. 339 crore, coinciding with the broader market bull run, this growth has not been one-side with FY16 actually witnessing 7% YoY decline in total revenue and 19% YoY drop in net profits. Thus, operating leverage is high, on either side. 9mFY18 revenue grew 31% YoY to Rs. 1,344 crore, while net profit surged 56% YoY to Rs. 399 crore, exceeding FY17 net profit of Rs. 339 crore. On an equity of Rs. 161 crore (FV Rs. 5 each), 9mFY18 EPS stood at Rs. 12.39, against FY17 EPS of Rs. 10.51. Company’s net worth stands quite low at Rs. 675 crore, translating into BVPS of Rs. 21.

Objects of Issue and Shareholding Pattern

The OFS is being undertaken only to help ICICI Bank, unlock value from its subsidiaries (after listing life insurance and general insurance business in the past 18 months). If news reports are to be believed, bank has mandated that IPO proceeds be deposited into its account before 31-3-18, so that it can recognized the gains in FY18 itself, given the 29-31 March long weekend, so as to partly off-set mounting bad loan provisions. Thus, the timing of this IPO is very critical for ICICI Bank and hence some talk of valuation trim-down (vis-à-vis 3 months ago at the time of DRHP filing) also floating in the media. Company will not receive any proceeds or growth capital from the issue and post-listing, ICICI Bank’s stake will reduce to 76%.

Valuation:

At Rs. 520 per share, company’s market cap will be at Rs. 16,751 crore, which discounts 9MFY18 annualised  EPS by PE multiple of 32x and one year forward expected earnings by a PE multiple of 26x, which is the highest in the listed peer set, as under:

While larger brokerages such as IIFL and Edelweiss are ruling at lower valuation multiples (21x and 23x), despite more diversified operations, Motilal Oswal with similar market cap as ICICI Securities edges the latter, due to asset management and advisory business, which ranks higher in the value chain vis-à-vis brokerage, due to more lucrative RoCE, accounts for over a third of Motilal’s profits (at 38%, higher than 27% of operating profits coming from brokerage) while ICICI’s asset management business is housed under a different subsidiary and ICICI Securities has nearly 60% income from broking alone. Thus, Motilal Oswal, with its more diversified operations across broking, fund based lending, asset management and advisory, is ruling at comparable valuation of current year PE of 32x and lower one year forward PE of 24x, making ICICI’s offer appear expensive. Another peer JM Financial is ruling at much lower valuations, in mid-teens.

In addition to the valuation multiples, brand ICICI has taken a hit in the minds of investors, given bank’s persisting NPA woes and poor stock returns for both the life insurance and bank stock. While ICICI Securities has been paying out 54% earnings as dividends, based on the IPO price, dividend yield is barely 1%, hence investors can’t play on this theme as well.

While on one hand, formalization of economy and greater channelization of retail savings is booming the stock markets, conscious efforts by SEBI to curb mutual fund distribution expenses and other stringent measures towards investor protection, show that outlook for financial markets intermediaries is cautiously optimistic. While ICICI Securities will benefit from supportive macros, it is not our preferred pick as a proxy to the buoyant Indian stock market, due to valuations being on the higher side.

Conclusion:

ICICI Securities’ business is heavily market dependent and hence cyclical in nature. Since more diversified plays are ruling at lower valuations, ICICI Securities IPO is not attractively priced, and hence can be skipped.

Disclosure: No interest.