INDIA RESEARCH

INITIATING COVERAGE
NBFC

19 December 2019

ICICI Securities
Making of India's own Charles Schwab

Trading
?Stocks
?Derivatives
?Bonds
?Stock SIPs
Investment & Planning
? Mutual Fund
? PMS
? NPS
? AIF
? Life Insurance
? General Insurance
? Health Insurance

Loans and Assets

?Insta loan
?ESOP
?Mortgage

Digant Haria Vidhi Shah Bhavik Mehta

+91 22 4031 3422 +91 22 4031 3467 +91 22 4031 3397
digant.haria@antiquelimited.com vidhi.shah@antiquelimited.com bhavik.mehta@antiquelimited.com
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 1

Current Reco : BUY INITIATING COVERAGE

Previous Reco
CMP
: BUY
: INR341
ICICI Securities
Target Price : INR450 Making of India's own Charles Schwab
Potential Return : 32%
Apart from being India's largest retail broker, ICICI Securities has many firsts
to its credit including India's first 3-in-1 platform, largest customer base,
Digant Haria widest product offering and the most extensive geographic presence. Unlike
+91 22 4031 3422
digant.haria@antiquelimited.com
most of the innovative companies, ISEC isn't resting on its past laurels and
has started its journey to transform from India's largest retail broker to India's
Vidhi Shah largest "Financial Supermarket" for retail investors just like Charles Schwab.
+91 22 4031 3467 This journey has the potential to not only reduce the cyclicality of business
vidhi.shah@antiquelimited.com but also provide long run way for growth. Initiate with BUY.
Bhavik Mehta Uniquely positioned to win
+91 22 4031 3397
bhavik.mehta@antiquelimited.com
Thanks to its two decades of existence, ISEC is a unique combination of multiple things - 1)
Largest base of affluent Indians consisting of retail, affluent, HNIs and institutions; 2) "Phygital"
combination of largest advisory team and the best digital platform; 3) Widest buffet of
investment products available in India; 4) Safety & comfort of bank backed broker
Market data
Responding to changing industry dynamics
Sensex : 41,559
Sector : NBFC ISEC is responding to aggressive competition in plain vanilla broking by transforming itself
Market Cap (INRbn) : 110.1 from mere broking / distribution to "financial supermarket" for affluent & retail. As a part of
Market Cap (USDbn) : 1.552
this, it has launched attractive broking plans under "PRIME" & "OPTION20" category and
O/S Shares (m) : 322.1
enhanced its focus on selling other investment products. This will not only help it retain &
deepen existing client base but also activate the inactive clients and acquire new customers.
52-wk HI/LO (INR) : 365/188
Avg Daily Vol ('000) : 165 Re-aligning the organizational set-up
Bloomberg : ISEC IN Over the past 12 months, the management team led by Mr. Vijay Chandok has sharpened its
Source: Bloomberg focus on cross-sell by re-aligning employee incentives and entering into revenue sharing
Valuation arrangement with ICICI Bank by aligning with their relationship managers. We are already
FY20e FY21e FY22e seeing revenue & cost benefits and remain hopeful that they will cushion any volatility in
EPS (INR) 14.7 17.5 20.5 broking income during the current transitory phase.
BV (INR) 35 38 42 Strong financial position
P/E 23.2 19.4 16.6
This transformation could reduce the volatility of its revenue and earnings and at the same
RoCE (%) 27.1 27.0 26.5
time provide long run way for growth. While H2FY20 will see some negative impact of
RoE (%) 44.0 48.2 51.5
transformation, we believe growth will re-start from FY21. Cash rich balance sheet, high
Source: Antique dividend payout and strong parental support remain icing on the cake.
Returns (%) Risk of price-wars is over-stated, but needs monitoring
1m 3m 6m 12m
Despite the onslaught of discount broking and the general decline in yields, bank backed
Absolute 11 47 57 27
brokers witnessed double digit growth in client base as well as revenue base on account of
Relative 8 29 47 11
on-going consolidation in the broking industry. The largest discount broker seems to be shifting
Source: Bloomberg
focus on products & wealth management; something which bank backed brokers already
Shareholding pattern have a strong hold on. Another risk that needs monitoring is regulations around expense
ratios of mutual funds.
Promoters : 79%
Public : 21% Key financial summary
Others : 0% INR mn FY18 FY19 FY20e FY21e FY22e
Source: Bloomberg Revenue (INRm) 18,585 17,042 16,432 17,966 20,056

Price performance vs Nifty Net Profit (INRm) 5,491 4,869 4,735 5,650 6,608
% growth 62.6 (11.3) (2.8) 19.3 16.9
140
EPS (INR) 17.0 15.1 14.7 17.5 20.5
120
100 BV (INR) 26 32 35 38 42
80 P/E 20.0 22.6 23.2 19.4 16.6
60 P/BV 13.1 10.6 9.8 9.0 8.2
Dec-18 Apr-19 Aug-19 Dec-19 RoCE (%) 55.9 50.8 27.1 27.0 26.5
ICICI Securities NIFTY RoE (%) 83.0 52.0 44.0 48.2 51.5
Source: Bloomberg Indexed to 100 Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 2

ICICI Securities - Valuation & financials

Transformation impact to be absorbed by FY20; growth to re-start in FY21
ISEC achieved peak profits of INR5.5bn in the year FY18, which also happened to be the
most buoyant year for capital markets, especially mid & small caps. Post that, market conditions
became tough and rules surrounding mutual fund commissions witnessed significant tightening.
As such, ISEC's distribution revenue has remained static and broking revenue may decline
~16% over FY18-20e.

