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ICICI Securities Click here for Rating Reckoner
Largest equity broker
(19 Mar 2018)
CM RATING45/100
Incorporated in 1995, ICICI Securities is a wholly owned subsidiary of ICICI Bank, India's largest financial conglomerate, offering a wide range of financial services including brokerage, financial product distribution and investment banking. The focus is on both retail and institutional clients. The largest equity broker in India since the fiscal year ended March 2014 (FY2014) by brokerage revenues and active customers in equities on the National Stock Exchange is powered by a significant retail brokerage business, accounting for 90.5% of the revenues from the brokerage business (excluding income earned on funds used in the brokerage business) in FY2017. The award-winning proprietary electronic brokerage platform had approximately 3.9 million operational accounts end December 2017. Of these, 0.8 million had traded on the NSE in the preceding 12 months. Since inception in the calendar year (CY) 2000, a total of 4.6 million customers were acquired through the platform end December 2017.

Shilpa Naval Kumar is the managing director and chief executive officer since November 2016. Ajay Saraf is an executive director from May 2011. Harvinder Jaspal is the Chief Financial Officer and Raju Nanwani is the company secretary.

The financial savings environment in India has undergone a fundamental transformation in recent years. Strong macroeconomic factors such as growing gross domestic product, rising affluence, increasing formalization of economy, lower inflation and falling interest rates have contributed to the growing shift of household savings towards financial assets. Consequently, India is witnessing increasing retail and domestic institutional participation in Indian equity market. The recent wave of digitization steered by the support and reforms by the Indian government and augmented by increasing smartphone penetration and faster data speeds in India has resulted in positive changes in customer out-reach and consumer behaviour.

The retail brokerage and financial product distribution businesses empower customers to access the Indian financial capital markets and provide them with a seamless settlement process through a three-in-one account, linking electronic brokerage platform with the customers' savings bank and dematerialised accounts held with ICICI Bank. Retail customers are offered a wide range of products and services in equities, derivatives and research. Various third-party products including mutual funds, insurance products, fixed deposits, loans, tax services and pension products are distributed. Customers are offered a wide variety of advisory services including financial planning, equity portfolio advisory, access to alternate investments, retirement planning and estate planning.

The retail brokerage and distribution businesses are supported by a nationwide network, consisting of over 200 of own branches, over 2,600 branches of ICICI Bank through which electronic brokerage platform is marketed and over 4,600 sub-brokers, authorized persons, independent financial associates and independent associates end December 2017.

Domestic and foreign institutional investors are provided with brokerage services, corporate access and equity research. Large cross-section of institutional clients, including foreign institutional investors, are empanelled and serviced through dedicated sales teams. There is significant presence among domestic institutional investors. The focus is on attracting foreign institutional investors.

The investment banking business offers equity capital markets services and other financial advisory services to corporate clients, the government and financial sponsors. The equity capital markets services include management of public equity offerings, share buybacks, tender offers and equity private placements. From April 2012 to September 2017, the leading investment bank in the Indian equity capital markets by number of primary issuances managed also provides financial advisory services to clients in relation to domestic and cross-border mergers and acquisitions, private placements, and restructuring.

The Offer and the Objects

The offer comprises sale of up to 77,249,508 equity shares, representing about 23.98% of the equity share capital for cash, through an offer for sale by ICICI Bank.

The entire proceeds from the offer for sale (OFS) will be paid to selling shareholders. The OFS would mop up proceeds of Rs 4009.25 crore at the lower price band of Rs 519 per share (face value Rs 5 per share) and Rs 4016.97 crore at the upper band of Rs 520 per share.

The issue is to be made through a book building process and will open on 22 March 2018 and will close on 26 March 2018.

The objects of the offer are to achieve the benefits of listing the equity shares of the company on the stock exchanges. The listing of equity shares will enhance its visibility and brand image and provide liquidity to its existing shareholders. No proceeds will be received from the offer.

Up to 5% of the shares have been reserved for the shareholders of ICICI Bank.

Strengths

The largest equity broker in India since FY2014 by brokerage revenues and active customers in equities on the NSE is powered by significant retail brokerage business. The integrated electronic brokerage platform, with the systems of over 25 third-party product providers, included depositories, exchanges and credit bureaus end December 2017.

