My last post on ICICI Sec was basically a rant about iSEC not getting its due in valuations simply because the market thought iSec wasn’t opening enough new accounts and the Zeros of the world were opening way too many. This was published on 26/04/21 when iSec’s market cap was about 14,000 crores. Today, the market cap is about 24,000 cr. While much has changed in the perception of the company, iSec too has changed a lot and once again, it think the market has to understand what the management seems to be doing at iSec.
Zerodha kinda democratised the access to financial markets by making it super efficient to get into the market (Aadhaar based opening, cheap brokerage, insanely awesome tech) and Smallcase did the same with Mutual Funds and PMS/AIFs (they literally turned the industry structure on its head). These moves look like a home run,
There are hundreds of ways to segregate investors – HNI, Ultra HNI, Retail, Institutional, Pension Fund, Fundamental, Technical, Techno-Funda etc etc. But I would like to look at them in a 2 by 3 matrix.
The number of accounts that are tech savvy and have an AUM of <1 cr far outnumber the cumulative of the other 5 categories. The AUM of the > 1 cr that areNot Tech Savvy + OK OK Tech Savvy will exceed the AUM of the other 4 categories, possibly by more than 100x (obviously my guesstimate)
By tech saavy – I just do not mean ability to operate the computer alone. I mean the ability to take decisions without human interaction and discussions with people in the equity industry. Most wealthy people have Family Offices, Wealth Mangers, PMS, AIF, Broker contacts, contacts of other wealthy investors etc.
62,500 Private Wealth clients who represent 2.85% of the number of clients, contribute to 45% of the 4.4 trillion AUM.
The remaining 21,37,500 clients contribute to just 10% more than those 62,500 clients!
While the retail bit is growing massively by leaps and bounds everyday, the HNI and UHNI book is being massively consolidated.
I would take a bet that within the next 3 years, the PW clients will contribute to over 65 % of the AUM, despite the retail book growing rapidly.
Now why is this so important ?
There are two ways to make money. One is from brokerage of the FLOW of money i.e from buying and selling and the other is from the PARKING of money. PARKING refers to money invested into places that are managed by others. Mutal Funds, Alternate Investment Funds, Venture Capital, Private Equity, Debt, Yield Products, Liquid Funds, REITS, Sovreign Bonds, Gold etc etc. Here the assets that are under management yield a certain percentage of the NAV every year to the investment manager.
This fixed fee is super important because it is nothing but a RETURN ON ASSET kind of measure meant. The higher the ROA, the better it is, that is obvious, but her the ROA is based on client asset and not yours 😉
- The total yield has moved up from 0.34% to 0.39%. This consists of transactioanl as well as recurring yield.
- The recurring as well as transactional cash flow is almost the same, indicating healthy, sustainable margins.
- The assumption that this is only sustainable in a bull run is WRONG. AUM’s do not really disappear, they merely get re allocated to debt or gold or govt bonds during bear phases. (Assumption is that the wealth Mangement team does its job in getting them out of the market in time).
Another behavioural trend is that the wealthy do not skip and jump easily. You will never see a wealthy guy with a second Jio Number just because it is free. They are likely to stick to what is known and what they are comfortable with, even if it their existing choice was inefficient or expensive. They usually move slowly, like ICEBERGS, and the starkest thing about them is that 90% of their size is unexposed as it is underwater.
Of the 62,500 PW clients, 7,500 of them have been added recently. What I am really excited about this AUM can grow 9x based on the above assumption.
Everyone seems to be under the impression that digitisation is the only blessing that has brought down the cost of operations. While it is true, if you look at the revenue per employee, another hidden factor is the growing effect of PW. While the PW customer keeps bringing more of his wealth into the iSec umbrella, operating leverage has no option but to kick in.
Brokering Income 2.0
While plain vanilla brokering income is still the life blood of iSec, much like cigarettes are for ITC, I think this is going to change fast, really fast !
I am particularly interested in the Products like Masters of the Street. This brings access to stalwarts of the industry to AUM’s of 50 lacs to 1 cr. Access to their portfolios usually begins at 50,00,000 onwards, and iSec has brought this down to 5,00,000.
Gambling is an addiction and success is usually not met by pulling out funds, but by doubling up stakes. In case an investor sees success with these masters, they would obviously want to go the full hog and take up the PMS or AIF, which again goes thru iSec.
Another new feature which I think will catch on really well is the introduction of subscription plans. The plan rate to no plan rate are almost incomparable. Subscription plans used to be taboo, and now they are becoming a norm. Subscription = Stickiness.
While this was mostly in theory a couple of quarters back, things are actually happenning. All the pieces aren’t just coming together, they are actually powering each other and powering off each other.
Another thing that the market has not understood is that iSec has a 65% dividend payout ratio. While that is great, a lot of the remaining 35% is being used to securely lend to investors by pledging what they already have with ICICI. I guess ICICI has learnt a lot from MannaPuram and Muthooth.
I’m super gung-ho about iSec as most brokerages represent velocity,
but iSec represents M O M E N T U M !