Revenue history & projections

FY16 FY17 FY18 FY19 FY20e FY21e FY22e
1) Benign macro environment 1) Tough macros 1) Normal macros?
Backdrop 2) Raging bull market 2) Narrow market 2) Normal market?
3) Mid & Small cap party 3) Tight MF regulations 3) Stable MF regulations?
Revenue 11,236 14,039 18,585 17,042 16,432 17,966 20,056
Broking 6,604 7,756 10,243 9,328 8,630 9,346 10,122
Distribution 2,541 3,497 4,665 4,635 4,623 5,278 6,225
Others 2,090 2,786 3,677 3,079 3,178 3,342 3,709
Source: Company, Antique

However, the good news is that the entire impact of tighter mutual fund regulations has been
absorbed as on Sep19. In case of retail broking, we expect H2FY20 to reflect the full impact
of firm wide roll-out of lower priced broking plans like PRIME & OPTION20. Thus, we believe
that ISEC is poised to re-start its growth journey from FY21, even if there is no material change
in market conditions.
Operating costs - big lever to off-set transformation impact
Although large parts of operating costs are fixed in nature, management is focused on
controlling them and improve employee level productivity. This will ensure that overall operating
expense increase over FY20 & FY21 will be minimal, may be in lower single digits. This in
turn prepares the organization for massive operating leverage benefits when growth returns.

Operating costs to remain contained

FY16 FY17 FY18 FY19 FY20e FY21e FY22e
Opex 7,112 8,392 9,462 9,138 8,645 8,962 9,727
Employee 3,924 4,736 5,347 5,413 5,142 5,348 5,776
Operating Expense 1,172 1,450 1,891 1,449 1,341 1,452 1,573
Other expenses 2,016 2,206 2,223 2,276 2,162 2,162 2,378
Source: Company, Antique

Retail franchise + Lower cyclicality = Higher valuations

While ISEC has always been the largest retail franchise in Indian Broking Sector, the future of
ISEC will have much lower earnings volatility, thanks to its focus on "financial supermarket"
approach. While the transformation is underway, we assign 22x earnings on FY22e and
remain cognizant of the fact that successful transformation to "retail wealth management"
company will attract much higher multiples.

Profitability to come back by FY21e

FY16 FY17 FY18 FY19 FY20e FY21e FY22e
PBT 3,710 5,210 8,479 7,551 6,486 7,740 9,051
Tax rate 36% 35% 35% 36% 27% 27% 27%
PAT 2,357 3,376 5,491 4,869 4,735 5,650 6,608
EPS 7.3 10.5 17.0 15.1 14.7 17.5 20.5
Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 3

Industry section
Trend 1: The decade long consolidation continues even now
n Top brokers continue to acquire new clients & grow their revenue
n Smaller brokers - who moved my cheese?
l Inadequate investments in technology
l Inability to offer research & advisory
l Regulations - slowly tightening the screws
l Trust - more important than cost

Trend 2: The battleground in discount broking is shifting from pricing

to products
n Observation 1 - No human touch
n Observation 2 - Heavy trading clientele
n Observation 3 - Young customers, with low disposable income
n Observation 4 - Huge gap between No.1 and No.2 player
n Observation 5 - Zerodha has shifted focus towards products rather than pricing
n Observation 6 - Many new discount broking plans come with riders
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 4

Industry section
Trend 1: The decade long consolidation continues even now
2011-2015 saw steep rise in stock markets on account of benign macro environment. Not
only did old investors, who fled market in financial crisis of 2008 return back but the boom in
small and midcap indices in 2016-2017 led to entry of many new investors. Discount brokers
as well as large full scale brokers benefitted the most in acquiring these customers. Large
brokers could acquire despite high broking prices due to their better technology platform,
research capabilities and ability to cater to changing needs. It can be seen from the table
below that market share of top 10 brokers has increased by ~900bps over past seven years.

TOP 10 brokers - steadily increasing market share (cash equities)

(%) FY13 FY14 FY15 FY16 FY17 FY18 FY19
BSE 22.0 24.0 29.0 31.0 29.0 33.0 34.0
NSE 24.0 25.0 26.0 29.0 28.0 31.0 32.0
Source: NSE, Antique

Not only did top brokers continue to acquire new clients……

The bull market in mid-caps and the general trend of customers opting for larger, reputed
broker with wide product offerings helped the full-scale brokers to grow despite the onslaught
of discount broking. As can be seen from the table below, most large brokers have been able
to double their active customer count over past six years.
Over time, there has been some differences in the profile of customers being acquired by full-
scale brokers vs. discount brokers. The full-scale brokers are more focused on acquiring
clients who have some kind of investible surplus and to whom they can offer more investment
products through cross-sell. Discount broking on the other hand attracts the high frequency &
savvy derivative traders and "new to market" kind of young customers, who have limited
investible surplus.

