We want to pivot to a financial marketplace: ICICI Securities CMD

What has led to the dip in market participation by retail investors?

The story of the current market environment was triggered in October 2021. Nifty 50 Index was at its all-time high and the first signs of market fade-out began over the next couple of months. This was in a way driven by the signals sent by the US Fed that it would be looking at quantitative tightening to address inflation in the US. Stock markets started drifting downwards soon after. And with every passing week, the markets tumbled as the commentary around quantitative tightening became stronger. and this trend continued till the end of January 2022 quarter.

And last year in February, when Russia invaded Ukraine, the market needed no further excuses; it collapsed. The collapse was quite sharp globally, less so for India. The US benchmark index plummeted 33-35% from its peak, whereas the Indian benchmark indices corrected by 14-15%.

So, the situation for Indian markets was still much better and their rebound was also rapid over the next four-five months. Meanwhile, amid this volatility in the markets, a sense of uncertainty had crept in among retail investors. During this period, they found it very difficult to manage the turbulence. This dampened their enthusiasm and they started to slowly reduce their participation in the market.

To be sure, we did see markets rebound and even go beyond their previous all-time highs, but the fabric of this revival has been tenuous. It is perhaps to do with the fact that while nobody is questioning the medium-term outlook, the short-to-medium-term outlook (over the next few quarters) continues to be fraught with uncertainty. And because of that, the retail investor has been quite nervous. In the meantime, you have also started to see time correction.

But shouldn’t participation improve with the rebound?

The bounce back that happened was more in the headline indices like Nifty 50. But the mid cap and non-Nifty sort of companies continued to struggle, which are the segments where retail activity tends to be.

While the market showed apparent strength, the undertone was weak. And that trend has continued. We have also had enough uncertainty on the capital fundraise side. Even the celebrated four-five fintech IPOs (initial public offerings) that came in the second half of 2021, suffered post their listing and this again dented the confidence of investors. During this entire period, the IPO market has continued to be quite tepid to weak. The only big IPO that happened during this period was that of Life Insurance Corporation of India (LIC). A few other IPOs happened, but you could distinctively see the size of the IPOs becoming much smaller. Earlier, ₹1,500 crore-plus IPO was considered a small-to-medium-sized IPO. Today, a large IPO is considered to be around just ₹1,000 crore.

On the other hand, due to intervention of Sebi (market regulator Securities and Exchange Board of India) over the last few years, there is very little leverage in the market. High leverage means to meet your obligations, your positions would get cut. So, it is no more a notional loss, but a real loss. And that is very painful and that causes panic. However, this time around there is no panic due to low leverage So, you don’t worry about cutting your position or realizing your loss; you can hold. That is why this time around, there is a decline in market participation, but not a collapse.

So, with interest rates rising, are you seeing any shift towards bonds?

To some extent, mutual funds continue to remain good recipients of systematic investments. The HNIs (high net worth individuals) money, or smart money as they call it, is probably drifting towards fixed income. If you look at mass affluent-retail as a composite, money has gravitated towards mutual funds’ systematic investment plans (SIPs), in a combination of equity and hybrid funds. There is also allocation to bank deposits because deposit rates have also inched up.

What has been your strategy to deal with the decline in market participation?

Our firm’s strategy has been to pivot from being an e-broker to a wealth tech company. It is about making equities just one of the products we offer and not the whole thing. This has manifested itself already between 2019 and 2022, when we started doing this pivot.

In 2019, our total revenue was around ₹1,700 crore. Of this, closer to 60% used to be from equity broking. In 2022, the overall revenue rose to ₹3,400 crore, and the contribution of broking has come down to less than 40%. So, on a doubling of revenue, the equity broking share going down from 55-60% to 40%, clearly represents the pivot to wealth tech.

What do you mean by wealth tech?

We had articulated three pivots. First was that we will pivot to open architecture. This means that when we acquire a customer, you don’t have to be an ICICI Bank customer. In a way, we thought it was pathbreaking because 90-91% of the liability market (savings account, current account, deposits) does not belong to ICICI Bank. ICICI Bank has 8-9% share, while other banks account for the remaining market share. And we were not even interested in that 90-91% of market. So, this pivot opened that whole segment of market for us.

The second pivot was broadening of the product basket beyond equities and the fewer investment products we used to do, to a whole range of products. So, from basic deposits, the whole fixed income portfolio was strengthened. The entire wealth-related products, products on PMS (portfolio management services), alternatives; we increased that basket. We launched our own PMS fund.

