HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters RESULT REVIEW 4QFY19 24 APR 2019 ICICI Securities NEUTRAL Facing stiff headwinds We rate ISEC a NEUTRAL post weaker than expected 4QFY19. Challenges to revenue and earnings growth continue due to increased competition and regulatory pressures. Our TP stands at Rs 235 (14x FY21E EPS). HIGHLIGHTS of the QUARTER Adj. revenues printed Rs 3.9bn declining 21.1/1.4% YoY/QoQ, while recurring PAT at Rs 1.08bn declined 28.2/7.2% YoY/QoQ. Broking Revs Rs 2.3bn (-16.9/+0.8% YoY/QoQ): ISEC’s market share increased to 8.5% (-20/+50bps YoY/QoQ) leading to an ADTV of Rs 584bn (+31.2/10.2% YoY/QoQ). Broking yields compressed further to 0.63bps (-37/-10% YoY/QoQ). While deteriorating mix is a factor, pricing continues to decline as well. This is evidenced by increase in competitive intensity and ISEC’s launch of lower price plans. MF Revs Rs 592mn (-30.9/-1.2% YoY/QoQ): With no upfront commissions, MF yields declined to 0.67% (- 36/-3bps YoY/QoQ). Overall AUMs were +5.3/2.5% YoY/QoQ at Rs 352bn. Yields are expected to decline further as TER reductions kick in beginning Apr-19. Revenue sharing: Management highlighted that it had entered into a revenue share agreement with ICICI Bank for new customers acquired through the bank. Full details are not disclosed. While we believe that this is not a large swing factor for earnings, it does reduce near term profitability for new business. We suspect, ISEC’s belief that loss of revenue will be compensated by early conversion of bank customers to investors. Costs: Employee costs were at Rs 1.33bn (+0.2/-6.2% YoY/QoQ). While we believe that most of the cost reduction is due to lower variable pay, ISEC has reported a reduction of 150 RMs QoQ to ~1200. We believe that some benefits of productivity increase and lower headcount will start flowing over FY20/21E. Near term outlook: We expect stock price to decline as earnings disappoint and outlook appears weak. STANCE With increased competitive intensity (Refer our Note: The Rise of Discount Brokers) we except broking yields to decline further. Additionally, regulatory reduction in MF TERs will pressure distribution revenues. The only silver lining we see is the emerging cost consciousness. We expect an anemic FY19-21E PAT CAGR of 4.8% p.a. Longer than expected rally in equity markets coupled with increased retail participation remains a key risk. FINANCIAL SUMMARY (Rs mn) 4QFY19 4QFY18 YoY(%) 3QFY19 QoQ(%) FY18 FY19 FY20E FY21E Revenues 3,881 4,919 -21.1 3,936 -1.4 17,824 16,406 16,508 17,508 EBITDA 2,256 2,556 -31.2 1,593 2.1 8,427 7,281 7,455 8,081 EBITDA Margin (%) 41.9 48.1 -617bps 40.5 141bps 47.3 44.4 45.2 46.2 PAT 1,084 1,510 -28.2 1,012 7.2 5,577 4,776 4,997 5,391 EPS 3.2 4.7 -32.5 3.1 0.8 17.3 14.8 15.5 16.7 EV/EBITDA (x) 9.4 8.3 10.3 9.5 P/E (x) 13.4 15.6 15.0 13.9 ROE (%) 84.3 50.8 44.4 41.8 Source: Company, HDFC sec Inst Research estimates INDUSTRY RETAIL BROKING CMP (as on 23 Apr 2019) Rs 218 Target Price Rs 235 Nifty 11,576 Sensex 38,565 KEY STOCK DATA Bloomberg ISEC IN No. of Shares (mn) 322 MCap (Rs bn) / ($ mn) 70/1,006 6m avg traded value (Rs mn) 74 STOCK PERFORMANCE (%) 52 Week high / low Rs 428/188 3M 6M 12M Absolute (%) 3.2 (5.8) (48.6) Relative (%) (3.6) (19.7) (60.5) SHAREHOLDING PATTERN (%) Dec-18 Mar-19 Promoters 79.2 79.2 FIs & Local MFs 13.1 13.8 FPIs 2.0 1.4 Public & Others 5.7 5.6 Pledged Shares Nil Nil Source : BSE Madhukar Ladha, CFA [email protected]+91-22-6171-7323 Keshav Binani [email protected]+91-22-6171-7325
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HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
RESULT REVIEW 4QFY19 24 APR 2019
ICICI Securities NEUTRAL
Facing stiff headwinds We rate ISEC a NEUTRAL post weaker than expected 4QFY19. Challenges to revenue and earnings growth continue due to increased competition and regulatory pressures. Our TP stands at Rs 235 (14x FY21E EPS).
HIGHLIGHTS of the QUARTER Adj. revenues printed Rs 3.9bn declining 21.1/1.4%
YoY/QoQ, while recurring PAT at Rs 1.08bn declined 28.2/7.2% YoY/QoQ.
Broking Revs Rs 2.3bn (-16.9/+0.8% YoY/QoQ): ISEC’s market share increased to 8.5% (-20/+50bps YoY/QoQ) leading to an ADTV of Rs 584bn (+31.2/10.2% YoY/QoQ). Broking yields compressed further to 0.63bps (-37/-10% YoY/QoQ). While deteriorating mix is a factor, pricing continues to decline as well. This is evidenced by increase in competitive intensity and ISEC’s launch of lower price plans.