Steady growth in active clients (NSE) across broker categories

('000) Mar14 Mar15 Mar16 Mar17 Mar18 Mar19 Nov19
Bank Backed
ICICI Sec 501 595 560 618 798 844 935
HDFC Sec 279 348 408 483 602 672 648
Kotak Sec 223 268 247 274 369 437 485
Axis Sec 77 120 184 259 405 419 311
SBI Caps 68 114 126 169 214 210 220
Full Scale
Sharekhan 275 343 336 366 535 510 486
Angel 140 160 171 230 364 415 455
Motilal Oswal 123 153 166 207 308 322 333
Karvy 126 172 167 181 245 268 283
Discount Broking
Zerodha 18 30 62 166 541 909 1,113
5PAISA 0 0 0 4 36 101 295
Others 2,457 2,789 2,744 2,993 3,874 3,675 3,774
Total 4,288 5,092 5,170 5,951 8,290 8,782 9,338
Source: NSE, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 5

…..but they also witnessed decent revenue growth

Despite the huge noise of discount broking prices FY18 onwards, the top brokers were able
to grow their broking revenue pool at a decent rate even in FY19. Both the bank backed and
standalone brokers witnessed double digit revenue CAGR growth. Even the largest players
i.e. ICICI Securities and Motilal Oswal grew their revenues at 13.5% and 22% CAGR over
FY14-19 respectively.

Steady increase in broking revenue of large brokers

(INR mn) FY14 FY15 FY16 FY17 FY18 FY19 CAGR (%)
Bank Backed
ICICI Sec 4,960 7,554 6,607 7,759 10,243 9,328 13.5
HDFC Sec 2,039 3,374 3,116 4,211 5,960 5,260 20.9
Kotak Sec 3,124 5,450 5,147 6,650 8,173 7,837 20.2
Axis Sec 485 1,010 1,058 1,450 1,706 1,597 26.9
SBI Caps 470 730 758 1,113 1,553 2,014 33.8
Full Scale
Motilal Oswal 2,648 4,449 4,510 5,516 7,336 7,115 21.9
India Infoline 3,233 4,726 4,254 4,412 5,141 5,048 9.3
Angel 2,592 3,330 3,145 3,600 4,785 5,014 14.1
JM Financial 942 1,453 1,347 1,614 2,188 1,902 15.1
Source: Company, Antique

An important point to note is that the bank backed brokers could grow their broking revenue
despite having relatively high brokerage rates vs. their standalone full-scale counterparts
and their discount broking counterparts. This trend highlights an important aspect of customer
behavior:
n Trading costs are not the only consideration in minds of every customer
n Not all customers are cost conscious

Pricing chart for brokers from 2010 to 2018 remained more or less similar
Broker Cash (Delivery) F&O
ICICI Sec 0.55% 0.05%
Axis Sec 0.50% 0.05%
HDFC Sec 0.50% 0.05%
Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 6

Smaller brokers - who moved my cheese?

Small time brokers have constantly undergone a challenge to stop their customers from migrating
to other brokerages. That's because of lack of services and products offered to their customers
due to inadequate investment in technology and also due to malpractices taken place by
some brokers overtime. The recent Karvy fiasco, which involved diverting client's pledge
securities for personal use seems to be the final nail in coffin for mid/small sized brokers. We
expect this market share shift towards large & reputed brokers to continue in times to come.

Slow addition of active clients (NSE)

('000) FY15 FY16 FY17 FY18 FY19 Nov19
IIFL Securities 286 263 198 225 222 199
Religare 130 120 121 144 162 128
Reliance Sec 114 97 83 123 122 119
SMC Global Sec 63 64 74 103 108 105
Nirmal Bang 59 61 73 96 96 89
Anand Rathi 57 58 64 78 75 73
Ventura Sec 51 59 69 83 77 71
Indiabulls Ventures 47 39 39 49 45 44
Aditya Birla Money 43 39 40 55 41 42
Source: NSE, Antique

Inadequate investments in technology

Except for top 15 or 20 brokers, most of them cannot even offer services like online IPO,
taxation support in terms of short/long term gains, SIPs, app based trading, seamless fund
pay-in / pay-out, etc. Even if they offer any of these services, implementation isn't as smooth
in comparison to the large full scale brokers. Key reasons include lower technology budgets
and lack of focus.

