By Sahej Mittal
ICICI Securities Ltd (NS: ICCI ): ISEC printed degrowth (5% QoQ) in pure broking revenue, as cash volumes plunged 10% sequentially (illustrating dependence on cash volumes). While the customer addition run rate has been impressive, we continue to be wary of the quality of ARPUs from digitally-sourced customers. We draw comfort from ISEC’s renewed focus on building digital capabilities, but given the high dependence on cash delivery volumes and tech-based handicap, we believe that its top line will remain cyclical and face headwinds from the new-age fintech brokers. We cut our FY22/23E APAT estimates by 3/6% to build in the impact on the ESOP book, pressure on broking yields and increased tech spending in the medium term. Given the macro lead indicators (rising retail participation and a healthy pipeline of primary issuances) and attractive valuation, we maintain our positive stance on ISEC; however, we trim our target multiple to 20x (from 23x) to build in the tech handicap and competitive intensity and maintain ADD with a revised target price of INR740.
Mastek (NS: MAST ): Mastek reported a strong quarter with revenue and margin both coming in line. The order book improved 25.4% YoY, boosted by a USD 65mn+ win from the UK government (Home Office), following a USD 60mn NHS deal in Q3FY22. The management is aiming to reach USD 1bn revenue in the next five years, implying an organic revenue CAGR of >20%. Mastek expects to achieve this growth, based on (1) continued traction in the UK government business (~10% wallet share); (2) cloud migration/transformation agenda, which will drive Evosys growth; (3) recovery in UK private; and (4) turnaround in the US geography with a focus on healthcare and life sciences vertical. The US geography will be a key focus area and investments will be made to strengthen the partner ecosystem. M&A will be a key pillar in US revival, with companies in the range of USD 30-40mn as targets. The target EBITDA margin range is 19-20%; there could be near-term headwinds related to ongoing supply-side concerns. We have cut our EPS estimate by 2-3% and our TP of INR 3,530 is based on 25x Mar-24E EPS. The stock is trading at a P/E 25/19.8x FY23/24E, which is a discount of ~34% to the mid-tier IT average. Maintain BUY.
Weak quarter; challenging times ahead
Broking segment drives disappointment: Total broking revenue, at INR5.6bn (-3% QoQ), was 6% ahead of our estimates, mainly on account of a significant beat on the MTF book. After four quarters of flattish trend, pure broking revenue de-grew 5% sequentially, as cash volume declined 10% QoQ, reflected in blended yields at 0.44bps (-9bps YoY; a nine-quarter low!). Growth in the average MTF + ESOP book was impressive (+9% QoQ) and much ahead of pure broking revenue, suggesting that clients with prime and NEO plans are leveraging heavily, albeit not translating into broking revenue on account of lower rack rates. Retail market share in the cash segment improved 30bps to 10%; however, loss in the derivative segment continues unabated as traders continue to prefer FinTech discount brokers. While the client acquisition run rate fared well at 618k ( Q3: 676k), customer quality and monetization remain major concerns. Despite a slowdown in primary issuances, advisory service revenue was healthy at INR0.65bn (-41% QoQ).
Margins under pressure: Operating expenses improved by 7% sequentially; however, management has stated that tech spending (3% of net revenues in FY22) will remain a major focus area and increase ~2.5x in FY23E. This will keep EBITDA margins troubled in the near to medium term. Adjusted PAT came in at INR3.4bn ( -11% QoQ) due to degrowth in broking and advisory business, partially offset by better-than-expected traction in the MTF portfolio. RBI’s new circular capping ESOP funding limits at INR2mn/customer may impact the ESOP book by ~INR7bn by FY23E.
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