ICICI Securities’s profits have grown handsomely from a year ago, but sequential growth is poor.
ICICI Securities, the brokerage and investment banking arm of ICICI Bank Ltd, posted a net profit growth of nearly 91% in the March quarter from to a year ago. But profit has hardly moved compared to the preceding quarter. For the December quarter, net profit was Rs153 crore and that inched up to Rs158.6 crore in the March quarter.
“January was a very good month for brokers what with the markets being on a strong wicket,” says Digant Haria, an analyst at Antique Stock Broking Ltd. That should have helped ICICI Securities report a much better March quarter although February and March were subdued months, he added.
On a year-on-year basis, overall operating costs (including employee costs, operating and other expenses) have grown at a much slower pace relatively at 5%. Revenue growth, on the other hand, was robust at 35% (for fiscal 2018, revenue was 32% up).
While that looks good, “if at all revenues decline, operating deleveraging will start to play considering most of the costs are fixed in nature,” reckons Haria.
Within revenues, income from services (which is essentially its non-broking business and comprises of revenue from distribution and investment banking) grew slightly faster at about 38%. This should bring cheer, albeit not much. Broking revenues account for a big chunk of total revenue at 63% and that’s a risk.
The road ahead is not easy. Ironically, ICICI Securities faces competition from its parent i.e. ICICI Bank in the distribution and investment banking business, pointed out analysts from Prabhudas Lilladher Pvt Ltd in a report on 21 March. “We believe its peers have created a better niche for themselves in these areas thus making it difficult for ICICI Securities to have a sharp profitable growth,” added the brokerage.
What of the stock?
Despite the 3% increase in ICICI Securities’ share price on Friday, the stock is nearly 19% lower than its issue price of Rs520 per share. Blame two things for the lacklustre debut: One, its valuations were rich to begin with. And the recent correction still doesn’t make it too cheap. The stock trades at 24 times fiscal 2018 earnings.
Secondly, the allegations of impropriety against ICICI Bank’s chief executive officer Chanda Kochhar have weighed on sentiment for the stock. Analysts expect this overhang to continue for some more time, which means the underperformance in the stock is unlikely to reverse soon.