Few services are not offered by next top 10 brokers

Source: Company, Antique

Inability to offer research & advisory

Over past few years, many savvy & DIY customers migrated away from traditional brokers to
either full-scale brokers or discount brokers due to competitive brokerage rates & better
technological platforms offered by the later. Thus, the traditional brokers were left with customers
who needed advice & hand-holding, which they themselves were not capable of. Eventually
even these customers migrated in search of better research and advisory services.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 7

Regulations - slowly tightening the screws

Regulators have changed their focus from "entity level" to "client level" over past 10 years.
Earlier, client level regulations were not very strict and focus of stock exchanges was on "entity
level". Now the regulations relating to margins, credit/debit, and settlement are all at individual
account level and this reduces the leeway for small time broker. The bank backed brokers like
ICICI Securities always had the "client level" focus and hence these regulations have little
impact on them.
„ Shifting client codes at EOD: While this loophole was plugged somewhere in
2014, this practice was used by brokers to offer "tax adjustment or tax planning"
services to their large clients. Now, there is a large penalty in doing this, even in case
of genuine errors.
„ Ability to "net-off" margin requirement: Earlier, brokers could net off the
margin requirements within their own clients and were required to pay only the "net"
margins. Also, client balances could be parked in FDs that could earn float. Now,
the compliance happens at individual account level balances and can be parked in
current accounts only.
„ Allowing client debits in individual accounts: This was one of the key facilities
that small time brokers used to offer their clients. "Buy today, pay after few days"
offered a lot of convenience to clients. Now, the rules are so stringent that accounts
with more than 5 days of debits have to be squared off.
Trust - more important than cost
Over past few years, there have been many instances of small time brokers going belly up
and clients losing their shares or cash balances or ending up in long litigations. While few of
these instances could be because of weak risk management, some of them were out-right
malpractices on the part of brokers. Whatever the reason, smaller brokers do not inspire the
confidence they once used to.

Fraudulent events occurred in the past

Name of Event
Broker
Blue Chip Raising money from
Corporation the public in a "fraudulent
and deceitful" manner
Allied Financial Misappropriating client
securities and other
violations
Allied Financial Illegally transferring
Dalmia Cement's
financial securities
BMA Wealth Misappropriation of
Creators client securities
Karvy Stock Broking Pledging client securities
to raise funds
Source: Company, Antique
Date of Event Amt involved Explanation
(INR bn)
Sep 17 12 Collected funds from the investors through misrepresentation
as a portfolio manager by using the certificate of registration
issued to BCCPL as a stock broker by promising high returns
Feb 19 0.94 Misuse of client funds by way of transferring their money to
own bank A/c and making a donation, while payments were
made to some clients without sufficient balance in the ledger
Aug 19 3.44 Fraudulently transferred mutual fund units of Dalmia Cement
into its account by using delivery instruction slips bearing the
forged signatures of authorized signatories
Oct 19 1 Securities were prima facie used for meeting the pay in
obligation of certain related clients
Dec 19 23 Pledged securities of over 95,000 clients with many lenders as
collateral to raise over INR 6bn in loans for itself.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 8

Trend 2: The battleground in discount broking is shifting from pricing to

products
Zerodha is the pioneer in discount broking, having started its offering in 2011. After a
relatively slower progress till 2015, customer acquisition accelerated over FY16-19 and
continues till date. So much that it has become the largest broking company in India in terms
of active customers (not in terms of revenue). Over past few years, many players jumped into
this game and offer similar value proposition.

Discount Pricing Plans of various brokers - Oct 19

(Rs/Per order) Zerodha 5Paisa UpStox Samco Angel Bajaj
Plan Name All plans All plans Basic Basic iTrade Prime Basic
Equities
Delivery 0 10 0 20 0 1
Intraday 20 10 20 20 20 1
FnO 20 10 20 20 20 1
Currency 20 10 20 20 20 1
Commodity 20 10 20 20 20 1
Direct MF 0 0 0 NA NA NA
Source: Company, Antique

Important observations on discount broking

Observation 1 - No human touch
Discount brokers operate mostly on offline mode. They barely have any physical presence or
any RMs for selected clientele to adhere to their needs. In case a customer faces any issue,
they need to raise a ticket and wait for the issue to get resolved.
Observation 2 - Heavy trading clientele
Discount broking customers seem to have huge affinity towards F&O trading. We state this
from the fact that Zerodha's average DP holding per customer stands at INR 0.14mn. This is
significantly lower to the average DP holding of full-scale brokers like Geojit and ICICI Securities
which is INR 0.30mn and INR 0.55mn respectively.
Observation 3 - Young customers, with low disposable income
Discount brokers have made a large customer base but more than 70% of the customers fall
within the age group of 20-35 years. This segment is in the process of creating their wealth
and currently have small corpus for trading.
Observation 4 - Huge gap between No.1 and No.2 player
While Zerodha has surely created splash, but even the second largest discount broker seems
to be struggling, whether in terms of customer acquisition or profitability. This phenomenon
suggests that discount broking in its current form could have exhausted its "shock value" and
they may have to offer some of the facilities provided by full scale brokers to attract valuable
customers.

Key parameters of discount brokers

FY17 FY18 FY19 H1FY20
Zerodha
Active Customers ('000) 166 541 909 1,113
Revenue (INR mn) 2,210 5,600 8,500 NA
PAT (INR mn) NA 2,240 3,500 NA
5Paisa
Active Customers ('000) 4 36 101 295
Revenue (INR mn) 75 197 626 461
PAT (INR mn) (117) (253) (166) (33)
Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 9

Observation 5 - Zerodha has shifted focus towards products rather than

pricing
Zerodha has been launching various products since past few years in order to cross sell to
their existing customers. It started by launching Coin platform in order to sell mutual fund in
FY17 and then obtained NBFC license to start margin funding.

