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 markets. 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. However, activity in capital markets in India remains low compared to global markets as demonstrated by market capitalization to GDP ratio of 69% for India compared to global average of 99% in 2016 (Source: CRISIL). Being one of the pioneers in the e-brokerage business in India, along with its strong brand name, large registered customer base, wide range of products across asset classes, complimentary advisory services, position I-sec to be the natural beneficiary of the growth in digitization and resultant transformational changes in the Indian savings markets.
I-sec also distribute various third-party products including mutual funds, insurance products, fixed deposits, loans, tax services and pension products. All its businesses verticals are supported by its nationwide network, consisting of over 200 own branches, over 2,600 branches of ICICI Bank through which its electronic brokerage platform is marketed and over 4,600 sub-brokers, authorized persons, independent financial associates and independent associates as at December 31,2017.
To unlock value for stakeholders and listing purpose, I-sec is coming out with a maiden IPO of 77249508 equity shares of Rs. 5 each as Offer for Sale (OFS) via book building issue with a price band of Rs. 519 – Rs. 520 to mobilize Rs. 4009.25 cr. to Rs. 4016.97 cr. (based on lower and upper price bands). Issue opens for subscription on 22.03.18 and will close on 26.03.18. Minimum application is to be made for 28 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. I-Sec has reserved 3862475 (5%) shares for purchase by the ICICI Bank retail and HUF stakeholders who were on the books of bank as on 13.03.2018. Issue constitutes 23.98% of the post issue paid up capital of the company. BRLMs to this offer are BofA Merrill Lynch (DSP Merrill Lynch Ltd.), Citigroup Global Markets India Pvt. Ltd., CLSA India Pvt. Ltd., Edelweiss Financial Services Ltd., IIFL Holdings Ltd and SBI Capital Markets Ltd. Karvy Computershare Pvt. Ltd. is the registrar to the issue. Average cost of acquisition of shares by the selling stakeholder is Rs. 5.82 per share. On the net issue size, excluding ICICI Bank stakeholder reserved quota, I-sec has reserved 75% issue for QIBs, 15% for HNIs and 10% for retail investors. Post issue, I-sec paid up capital remains same at Rs. 161.07 crore.
On performance front, I-sec has (on a consolidated basis) reported revenue/net profits of Rs. 812.26 cr. / Rs. 89.19 cr. (FY14), Rs. 1209.51 cr. / Rs. 293.87 cr. (FY15), Rs. 1124.58 cr. / Rs. 238.72 cr. (FY16), Rs. 1404.23 cr. / Rs. 338.59 cr. (FY17). For first nine month of the current fiscal, it has earned net profit of Rs. 399.09 cr. on revenue of Rs.1344.69 cr. If suffered a setback for FY16 in line with general trends of the markets. Its entire equity is issued at par since inception. For last five fiscals, it has reported related party revenue of around 10% on an average in the total revenues. 40% of revenues are from non-broking business. Issue is priced at a P/BV of 25.05 based on its NAV of Rs. 20.76 (on consolidated basis) as on 31.12.17. For last three fiscals it has posted an average EPS of Rs. 9.25 and an average RoNW of 76.91%. If we annualize latest earnings and attribute it on post issue equity then asking price is at a P/E of 31 plus against industry average of 37 and its peers trading at a P/E of Edelweiss Fin. (184), IIFL Holdings (137), JM Fin. (78), Motilal Oswal (133) and Geojit Fin. (42) (as on 15.03.18). For last five fiscals, I-sec has posted CAGR of 18.8% in revenue and 47.4% CAGR in PAT. For first nine months it has posted growth of 31.5% and 56.3% respectively.
Here is a quick overview of ICICI Securities IPO recommendations by major brokerage houses.
GEPL Capital sees several positives for India’s biggest equity broker including benefits from financialization of household savings and distribution of other financial products. “ICICI Securities Ltd (I-Sec) stands to gain from operating leverage. At a P/E of 32xs of annualized FY18 EPS. We believe that I-Sec is at a discount compared to its peers. We assign a Subscribe rating to the IPO,” said the brokerage house in its IPO review.
Jatin Damania of Kotak Securities has put a subscribe rating on the upcoming IPO. “At the higher end of the issue price of Rs 520 per share, the stock is being offered at 31.5x 9MFY18 annualized earnings. In the past two years, the broking industry in India has witnessed growth in terms of increase in new accounts, higher income from distribution business and sharp rise in primary market transactions. Activities in the capital markets business will remain a direct beneficiary of an improving macro environment, shift from physical assets to financial assets and stable government and its policies. Given ICICI Securities presence across the different segment and its customer base helps the company to explore new opportunities. We recommend Subscribe to the issue,” recommended its research note.
Asit C Mehta is also positive on the public offer while pointing out full valuations at the current price. It has recommended investors to Subscribe for Long Term. “ICICI Securities is one of the leading broking houses with highly integrated technology based platform, ICICIdirect. They offer diversified range of financial products and services and have forte in retail broking services, which have ample growth opportunities with increasing investments from the households. At an upper price band of Rs.520, the asking price of ICICI Securities’ stock is at a P/E of 31.55x on FY18E EPS of Rs.16.48 making it fully valued. We recommend to SUBSCRIBE the issue with a long-term perspective,” said the brokerage house’s note on ICICI Securities IPO review.
Way2Wealth is also in the list of brokerage houses with positive ICICI Securities IPO recommendations, although it warned gains might be limited due to premium pricing. “At the price band of `519-520 the issueis priced at ~34.8x its TTM-Dec-17 earnings and ~24.8x its book value as on Dec-17. ISL has delivered exceptional sales and PAT CAGR of 20% and 56% over the past 3 years with return on equity ratios in excess of 30% for each year since FY13 and far superior compared to listed peers. However, as the issue is priced at a premium compared to its peers, we believe it limits the scope of gains in the short term and hence advise investors with a long-term investment horizon to SUBSCRIBE to the issue,” noted analyst Chintan Gupta in his analysis of ICICI Securities IPO.
So, if you are a bull right now and have a view that the Indian stock markets will have a healthy upward movement in the next 3-5 years, and most importantly, ICICI Securities will be able to cash it one way or the other, then you should definitely subscribe to it. Conservative or risk-averse investors should avoid it.
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