Household savings are increasingly shifting from physical assets to financial assets. The shift will be beneficial. The average daily turnover for cash equity and equity derivatives traded by customers (i.e. excluding any proprietary trading) recorded a CAGR of 59.9% from FY 2013 to the nine months of FY2018 compared with the market CAGR of 37.4%. Over 95.0% of the customers' brokerage transactions by notional value and over 90.0% of the mutual fund transactions by number of transactions were online end December 2017.

The strong and growing distribution business comprises distribution of third-party mutual funds, insurance products, fixed deposits, loans and pension products to retail customers for commission income. The revenues from the distribution business have increased from Rs 162.14 crore in FY2013 to Rs 350.06 crore in FY2017 and stood at Rs 328.05 crore in the nine months of FY2018, with distribution of third-party mutual funds being major contributor. An open-source distribution model has been adopted for all distribution products, except insurance products. In addition to strong online presence, the distribution business is supported by nationwide network.

Innovation is deeply embedded in the corporate culture. There is a history of product and technology innovation to satisfy the needs of the customers. With the three-in-one accounts in partnership with ICICI Bank, customers get greater flexibility in the use of their money. Retail brokerage and distribution customers comprised over 140 different order types end December 2017.

The sole equity securities arm of ICICI Group has mutually beneficial agreements with various companies in the ICICI Group.

Revenues of the leading investment bank in the Indian equity capital markets by number of equity capital market issuances managed from April 2012 from investment banking business have increased from Rs 70.14 crore in FY2013 to Rs 119.48 crore in FY2017, recording CAGR of 14.2% and were Rs 113.44 crore in the nine months of FY2018. Clients are also provided financial advisory services for domestic and cross-border mergers and acquisitions, private placements, and restructuring. The institutional research team covered over 220 Indian stocks across sectors end December 2017, and also provided macroeconomic and industry-related research.

The established track record of strong financial performance consists of a consistent record for paying dividend, with the dividend pay-out ratio was 60.6% in FY2017. The ratio of total expenses to total revenue decreased from 84.6% in FY2013 to 62.8% in FY2017 and 54.4% in the nine months of FY2018.

Weaknesses

The business is highly dependent on economic and market conditions in India. The brokerage business, which accounts for a significant portion of revenues (62.6% in FY2017), is highly dependent upon the levels of activity in the securities markets in India.

There is high dependence on relationship with ICICI Bank. One of the significant retail products, the three-in-one account is a joint offering with ICICI Bank. Any adverse change in the commercial arrangement with ICICI Bank can negatively affect profitability. In addition to own branches, there is reliance on ICICI Bank for access to their branches through which customers are sourced. In addition, there is dependence on ICICI Bank for certain aspects of customer service, account opening process, verification of certain sub-brokers, authorized persons, independent financial associates and independent associates, and referrals to investment banking business. In the past, senior employees from the ICICI Group have been hired to fill managerial positions. Some of the senior employees have also gone on to work at the ICICI Group. Thus, there is reliance on the ICICI brand that is not owned by it.

The operations rely heavily on the ability of the IT systems to record and process accurately a large number of transactions on a daily basis and in a timely manner. A prolonged disruption to, or failure of, information processing or communications systems will limit ability to process transactions and impair the ability to service customers.

A significant portion of the brokerage and distribution revenues and income is derived from relatively few customers. The top 5% of active customers accounted for more than 50% of the brokerage and distribution revenues and income in the nine months of FY2018.

All the businesses are highly competitive. The brokerage business faces competition from online discount brokerages, some of which render services at very little or even zero brokerage.

Valuation

The revenues from the broking and commission segment, with a share of 89.6% in the overall revenues for FY2017, recorded 17% CAGR to Rs 1257.03 crore in FY2017 from Rs 660.95 crore in FY2013. Within this segment, income from commissions on the distribution of third-party mutual funds and life insurance products recorded a higher CAGR of 21% to Rs 350.06 crore (24.9% of the total revenues) in FY2017 from Rs 162.14 crore in FY2013, while brokerage revenues registered CAGR of 15% to Rs 878.15 crore (62.6% of total) in FY2017 from Rs 796.71 crore in FY2013. Further, the other broking and commission notched 92% CAGR to Rs 28.82 crore in FY2017 from Rs 2.1 crore in FY2013.