Timeline of new product launches by Zerodha

2017 2018 2019

“Coin” Platform for Introduced ELSS Started with LAS on

Direct MF and SIP in Coin obtaining NBFC license

Source: Company, Antique

Nitin Kamath, founder and CEO of Zerodha's quote in newspaper article - "A lot of
people think that broking business is about pricing. It has stopped being about pricing
long time ago. It is all about products and product development takes time."
This indicates that you cannot achieve profitability merely on discount broking prices and
large customer base. In order to survive in the long run, distribution of other investment products
and services is fairly important.
Observation 6 - Many new discount broking plans come with riders
Discount brokers are charging high upfront fees or putting conditions if the customer wants to
opt for discount prices. Thus, on net basis they are not providing much discount broking prices
as they claim to be. For example, in order to avail discount prices and services in case of
5Paisa, the customer needs to shell out upfront fees of INR 3,000 or INR 5,000 per annum.

5Paisa is free, but only after paying upfront fees

Free plan
Account Opening
No Subscription cost
No PAY OUT charges
Source: Company, Antique
249 p.m./ Rs. 2999 p.a.
Account Opening
Fundamental Research
Technical Research
Thematic Investment
Free 50 trades annually
Investment in Direct M.F.
Zero PAY OUT charges
499 p.m./ Rs. 4999 p.a.
Account Opening
Fundamental Research
Technical Research
Thematic Investment
Free 100 trades annually
Investment in Direct M.F.
Free "Call and Trade"
Zero PAY IN/OUT, Demat, AMC

Similarly, in case of Axis Direct, in order to avail discount prices, the customer needs to
maintain minimum balance of INR 75K with Axis Bank and pay INR 250 monthly maintenance
charges.

Axis Direct plan with riders

Axis Direct - Rs20 per trade, but conditions applies
Condition 1 Minimum AQB of Rs75,000 per year
Condition 2 Monthly AMC of Rs250
Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 10

Case Study - Charles Schwab

The 30 year journey of Charles Schwab
n Phase 1 (Pre 2000) - Innovation in the broking industry
n Phase 2 (2000-2010) - Small hiccups, but setting the tone for future
n Phase 3 (2010-2018) - Became the "Walmart of Financial Services"

Similarities between Schwab & ICICI Securities

n Client Profile
n Tech Platform
n Product Offering
n Fees
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 11

Case Study - Charles Schwab

The 30 year journey of Charles Schwab
Phase 1 (Pre 2000) - Innovation in the broking industry
Charles Schwab introduced discount broking in 1985, when the broking industry was de-
regulated. Somewhere in the 90's, it came up with "Click and Mortar" concept so that it can
cater to both, DIY investors and those who need human assistance. It was ahead of the curve
by introducing online broking at reduced commissions and no-load mutual funds. These
measures enabled it to capture a lot of baby boomer clients, who would eventually become
their cross-sell clients.
Phase 2 (2000-2010) - Small hiccups, but setting the tone for future
The dot-com crash of 1999 impact all brokers including Schwab. In order to diversify its
revenue stream, Schwab entered into wealth management business by acquiring high-end
wealth manager, U.S Trust. This confused positioning between wealthy & retail customers
drove few customers away from Schwab. Seeing this, Mr. Schwab stepped back in, made
corrections. Then the focus shifted on deepening relationships with existing clients via offering
more products & advisory services.
Eventually, they started using software and web services to generate model portfolios and
strategies which accommodate both "Self-directed" as well as "Professional help seeking"
investors. Financial crisis of 2008 changed many things which were in favor for the company.
Investors shunned away from equity-driven portfolios to an all-round approach and DIY investors
also started seeking for help when it came to financial planning. Schwab was prepared with
host of non-equity financial products and their ad campaign "Talk to Chuck" enabled them to
garner more customers.

Corrective actions strengthened customer ties…. .... which helped at the time of financial crisis
Active brokerage accounts (000s) Total client assets (INR bn)
1,054

1,239

1,446

1,137

1,422

1,574
7252

7049

6737

7049

7401

7701

7998

942

2004 2005 2006 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010
Source: Company, Antique Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 12

Phase 3 (2010-2018) - Became the "Walmart of Financial Services"

"Quote by Schwab's CEO - "Discount brokerage might be our heritage, but full service
is what we are today and a true cause for optimism about our future"
Schwab reiterated that they are a mass-market brand that aims to serve anybody who wants
to invest. At the same time, their philosophy of "low prices matter" continued. They made
tremendous efforts to gain trust of the people and convinced them that Charles Schwab is the
best place to go for any investment related advice. During this journey, they were continuously
introducing various investment products such as indexed mutual funds, ETFs, wealth, Individual
retirement savings (IRS) etc.

