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?

Earnings Review:ACC volume up but PAT down on operating costs surge

14 Jul 2022
 
ACC Ltd had everything going for it in the quarter ended June with regard to demand-driven growth, but a surge in key input costs overwhelmed its profitability. The company even took a 4% hike in the net selling price but said that this could only marginally offset cost inflation.
 
Little wonder then that the company’s operating profit for the three months dived 50% to 4.3 bln rupees and the operating margin shrunk to 9.7% from 22.1% a year ago.
 
As a result, the consolidated net profit for the cement manufacturer was down 60% on the year to 2.3 bln rupees, well below the 3.4 bln rupees had expected on average.
 
In contrast, ACC’s Apr-Jun topline grew strongly by 15% on the year to 44.7 bln rupees, well clear of the average analysts’ estimate of 43.3 bln rupees.
 
This came on the back of a 11% growth in cement sales volume to 7.56 mln tn and a 43% rise in sales of ready mix concrete to 0.83 mln cu mtr. Revenue from cement sales was up 13% on the year to 41.5 bln rupees while ready mix concrete sales jumped by 50% to 3.9 bln rupees.
 
Aiding the topline growth was a 4% hike in the cement price to 5,337 rupees per tn, said the company which is currently being acquired by the Adani group.
 
But there was no respite from inflationary pressures on the key input costs during the June quarter. As a result, ACC’s operating profit, derived as earnings before interest, tax, depreciation, and amortisation, halved to 4.26 bln rupees.
 
The company said “soaring global energy prices led to a significant cost increase” in its power and fuel expenses, which surged 58% on the year to 13.12 bln rupees. Coal and petcoke costs make up for a bulk of the power and fuel costs for cement producers.
 
Power and fuel expenses, which accounted for nearly one-third of the total operating costs, rose 44% on the year to 1,708 rupees per tn.
 
Managing Director and CEO of ACC, Sridhar Balakrishnan, said that the company maintained “a positive outlook” for demand in the coming months on the back of government’s efforts to stimulate investments across several sectors and the impact of a likely normal monsoon on the rural economy.

ACC’s consolidated cash and cash equivalents stood at 45.17 bln rupees at the end of Jun 30.

Earnings Outlook: ACC consol PAT seen down on high input costs

12 Jul 2022

ACC Ltd's topline is seen as having recorded a double-digit growth on a low base in the quarter ended June, although sequentially it is seen flat on weak demand.

The company’s bottomline is seen having fallen on the back of contraction in operating profit due to rising input costs.

ACC's consolidated net sales in Apr-Jun are expected to be 43.3 bln rupees, 13.7% higher on year and 0.3% higher on quarter, according to an average of estimates by five brokerage firms.

The estimates put the company's consolidated net profit at 3.4 bln rupees, down 40% on year and down by 14% on quarter.

The company will declare its Apr-Jun results on Thursday.

ACC's volume in Apr-Jun is estimated at 7.5 mln tn by brokerage Kotak Institutional Equities. Low base of Apr-Jun quarter of 2021 will keep the on-year volume growth strong, the brokerage said.

Ramping up of new incremental capacity would be behind an on-year volume growth of 9%, brokerage Yes Securities said in its preview.

Sequentially, however, the volume is seen as having declined by around 4% by the two brokerages.

Sharp price hikes taken by the company during the quarter would have helped it clock better realisations, according to Kotak Institutional Equities, leading to a growth of 3% each on year and on quarter.

“We expect 12-15% QoQ (on quarter) increase in power-fuel cost led by higher pet coke and thermal coal prices in the past six months and a 5-7% QoQ increase in freight costs leading to 10% QoQ increase in costs/ton,” the brokerage said.

Rising input costs would have likely shrunk ACC’s operating margin in Apr-Jun and hit the net profit growth of the company. Tax costs are seen the uncertain factor that may buffer or worsen the fall in net profit.

Analysts will be closely watching management commentary on the future operations of the company given the big announcement during the June quarter that Adani Group will take over control of ACC, along with Ambuja Cement Ltd, in an all-cash buyout of Holcim Group’s stake.

SEBI Watch: Focus on liquidity impact on IPOs may yield better result

20-May-2022

In a speech in February, the then Securities and Exchange Board of India Chairman, Ajay Tyagi, remarked that the appropriateness of valuation of new-age, loss-making companies coming out with initial public offerings was being debated intensely among stakeholders.

These debates appear to have picked up pace in recent weeks with the IPO frenzy fizzling out in line with the fall in secondary market equity indices.

Even in the case of the large IPO of Life Insurance Corp of India, the government had to bring down the valuation in order for the issue to scrape through.

The post-issue share performance of recent high-profile IPOs such as Zomato and Paytm have disappointed retail investors.

A report in Mint on Wednesday said that SEBI was currently having internal discussions on why recent high-profile IPOs were trading below their issue price. It said that SEBI was also telling IPO aspirants to reconsider their valuations.

Over the last one year, the stock market regulator has strengthened the disclosure requirements by companies in their red herring prospectuses for IPOs, and also tweaked other norms around exit of large shareholders through the offer for sale route.

These changes have mostly focused on the new-age companies.

The debate inside SEBI on IPO valuations is fine but the fact that they are high is known to investors, including the retail and other individual investors. Even anchor investors who are qualified institutional buyers and for whom a portion of the IPO is reserved are not oblivious to it.

The problem is not that of lack of awareness.

Investors, of all size, are flush with funds to invest and desperate for quick returns from listing gains.

For investors, with not enough funds to subscribe into IPOs, brokerage houses and non-banking finance companies have supplied easy money. 

The IPO market started heating up in the middle of 2020. Since the liquidity in the investment ecosystem was near all-time highs at that time the issues were getting subscribed in high multiples and also delivering significant listing gains.

Investment bankers took advantage of this and prodded unlisted companies and their private equity investors to cash in on the IPO boom.

Ultra-short term return-hunting traders are always on the prowl in secondary market trading on the stock exchanges. During periods of primary market boom they get another market to play in.

Retail investors are lured by the promise of high and quick returns.

These factors have played out in IPOs in the last 18 months.

SEBI has done everything in its capacity to improve measures at the level of disclosures on corporate fundamentals. But it has stopped short of measures to control leverage and liquidity in IPO subscriptions.

SEBI must explore measures to curb recklessness in IPO financing by brokers and NBFCs. Such financing is also seen in the pre-listing IPO grey market.

The leverage available to ultra-short term investors is substantially high. The market regulator will not hurt anyone if this is tempered.

Further, the rush for returns has its own rolling mass effect. Retail investors subscribe to IPOs in larger quantity in order to improve their chances of getting allotment and this feeds on itself leading to higher over-subscription multiples.

SEBI must, therefore, review the allotment process to deter such frantic investments. If there is a way to assure a minimum level of allotment to each subscriber it must be quickly implemented.

SEBI must also consider extending the lock-in period for anchor investors. Their subscription in an IPO, before it opens for public investors, has bearing on the latter.

A longer lock-in period will indicate that anchor investors are committed for a longer time and that will provide a better signalling effect at the time of IPO.

Usually, regulators avoid fiddling with valuations in the market. The market must be let free to decide. The demand-supply dynamics may not always be what the regulator wants.

Any fizzling out of issues in the primary market ought not to be the regulator’s worry. Markets ebb and flow. It is a natural cycle.

The market regulator must only ensure that the processes that grease the market ecosystem are not gamed and manipulated.