The revenues from the investment banking segment recorded a CAGR of 14% to Rs 119.48 crore (8.4% of total revenues) in F2017 from Rs 70.14 crore in FY2013, supported by an increase in the number of equity capital markets and financial advisory transactions. Revenues from the treasury investment and trading segment stood at Rs 27.72 crore (2% of total) in FY2017.

There a 47% CAGR in profit after tax from Rs 71.75 crore in FY2013 to Rs 338.59 crore in FY2017, while profit after tax (PAT) notched 56% CAGR to Rs 399.09 crore in the nine months ended December 2017. The return on equity has exceeded 30.0% for each year from FY2013, with return on equity of 69.2% in FY2018. There has not been any shareholder capital injection since FY2011.

The EPS for the nine months of FY2018 works out to Rs 16.5 (annualized). At the price band of Rs 519 to Rs 520, P/E works out to 31.4 to 31.5 times. Among comparable companies, Edelweiss Financial Services is trading at P/E (annualized for nine months of FY2018) of 27.0x, IIFL Holdings at 28.9x, Motilal Oswal Financial Services at 31.7x and Geojit Financial Services at 33.4x.

The company's CAGR in revenues between FY2013 to FY2017 was relatively slow at 19% compared with the comparable peer companies. But the CAGR PAT has been strong at 47%, with robust return on equity.

However, profit of brokers fluctuates with sentiments in the market. The recent track record was supported by surge in liquidity. Growing in a pre-election year of FY 2019 on a very high base of FY 2018 will be very difficult for the industry.

ICICI Securities: Issue highlights
For Offer for Sale Offer size (in Rs crore)
- On lower price band4009.25
- On upper price band4016.97
Offer size (in no. of shares )7.72 crore
Price band (Rs)*519-520
Post issue capital (Rs crore)161.07
Minimum Bid Lot (in no. of shares )28
Post-issue promoter & Group shareholding (%)76.02
Issue open date22-3.2018
Issue closed date26-3.2018
ListingBSE, NSE
Rating 45/100

 

ICICI Securities: Consolidated Financials
1303(12)1403(12)1503(12)1603(12)1703(12)1612(09)1712(09)
Sales680.46750.151091.721010.661274.18929.101218.36
OPM (%)18.8%15.4%34.7%29.9%34.2%35.8%43.7%
OP128.07115.77379.29301.98436.21333.05532.95
Other Income25.3862.11117.79113.92130.0593.59126.33
PBDIT153.45177.88497.08415.9566.26426.64659.28
Interest30.8924.6631.125.8428.7420.2435.15
PBDT122.56153.22465.98390.06537.52406.4624.13
Dep.13.9413.4816.315.9615.4811.7511.56
PBT108.62139.74449.68374.1522.04394.65612.57
Tax (including Deferred Tax)36.8750.55155.81135.38183.45139.24213.48
PAT71.7589.19293.87238.72338.59255.41399.09
EPS (Rs)*2.232.779.127.4110.5110.5716.52
*EPS is on current equity capital of Rs 161.07 crore of face value of Rs 5 each
Figures in crore
Source: Capitaline Databases

 

ICICI Securities: Segment-wise Break up of revenues
1303(12)1403(12)1503(12)1603(12)1703(12)1712(09)
(Rs crore)% share(Rs crore)% share(Rs crore)% share(Rs crore)% share(Rs crore)% share(Rs crore)% share
Brokerage496.7170.3544.6567.1834.6169.0736.9665.6878.1562.6854.6963.6
Distribution162.1423.0186.6923.0266.8822.1254.0922.6350.0624.9328.0524.4
Other2.100.37.610.95.630.513.011.228.822.127.942.1
Brokerage and distribution660.9593.6738.9591.01107.1291.61004.0689.41257.0389.61210.6890.1
Investment banking70.149.959.337.363.845.283.367.3119.488.4113.448.4
Treasury and trading-25.25-3.513.981.738.553.237.163.327.722.020.571.5
Total 705.84100.0812.26100.01209.51100.01124.58100.01404.23100.01344.69100.0
Source: ICICI Securities IPO prospectus

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