Brokerage income contributed significantly earlier… .. but is merely 7% of the current mix
Revenue (90s) Revenue (CY18)

Interest
30% Wealth
Mgm t
Interest
43%
50%

Brokerage
70%
Brokerage
7%
Source: Company, Antique Source: Company, Antique

Over the years, revenue from broking has come down as it has become a low margin
business and focus has been shifted towards providing advisory services to the customers
which earns better fee income. As on CY18, active brokerage accounts stand at 11.5mn and
outstanding client assets are at USD 3.5tn. Schwab's AUMs have surpassed that of global
banks like Merrill Lynch and Morgan Stanley.

Charles Schwab has become the largest holder of client assets in US markets
US$ tn 2008 2018
Charles Schwab 1.5 3.5
Merrill Lynch 1.5 2.5
Morgan Stanley 1.5 2.5
Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 13

Similarities between Schwab & ICICI Securities

Charles Schwab had started broking business in 1985 and built a customer base of mass
retail customers by offering low prices. Over the years it transformed itself into wealth
management platform for mass as well as affluent customers and it has become the largest in
terms of client assets and the most desired wealth advisory company of US citizens.
On the other hand, ICICI Securities had built a customer base of affluent clients by first
offering broking services to then providing them with various investment, protection and retirement
products. With the entry of discount brokers, it changed its strategy and started providing
broking plans at discount prices to tap the mass retail market while at the same time it
provides advisory services to its entire customer base with designated relationship managers.
Zerodha has been able to become the largest retail discount broker in terms of active customers
on NSE but its customers are quite young and have limited investible surplus. Not only Zerodha
does not have variety of products to offer to its customers but its existing customers also aren't
suitable to invest in any other financial products.

Can I-SEC be the Indian Charles Schwab???

Charles Schwab ICICI Securities Zerodha

Client Profile Affluent Affluent Young

Tech Platform
AVOID Best Best Best

Product Offering Widest in US Widest in India Simple

Fees Moderate Moderate Low

Source: Company, Antique

ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 14

Company Section - ICICI Securities

The Transformation has begun
n Potential to become India's largest "Retail wealth Management Company”
n Summary of various transformative measures
n ICICI Securities already has the largest customer base of affluent Indians
n Its journey towards "financial supermarket" started in 2013
n Multi pronged strategy to protect customers & expand broking base
n Cost rationalization to protect profitability for a while
n Some unique aspects about ICICI Direct Platform
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 15

Company Section - ICICI Securities

The Transformation has begun
Potential to become India's largest "Retail wealth Management Company”
ISEC under the management team led by Mr. Vijay Chandok is set to become India's largest
"retail wealth management company”. From earlier focusing on mere broking to then becoming
one of the largest non bank mutual fund distributor and also offering insurance, pension &
fixed income products; it is now offering discount broking plans, PMS for HNIs, wealth
management to customers having advising assets over INR 7.5mn and digital loans offering
home, auto and personal loans.
ISEC has found a way to tap not only the masses but also the affluent customers. It has 300
equity advisors who adhere to the needs of 60-70K affluent customers, a separate team to
cater to supreme clientele and 2,000 employees who provide advisory services to the masses
via telecalling in case of any queries. It is on its way of being capable to cater to any
financial needs of any type of customer.

Summary of various transformative measures

Source: Company, Antique

ISEC has the largest customer base of affluent Indians

ICICI securities (ISEC) has steadily increased its customer base, which now stands at 4.6mn
operational accounts. Of these, overall active and NSE active customers stand at 1.3mn and
0.9mn respectively. Overall active customers are defined as customers who do one transaction
per year, either in equities or any other financial products. NSE active clients are defined as
clients who trade in equities on NSE at least once in past twelve months.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 16

Steady increase of customers … ... by building a sticky and qualitative customer base
Customers (mn) 0.6 Avg. DP holding per client (INR mn)

0.5

0.4

0.3

0.2

0.1

0.55

0.53

0.14
2.5

2.8

3.2

3.6

4.0

4.4

4.6
0
FY14 FY15 FY16 FY17 FY18 FY19 Sep19 ISEC Geojit Zerodha
Source: Company, Antique Source: Company, Antique

More than 50% of ISEC customers are sourced through the bank channel - this not only
ensures higher stickiness but also ensures some amount of affluence. The sticky customer base
is visible from the fact that contribution of customers with more than 5 years of vintage has
been more 65% to the retail broking revenue. Affluence is visible from the fact that average
DP holding per client is reasonably high. Also, contribution of "A group" shares in ISEC's DP
holding is 55% which signifies that its customers may not have suffered severe losses and will
continue to trade.
Efforts are not only to activate the large inactive customer base but also acquire new customers.
To further increase its active customer base, it is tele-calling to activate its non active customers.
Currently, 100 customers are being activated on monthly basis. The revenue sharing
arrangement with ICICI Bank is a step towards this accelerated account opening. It is also
working towards streamlining the banking back-end which opens gateway for non iBank
customers to join ISEC platform as well.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 17

