ICICI Securities: A falling knife from the start

When ICICI Bank, the holding company of ICICI Securities, announced its decision to list the latter in 2018, it came as a surprise to everyone. That was the time when the listing of asset management companies was gaining momentum and the expectation was that taking a cue from this trend, the second largest private bank would also follow suit. But what happened was exactly the opposite.

The pure-play stock business is starting to lose steam. Listed players such as Motilal Oswal Financial Services, Edelweiss Financial Services and the IIFL have largely enjoyed good stints on the stock exchanges due to their diversified businesses rather than the strength of their brokerage or distribution businesses.

Thus, I-Sec’s debut on the exchanges was a disaster.

It was a Rs 4,000 crore issue, which was 78 per cent undersubscribed and had to be jacked up heavily by institutional investors. It was listed below its issue price of ₹520 per share and never rose above these levels, until Monday morning (26 June) when the brokerage announced the delisting. The stock rose 11 percent, but the cheer didn’t last long. On Tuesday, the stock gave up its gains, ending trading down 2.72 percent.

There is not much support

There are three main components that have not been supportive of I-Sec from the start – the faster and deeper growth of the discount brokerage industry is one of the most important factors. While I-Sec remains the leader among bank-led brokerages, the dynamics of the industry were on the verge of an overhaul prior to its inclusion as well. So it was with mutual funds and wealth management companies. The investment banking arm also faced stiff competition.

Since the IPO, there has been a slight increase in the company’s market share, particularly in terms of trading volumes, while in other businesses, there has been a slight increase in overall market share. But little of this has gone down well in terms of finances. On a consolidated basis, total income in FY23 was flat at INR 3,425 crore while net profit fell by 19 per cent year-on-year to Rs. 1,117 crore. Since listing (from FY2018 to FY23), I-Sec’s total income and net profit have grown at a compound annual growth rate of 10.8 percent and 12.4 percent, respectively. These figures place I-Sec as a poor performer among ICICI Bank’s listed subsidiaries.

Is this the reason behind the bank’s decision to delist I-Sec from the exchanges?

Usually, the board of directors proposes a delisting when there is consensus that the stock market is undervaluing the company. Trading at 15 times 12 months earnings, I-Sec shares command a premium over their peers. Moreover, the company has also greatly diversified the scope of brokerage business in the past five years.

Therefore, the delisting decision may not be based entirely on valuations or business improvement. With ICICI Bank growing at a faster pace and I-Sec not contributing as much as an affiliate to its overall valuations – less than 5 percent of the total parts of ICICI Bank – the incentive to run I-Sec as a listed subsidiary is not attractive. Perhaps the decision to delist I-Sec was to fix this problem.