We also brought in partners through RIA (registered investment advisor) route, by offering curated portfolios through our ‘masters of street’ offering. So, we tied up with 8-10 experts or well-regarded fund managers and they offer their curated portfolios through this. We call it one-click baskets.

Under the series of one-click baskets, we have retail portfolios and we have also launched the higher-end version of it, which we call premium portfolios, which are from ICICI Direct.

We have expanded our partnerships in distribution of life insurance, health insurance, and general insurance products. So, from being only an ICICI Prudential Life and ICICI Lombard distributor, we have onboarded different insurers. HDFC Ergo and HDFC Life have been onboarded, and so have Star Health, Care Health, etc. So, we have broad-based product basket, again going with the whole open architecture.

Third, we have broad-based loan distribution. We realized that we have had a long history of retaining customers . So, loan was a natural adjacency for us. We have launched business loans, home loans, loans against property (LAP), loans against shares (LAS), loans against mutual funds, and, more recently, credit cards as well. Soon, we will come up with personal loans. So, the whole basket of loan products has been systematically broad based.

How do you work with banks on the loans business?

We don’t carry the credit risk. We simply become the loan finder. So, it is a distribution model. At the back-end, we have a plethora of banks. We are not limited to ICICI Bank. Even HDFC home loans are available on our platform, Bank of Baroda home loans are available. We are now tying up with Bajaj Finance, Tata Capital, Cholamandalam Finance.

So, the idea of ICICI Direct is to pivot to a wealth tech and eventually a financial marketplace. So, the dependence on equities becomes less and less. It is a very conscious pivot we have done. So, think of us two-three-year down the line, as a combination of LoanBazaar, PolicyBazaar and a wealth tech, all under one umbrella. That is the direction in which we would want to move.

So, what is your revenue split right now, apart from equity broking?

So, it is a combination of a few things. The distribution-linked revenue is 20%. Then we have another 20%-odd coming from what we call as quasi-equity products. We have changed the way in which our broking is priced. We introduced subscription-based plans. It is not linked with broking because you subscribe to a plan. It is just like a Netflix subscription and you get some benefits such as access to research, liquidity and low-cost margin trading funding (MTF), which is another revenue stream.

So, there is a basket of slightly 20%-plus, which is belonging to non-broking equity products, which used to be like 3% or so. It is in a way is linked to equity but the correlation is far lower compared to, say, direct broking. It is because of this pivot that we have been able to hold or grow our equity revenue despite the decline in market participation.

So, 40% is from equity broking revenue. And another 40% is split in the manner described above. About 5-7% would be from our treasury operations. And the remaining 15% will be institutional equity.

Institutional equity is again linked to markets..

So here also, we have split the 15% into two baskets. One is the 7%-basket, one is the 8%-basket. The 7% basket is institutional equity broking, where we have increased the flow business. So, when you are catering to various mutual funds and foreign institutional investors, there is a core allocation that they keep giving you because they have to also deploy money in markets, buy and sell stocks, and so on. So, while it is linked with markets, it is not cyclical. We have seen it being more stable. It has a direct correlation with mutual fund flows and stuff. And then you have remaining 8%, which is IPOs. Rather than cyclical, I call it episodic. Even in an adverse cycle, you suddenly have a very big IPO for the quarter, and you will suddenly see a spike. So, it is more episodic than cyclical.

Our endeavour is to reduce dependance on IPOs and increase the dependence on QIP (qualified institutional placement). And it has been a conscious effort in the last three years to increase our presence, particularly in the BFSI (banking, financial services and insurance) space.

So, what we have seen is that if we have a foothold with 40-50 top BFSI companies of the country, someone or the other is raising money at some point or the other. Whether it is a large bank, small bank, small finance bank of NBFCs (non-bank financial companies), someone is in the market. So, you have coverage of 40-50 such companies, and typically these companies would at least take three investment bankers for their issuances. So, we have increased our research coverage footprint. We have a very high market share in this space, more than 70% in this BFSI space.

So, to what extent do you expect to diversify your revenue streams?

Three years down the line, we would hope instead of having one thick and 3-4 thin line items, to have broadly 4-5 almost equally thick line items. So, our attempt would be mutual fund distribution becomes a thicker line item than it is. Non-mutual fund distribution line item, which is insurance, loans, wealth products, bonds, etc. all of them together become another thick line item.