ISEC's journey towards "financial supermarket" started in 2013

Along with creating a niche in broking business, ICICI Securities is the second largest non
bank mutual fund distributor in the country. In 2013, it realized that it wants to provide
various other products and services to its customers and hence started offering mutual fund
and insurance products and also launched Robo advisory platform. Gradually, it opened
further avenues of investments and now poses as a "one stop shop for all financial needs"

Timeline of new product launches by ISEC

FY 13-16 FY 18 FY 19 H1FY 20

l Online Mutual Funds l Online AIF l PMS facility l Digital loans

l Life & general insurance l Factor based portfolios l Wealth Management l Health Insurance
l Robo-advisory platform

Source: Company, Antique

Over past twelve months, SEBI has tightened norms around the economics of mutual fund
industry, mainly revolving around banning upfront commission and tightening of TER expenses.
This impacted the mutual fund distributors including ISEC and led to reduction of their yields.
The full impact was absorbed between Jun18 to Sep19 and this portion of revenue now
seems to have stabilized.

Steady building up of AUM MF income to stabilize at Sep19 levels

AUM (INR bn) Distribution Incom e - MF (INR m n)
Regulatory implications
320

334

343

351

343

352

368

358

765

857

773

731

599

592

562

556
Dec 17 Mar18 Jun18 Sep18 Dec18 Mar19 Jun19 Sep 19 Dec 17 Mar18 Jun18 Sep18 Dec18 Mar19 Jun19 Sep 19

Source: Company, Antique Source: Company, Antique

Non Mutual Fund distribution income is showing good traction as ISEC focuses in increasing
insurance distribution income by tying up with more insurers. Currently, it has added Religare
Health to their platform and making progress with Star Health. To further increase non MF
distribution income; it has also launched digital distribution of loans and already started with
top up of personal loans, credit cards and auto loans in Sep19.

Non MF Distribution income shall pickup pace going ahead

INR mn Dec 17 Mar18 Jun18 Sep18 Dec18 Mar19 Jun19 Sep 19
Non MF Distribution Income 438 536 391 545 471 533 424 504
% of Total revenue 8.9 10.6 9.0 11.9 11.6 13.1 11.0 12.1
Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 18

Multi pronged strategy to protect customers & expand broking base

Apart from being India's largest retail broker, ISEC has also been one of the most innovative
brokers in both in equity and F&O segment to provide ease to its customers. It was the first
Indian broking firm to offer 'Life Time Prepaid Brokerage Plans' which aimed at helping
customers to optimize their transaction costs and spread their trading over a period of time. It
also came up with various other products and services such as "Order Level SPAN Margining"
facility, "I-Gain" and "Bullet Trade". These plans though came at a cost but it helped retain its
customers and also bring more customers to ISEC platform.
The revenue contribution from retail broking has steadily declined over years, but still constitutes
46% of overall revenues. This is also a segment that is prone to market cycles and fierce
competition from discount & full-scale brokers. It was getting increasingly clear that ISEC may
not be able to hold its high yields for longer without the risk of losing some of its customers.

Gradual reduction in contribution of retail broking

INR mn FY14 FY15 FY16 FY17 FY18 FY19 Sep 19
Retail Broking Revenue 4,621 7,027 6,070 7,016 9,174 8,154 3,725
% of Total revenue 61 58 54 50 49 48 46
Source: Company, Antique

While the discount broking threat was looming since few years, the weak phase in equity
markets which started from Jan18 was the ultimate call to ISEC to respond. With the new
management & new strategy in place since Jun18, ISEC slashed its broking rates through
their PRIME plans, which start at INR 900 and offers 0.25% brokerage on cash delivery vs.
0.55% earlier.
The good part was that the PRIME plans were offered to customer in a calibrated manner
over past twelve months so that there is minimum cannibalization of revenue. PRIME Plans
have attracted 1.6lac customers till Sep19 and have been made open to all customers from
Oct19. In addition to reduced broking rates, ISEC also launched the eATM product, which
provides an instant liquidity to customers.

Revision in charges of Prepaid Brokerage Plan - Oct 18

Prepaid Plan Total amt with GST Cash % Options-(per lot) eATM limit (INR)
(INR) (INR) Now Earlier (INR) Newly Launched
10,000 11,800 0.25 0.45 35 10 Lacs
25,000 29,500 0.22 0.35 30 10 Lacs
50,000 59,000 0.18 0.3 25 25 Lacs
100,000 118,000 0.15 0.2 20 1 Cr
200,000 236,000 0.12 0.15 15 1 Cr
300,000 354,000 0.09 0.12 10 1 Cr
Source: Company, Antique

ISEC is coming with new plans in derivatives segment which is still in pilot stage. OPTION20
plan is aimed to capture the growing volumes of options. This product is priced at INR20 per
order and INR5 per lot in Options. For instance, on 4 lot of Nifty contract i.e. 300 quantity, the
customer will pay only INR 40 as brokerage for entire order as against the normal rate of INR
380.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 19

Cost rationalization to protect profitability for a while

The transition that ISEC is going through currently will lead to reduction in retail broking
revenue in H2FY20, but we believe growth will re-start FY21 onwards. However, the reduction
in revenues won't impact the profitability as cost levers are available.
Employee expenses which constitute 50-60% of its expenses have been well controlled through
rationalization activity (not replacing the natural attrition) as employee count has reduced to
4,077 in Sep19 from 4,298 in Jun19. Management is also making efforts to improve per
employee productivity by encouraging cross-sell and increasing investment in technology.
Of the remaining 40-50%, 15%-20% pertains to variable operating expenses which are
directly proportionate to the trading volumes. The remaining expenses pertain to admin charges
which have the potential to decrease on account of technology advancement (tab based
account opening).

