ICICI Sec delisting hints at unbearable competitive pressure

ICICI Sec delisting hints at unbearable competitive pressure

Coming as a bolt out of the blue as it did, if brokerage ICICI Securities Ltd's announcement last week that it wants to delist its shares via a scheme of arrangement with its parent ICICI Bank Ltd is successful it will mark the end of an unfortunate tale. It will take the continuous spotlight on a listed large-sized corporate player, and top leader in its business, caught in the vortex of its own weight and nimble new-age competitors.

It will be become a classic example of a big listed company failing to deliver shareholder returns.

It is a stock market story that turned from the company aiming to enhance its market leadership position in the growing retail brokerage segment to "we have to start growing at the rate ahead of the market" as is what a senior management official told an analyst in the post Jan-Mar earnings investor call.

ICICI Securities is a subsidiary of ICICI Bank with 74.85% of its shares held by the parent bank as of Mar 31 and the remaining with public shareholders.

DIFFICULT START

The brokerage firm went public with an initial public offering, involving offer of sale by its promoter ICICI Bank, in Mar-Apr 2018. The start itself was ominous. Against a targeted IPO amount of 40.18 bln rupees the company got subscription of 34.8 bln rupees, or 13.4% less. The issue price was 520 rupees.

Then, on the day of listing in April that year shares opened for trading at 431.10 rupees, or 17.1% discount to the issue price. A month later it fell more, and was 29% below issue price at 369.15 rupees.

This by itself was a setback to investors who were allotted shares in the IPO. The fall was not on account of bearish market conditions at at that time. A week before ICICI Securities got listed the shares of Bandhan Bank Ltd had got listed at a premium of 29.3% over its IPO issue price. A month later it moved up further and was 34.6% higher than the issue price.

WEIGHED DOWN HEAVILY

Nearly a year later, at the end of 2018-19 (Apr-Mar), shares of ICICI Securities were still in the doldrums, 53% below the issue price. Investors in the IPO of the company had to wait till February 2020 to merely get their principal back after close to two years. But that window was also short lived since the shares slipped below the issue price again in that month and stayed there for five more months. No doubt, it was an ardous journey for the IPO investors of ICICI Securities.

A good stock market has prices of companies' shares tracking their earnings performance whether they are based on earnings estimates of 1-3 years ahead or current earnings. If price movement moves in conjunction with current year earnings it will be logical.

No wonder then that in the case of ICICI Securities its weak comparative earnings performance in the couple of years following its IPO also kept its shares lodged below the issue price. But the extent was magnified.

In 2018-19, for instance, the brokerage's revenue declined 7%, and operating profit and net profit fell 11% each. The shares were down 53% from the issue price when the year ended.

But when earnings improved the catch up in share price was missing. In 2019-20, ICICI Securities' revenue for the year was up marginally by 0.1%, operating profit was up 6%, and net profit was up 11%. The effect: shares of the company ended that year 14% higher than a year ago.

The following year too saw the brokerage's shares underperform its earnings. In 2020-21, when the stock market had seen a surge in new trading accounts and demat accounts following the nationwide lockdowns in Mar-Jul 2020, ICICI Securities' revenue also rose significantly by 52%, and its operating profit jumped 87% while net profit nearly doubled.

But to the dismay of the investors, when that year ended the shares were up by only 38% on year to 382.80 rupees and was still below the IPO issue price.

It was not just ICICI Securities which was bearing the brunt. The stock market was not being kind to the traditional large brokerage firms. Motilal Oswal Financial Services Ltd, a peer of ICICI Securities, faced the same phenomenon. Its shares were up by just 25% on year at the end of 2020-21, even though its revenue jumped 73% and net profit surged 3.8 times.

The same story was repeated last year when the entire brokerage industry's earnings were hit on account of fall in trading volume in cash market and subdued market conditions. At the end of 2022-23, shares of ICICI Securities were down 31% on year while that of Motilal Oswal were nearly 30% lower. But these decline rates were much more than the hit on their earnings.

ICICI Securities' revenue declined 1% to 34.15 bln rupees and net profit fell 19% to 11.12 bln rupees in 2022-23. Likewise, Motilal Oswal Financial Services' revenue went up by just 3% to 26.14 bln rupees and net profit fell 20% to 5.69 bln rupees.

NEW-AGE COMPETITION

It appeared that investors in the market were showing some discomfort with traditional large brokerage firms which had their shares listed on the stock exchanges.

This was also evident from the earnings performance of a new-age listed competitor and a peer to ICICI Securities and Motilal Oswal Financial. Angel One Ltd's revenue rose 33% in 2022-23 while its net profit jumped 43%.

Angel One, RSKV Securities which operates under the brand name of Upstox, and Zerodha are among the new-age competitors to traditional brokerages. And their growth rates, in terms of number of clients, have been impressive. This is seen from the data from NSE's website on active unique client code numbers of brokers.

In the 2-year period from Sep 2020 to Sep 2022, the first half of which had seen a surge in new trading account opening by largely new investors, ICICI Securities' cash market clients jumped 2.58 times to 2.15 mln. Its derivatives clients rose 64% during that period to 136,259. Another traditional brokerage, Kotak Securities, recorded a near doubling of cash market client number to 870,000, and a jump of 2.85 times in derivatives client number to 97,000.

These growth numbers, however, trailed that of the new-age brokerage firms. Zerodha's cash market client number jumped 4.3 times to 5.18 mln as of Sep 2022 from Sep 2020 and derivatives client number to 4.5 times to 1.69 mln. Similarly Upstox's number of cash market clients surged 7.1 times to 3.35 mln while its derivatives client number jumped 5.1 times to 441,000.

THE FINALE

For ICICI Securities delisting appears to the endgame. If it is successful in getting its shares delisted will investors feel left out in the lurch or relieved that it's all over?

To add to the complexities, the brokerage has chosen an unusual route under Securities and Exchange Board of India's delisting regulations. SEBI's delisting norms provide for "a subsidiary company getting delisted through a scheme of arrangement wherein the listed holding company and the subsidiary company are in the same line of business."

ICICI Securities will have to establish to the stock exchanges and SEBI that ICICI Bank and it are in the same line of business.

In the meanwhile, as per ICICI Securities' proposed scheme of arrangement its shareholders will be allotted 67 equity shares of ICICI Bank for every 100 equity shares of the company. At recent market price, 100 shares of ICICI Securities is worth 60,885 rupees while 67 shares of ICICI Bank is worth 64,280 rupees.

Maybe, just maybe, the patient investor in ICICI Securities will be better off holding ICICI Bank shares instead. But then he didn't get into ICICI Securities to get an exposure on the banking sector, now did he?