ICICI Bank : 22% upside possible
Call & Research Report by Axis Securities Research
Report Date: 14 September 2021
CMP Rs. 716 Target Rs. 870
Target Period : not Mentioned
Well-placed For Sustainable Growth!
We initiate coverage on ICICI Securities (ISEC) with a BUY recommendation and a
Target Price of Rs 870/share, implying an upside of 22% from CMP. With a market share
of 8.4% in FY21, ISEC stands as the 4th largest broker amongst the active clients in NSE
despite increased competition from the discount brokers. By leveraging its strong digital
platform, the company endeavours to become a comprehensive solutions provider and cater
to the various needs across the investors life cycle comprising of investment, protection, and
borrowing. While the COVID-19 has front-loaded opportunities in the capital market, the
broking industry continues to consolidate in favour of digital and larger players. We believe
ISEC is well-placed as the industry leader and we expect its growth to be driven by (1) Long-
term industry tailwinds; (2) Limited revenue cyclicity owing to the diversified product basket as
well as its efforts to further diversify revenue stream; (3) Improving customer sourcing and
activation through proactive use of the digital platform; and (4) Improving profitability due to its
cost rationalization efforts. Additionally, ISEC is ensuring its growth by undertaking
various initiatives to improve customer engagement and activation as well as increase
monetization of customers’ wallet shares. This cements our confidence in the
company’s bright prospects over the long term which is reflected in our target multiple
of 19x Sept’23E EPS.
Investment Thesis
Industry tailwinds keep the structural story intact
While India is a high-savings economy, it is showcasing an increasing interest in investing in
financial assets such as mutual funds, life insurance plans, and equities vis-à-vis traditional
investment options. This trend is expected to continue on account of a) Digital initiatives
increasing ease of transaction; b) Superior returns offered by the equity markets vis-à-vis
traditional investments; and c) Higher investor awareness coupled with increased retail
participation aiding growth over the medium to long term.
Focus on reducing revenue cyclicity through revenue granularization
ISEC aims to reduce its dependence on the broking business by bringing down its share
below 50% over the medium term. While it contributed ~59% of the company’s revenues in
FY21, we expect the broking revenues to drop below 50% FY23E onwards. The company
looks to granularize its revenues by focusing on improving its cross-sell ratio which will also
play an instrumental role in reducing its revenue cyclicity. ISEC maintains its sharp focus on
improving the Average Revenue Per User (ARPU).
Diversified sourcing mix and new initiatives to drive customer growth and activation
The COVID-19 advent resulted in an increased focus on scaling up digital channels which
enabled ISEC to scale up its pace of customers sourcing. This also helped the company
broaden its geographical reach, providing it with access to the underpenetrated Tier II and Tier
III cities as well as younger customers. Along with a ramp-up in the digital channels, tie-up
with ICICIB aids the company in sourcing affluent customers. Moreover, its open architecture
for broking presents ISEC with a huge addressable market, thus aiding customer sourcing
further. Additionally, customer-centric initiatives such as “Prime” and “NEO” are expected to
improve the company’s customer activation moving forward.
Cost optimization measures led by the shift towards digitization
With the digital transformation underway, ISEC achieved significant cost savings by reducing
its dependence on the physical model and deciding to prune down its branch count. Going
ahead, it plans to focus on “variable”-izing costs to improve its C-I Ratio further. We expect the
C-I ratio to range between 45-48% over the medium term.
Play on Financialization; Initiate with BUY
ISEC is a play on the increasing financialization of savings and increasing interest of retail
clients in the equity markets. Over the past couple of years, ISEC has re-aligned its business
model to leverage the technology platform. It also undertook several customer-centric
initiatives to improve customer sourcing and activation which has started yielding results.
Despite increased competition from the discount brokers aggressively sourcing customers,
ISEC has continued to maintain a respectable market share and with growth levers in place,
we expect the company to improve its market share over the long term. We also believe that
ISEC is eligible to trade at premium valuation vs its peers given its superior ROE profile,
strong parentage, and competent management team. We initiate coverage with a ‘BUY
rating and a target price of Rs 870/share (19x Sept’23E EPS), implying an upside of 22%
from CMP.