Costs to remain under tight leash

INR mn FY16 FY17 FY18 FY19 FY20e FY21e FY22e
Employee 3,924 4,736 5,347 5,413 5,142 5,348 5,776
Total Operating Expenses 7,112 8,392 9,462 9,138 8,645 8,962 9,727
% of employee exp of total opex 55.2 56.4 56.5 59.2 59.5 59.7 59.4
Source: Company, Antique

Some unique aspects about ICICI Direct Platform

ICICI Direct Platform has been offering innumerous services and products to its customers and
contains some unique features that are not offered by any other broker.

Various features found in ICICI Direct Platform

Source: Company, Antique

ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 20

Financials
Profit and loss account (INRm) Growth indicators (%)
Year ended 31 Mar 2018 2019 2020e 2021e 2022e Year ended 31 Mar 2018 2019 2020e 2021e 2022e
Revenue 18,585 17,042 16,432 17,966 20,056 Overall revenue (%) 32.4 (8.3) (3.6) 9.3 11.6
Brokerage 10,243 9,328 8,630 9,346 10,122 Broking (%) 32.1 (8.9) (7.5) 8.3 8.3
Distribution 4,665 4,635 4,623 5,278 6,225 Distribution (%) 33.4 (0.6) (0.3) 14.2 17.9
IB 1,440 991 1,090 1,254 1,442 IB (%) 20.2 (31.2) 10.0 15.0 15.0
Opex 9,462 9,138 8,645 8,962 9,727 EBITDA (%) 61.5 (11.0) (4.1) 15.6 14.7
Employee 5,347 5,413 5,142 5,348 5,776 PAT (%) 62.6 (11.3) (2.8) 19.3 16.9
Operating Expense 1,891 1,449 1,341 1,452 1,573
EBITDA 9,123 8,120 7,786 9,004 10,330 Valuation (x)
PBT 8,479 7,551 6,486 7,740 9,051 Year ended 31 Mar 2018 2019 2020e 2021e 2022e
Tax 2,988 2,682 1,751 2,090 2,444 P/E (x) 20.0 22.6 23.2 19.4 16.6
PAT 5,491 4,869 4,735 5,650 6,608 P/BV (x) 13.1 10.6 9.8 9.0 8.2
Dividend Yields (%) 2.8 2.8 3.0 3.6 4.2
Balance sheet (INRm)
Year ended 31 Mar 2018 2019 2020e 2021e 2022e Financial ratios
Share capital 1,611 1,611 1,611 1,611 1,611 Year ended 31 Mar 2018 2019 2020e 2021e 2022e
Reserve and surplus 6,776 8,733 9,590 10,613 11,809 RoE (%) 83.0 52.0 44.0 48.2 51.5
Networth 8,387 10,344 11,201 12,224 13,420 RoCE (%) 55.9 50.8 27.1 27.0 26.5
Long term liabilities 2,163 2,966 2,669 2,402 2,162 Asset Turnover (x) 44.2 35.9 28.8 26.2 24.4
Short term borrowing 6,771 4,518 12,717 16,451 20,799
Trade payable 6,199 23,391 9,356 10,292 11,321
Per share data
Other Current Liabilities 5,126 5,244 5,768 6,345 6,979
Year ended 31 Mar 2018 2019 2020e 2021e 2022e
No. of shares (mn) 322 322 322 322 322
Total 28,645 46,463 41,712 47,713 54,681
EPS (INR) 17 15 15 18 21
BVPS (INR) 26 32 35 38 42
Fixed assets 421 475 570 684 821
DPS (INR) 9 9 10 12 14
Investment 162 151 181 218 261
Deferred tax assets 666 720 864 1,037 1,244
Margins (%)
Long term loans and advances 5,782 4,033 4,839 5,807 6,969
Year ended 31 Mar 2018 2019 2020e 2021e 2022e
Other non current assets 1,208 810 972 1,167 1,400
EBITDA margins (%) 49.1 47.6 47.4 50.1 51.5
Stock in trade 379 2,563 3,076 3,691 4,429
EBIT margins (%) 46.4 45.2 43.1 46.1 47.9
trade receivable 3,098 4,767 5,720 6,864 8,237
PAT margins (%) 29.5 28.6 28.8 31.4 32.9
Cash and bank 15,256 31,208 23,406 25,747 28,321
Tax rate (%) 35.2 35.0 27.0 27.0 27.0
Other current assets 1,674 1,735 2,082 2,499 2,998
Source: Company Antique
Total 28,647 46,463 41,712 47,713 54,681

Source: Company, Antique

ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 19 December 2019 | 21

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