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ISec, IIFL Securities gain on Sebi’s strict margin norms

ET Intelligence Group: The shares of two Indian listed leading brokerages ICICI Securities and IIFL Securities have undergone a sharp rerating in the past one month. This is in the aftermath of the fraud at Karvy Stock Broking where the brokerage diverted clients’ pledged securities for its own use and stringent margin norms introduced by Sebi, which is expected to put smaller brokerages out of business.

ICICI Securities (ISec) and IIFL Securities gained 26 per cent and 57 per cent, respectively over the past month. For investors, ICICI securities offers better business growth (five-year annual growth of 13.5 per cent in brokerage revenue compared with 9.3 per cent in the case of IIFL), higher return on equity (over 50 per cent in FY19 compared with 25 per cent for IIFL) and the strong backing of ICICI Bank.

However, the wide valuation gap between the two makes the stock of IIFL Securities cheaper. While ISec and IIFL are sufficiently capitalised with net worth of Rs 1,080 crore and Rs 870 crore, respectively, the latter trades at a price-book (P/B) multiple of 1.4 compared with 12.2 for ICICI securities. In addition, IIFL’s FY20 expected price-earnings (P/E) multiple is 10, which is lower than 23 for ISec.

The stringent Sebi norms are expected to make it more challenging for the smaller brokerages, while helping bigger brokerages gain higher market share. At the end of November 2019, ISec had the second highest market share of 10.3 per cent in terms of active clients while IIFL’s share was 2.2 per cent. Karvy had a market share of 3.1 per cent.

After a weak first quarter of the current fiscal, the brokerage industry witnessed a rebound in the second quarter. Revenue of ISec and IIFL grew by 4 per cent and 6 per cent quarter-on-quarter respectively. Profit before tax for the two rose by 6 per cent and 31 per cent in that order.

Shares of other listed brokerages including Motilal Oswal and Edelweiss have not gained as much, as these firms also have exposure to lending business.

Source: Economic Times