Indian equities are currently trading in the value zone with a two-year forward PE of less than 16x, after a time-based consolidation seen in the past two years, says Vijay Chandok, MD & CEO of ICICI Securities. In an interview with Ashley Coutinho, he says brokers having a strong presence in F&O will report robust financial performance this fiscal. Excerpts:
What is your outlook for Indian equities for FY24?
Amid this backdrop, we expect Indian equities to outperform the global peers in FY24, given that the growth-inflation construct is much more reasonable back home. Moreover, India Inc is poised to witness a healthy double-digit earnings growth, which will provide the much-needed push to the sentiment.
What is your take on valuations?
We don’t believe markets are richly valued, especially after time-based consolidation in the past two years. Indian equities are currently trading in the value zone with two-year forward PE of less than 16x (last 10-year average is about 16x) and at a lower end of the PE band observed in the last five years (16-20x).
Which sectors are you betting on?
We are positive on domestic-facing sectors such as capital goods, infrastructure and cement because of strong macro tailwinds in the form of high government capex, strong order backlogs, recovery in margins led by benign input costs and controlled working capital. Resumption of strong credit cycle, lower credit costs and attractive valuations favour banks. Select traditional pharma companies and power utilities may do well on the back of strong capacity addition and portfolio mix on the thermal/renewable side, strong demand environment, high dividend yields and attractive valuations.
What are the key trends for the broking industry?
It has been a year of continued growth, as far as derivatives volumes are concerned. It would be fair to say that the broking market has gravitated towards F&O in a big way, with the segment growing at 125% in FY23 versus FY22 in terms of average daily traded value on the NSE. The cash equity average daily trading volume has shown a 20% decline over the same period. New customer addition by the industry in terms of net monthly demat account additions is also down about 28%.
Market players having a strong presence in F&O, and not dependent on the cash segment, are expected to report robust financial performance for the current fiscal. In terms of technology, there is continued investment by the industry in digitisation and automation. Several players have bought tools and APIs to assist the seasoned as well as younger players to participate in the market opportunity, which has also aided the growth in the F&O segment.
The regulator has taken a number of steps to ensure that the client money is not misused by brokers and the float money does not remain with them. How will this impact brokers?
The regulator has been extremely focused on taking steps to ensure the minimum overlap of funds of customers and those of intermediaries. This reinforces retail investor’s trust in the system and is a welcome step. As far as ICICI Securities is concerned, this does not impact us much. All our 3-in-1 customers have always had full control of their funds at all times. Money would flow out and flow in directly into their accounts after any transaction without any intervention from their end.
This step would impact brokers whose revenue model is dependent on client’s pool money. They will now have to look for ways to fill that gap. Added to that is rising cost of operations, including on tech, compliance, and employees. So, the good news is that there is a lesser downward pressure on rates, and there is a reasonable case for rate hike in future. So, I am optimistic.
Could you tell us about your product and revenue mix?
Equities is just one of the products we offer. Between 2019 and 2022, while we doubled our top line, the share of broking came down to under 40%, clearly representing the pivot to wealth tech. Our distribution revenue — we distribute third party products such as MFs, insurance and pension products — is around 20%. Another 20% comes from what we call quasi-equity products, which constitute subscription fees of our products like Prime, pre-paid brokerage and financing charges towards margin trade and ESOP funding. While it is linked to equity, the correlation is lower compared to direct broking, and is relatively sticky. Our treasury operations contribute about 5-7% to revenue, and remaining 15% comes from institutional equity, split almost equally between broking and investment banking.
How will this evolve in the future?
Over the next three-four years, in addition to equities, we aim to have three-four other strong top line contributors, which will provide stability and growth during periods when market performance is muted. These are distribution of new products like assets and insurance, besides our existing lines of business.
Tell us about your recent acquisitions and possible areas for inorganic growth.
We are working with over 30 fintechs to offer new experiences to our customers. In August 2022, we acquired startup Multipie, a web- and app-based networking platform for the investor community, enabling it to exchange ideas and share views on stocks and other investment assets. In October 2021, we had taken a significant minority stake in Asknbid, a start-up in the financial gaming space. It has created a learning platform that uses engaging experience along with content and community learning to offer a practical stock market learning. We are open to acquisitions which provide us with newer skills and capabilities and give impetus to our strategy of emerging as a leading wealth-tech financial platform.