MF Revs Rs 592mn (-30.9/-1.2% YoY/QoQ): With no upfront commissions, MF yields declined to 0.67% (-36/-3bps YoY/QoQ). Overall AUMs were +5.3/2.5% YoY/QoQ at Rs 352bn. Yields are expected to decline further as TER reductions kick in beginning Apr-19.
Revenue sharing: Management highlighted that it had entered into a revenue share agreement with ICICI
Bank for new customers acquired through the bank. Full details are not disclosed. While we believe that this is not a large swing factor for earnings, it does reduce near term profitability for new business. We suspect, ISEC’s belief that loss of revenue will be compensated by early conversion of bank customers to investors.
Costs: Employee costs were at Rs 1.33bn (+0.2/-6.2% YoY/QoQ). While we believe that most of the cost reduction is due to lower variable pay, ISEC has reported a reduction of 150 RMs QoQ to ~1200. We believe that some benefits of productivity increase and lower headcount will start flowing over FY20/21E.
Near term outlook: We expect stock price to decline as earnings disappoint and outlook appears weak.
STANCE
With increased competitive intensity (Refer our Note: The Rise of Discount Brokers) we except broking yields to decline further. Additionally, regulatory reduction in MF TERs will pressure distribution revenues. The only silver lining we see is the emerging cost consciousness. We expect an anemic FY19-21E PAT CAGR of 4.8% p.a. Longer than expected rally in equity markets coupled with increased retail participation remains a key risk.
Structural issues with ISEC Rising competitive intensity
Recently Axis Securities and Angel Broking introduced fixed/subscription based pricing for retail broking. Axis Securities offers trading across segments at flat Rs 20 per order, subject to maintenance of minimum balance of Rs 75k in savings account. For non-Axis bank customers Axis Securities is offering low broking rates for a subscription fee of Rs 250/month. On the other hand, Angel Broking charges Rs 15 per order for order size of less than Rs 50,000 and Rs 30 for order size of more than Rs 50,000.
3 out of top 10 brokers (by active customers) have started offering broking at discounted charges. Axis is currently ranked 6th whereas Angel is ranked 7th in the pecking order and with that Zerodha occupying the 1st slot it seems that the industry is moving the discount broking way. We believe this will lead to additional pressures on broking yields and make customer retention challenging.
Additionally, the discounters are also disrupting the distribution business; Zerodha also has a platform for Direct MF investing named “Coin”. Current AUM size ~Rs 25bn. Direct MF investing platforms are now fairly common with the entry of players such as PayTM Money, ET Money, and 5 PAISA etc. As awareness for direct MF increases we may see reduced market share of distributor led MF AUM.
High fixed costs remain a concern
Zerodha is operating on fixed operating costs of ~Rs 1.2bn and total operating costs of Rs 2.0bn (FY18). This is considerably lower than that of ISEC, which is operating at a total cost of ~Rs 9.4bn in FY18 and Rs 9.1bn in FY19E. While we do see early signs of cost consciousness, follow through of the same remains to be seen.
Pricing continues to be under pressure with lower pricing being offered by discount brokers. High fixed costs compared to competition remains a concern.
Tax rate (%) 35.7 36.3 (57) 36.0 (26) C/I ratio (%) 52.7 50.1 261 57.9 (523) Note: Revenues netted of for estimated interest cost on margin funding book and treasury income; treasury income re-classified as other income. Source: Company, HDFC sec Inst Research
Revenues declined 21.1% YoY as all segments under-performed. Led by fall in operating expenses (-36.7% QoQ), and employee expenses (-6.2% QoQ) total expenses fell by -11.7% YoY. EBITDA margins fell by ~617 bps YoY to 41.9% primarily due to lower revenues.
ISECs active client base growth was low at 5.8% YoY. Insurance distribution growth was strong sequentially as 4Q is the best quarter for insurance sales. However the growth was below our expectations.
ICICI SECURITIES : RESULT REVIEW 4QFY19
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Broking revenue split and growth Broking: ADTV and yields
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
MF AAUMs and yields Advisory revenues (Rs mn) and growth (%)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Broking revenues fell by 16.9% YoY despite ADTV growth of 31.2% YoY as yields fell by 38.7% YoY.
While yields continue to fall, ADTV growth has been robust. ISECs ADTV market share improved sequentially to 8.5% (-20/+50bps YoY/QoQ).
Revenue from distribution of MF products decreased 30.9% YoY to Rs 592mn due to restriction on payment of upfront commissions to distributors effective 22nd Oct 2018.
MF distribution yields dropped from 103bps in 4QFY18 to 67bps in 4QFY19.
We expect ADTV growth to moderate whereas broking yields are expected to continue to slide downwards. We have toned down our MF distribution yield estimates factoring in further cuts as new TER regulations come in force w.e.f. 1st April-19. We expect MF AUM to grow at 15.0% CAGR for FY 19-21E.
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
15-Jan-19 279 NEU 298 19-Mar-19 258 NEU 298 9-Apr-19 232 NEU 235
24-Apr-19 218 NEU 235
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ICICI SECURITIES : RESULT REVIEW 4QFY19
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