360 One Wam Limited (360ONE) Earnings Call Transcript & Summary

[Audio Gap] And welcome to IIFL Wealth and Asset Management's quarter 3 update call. Over the next hour, we'll have Mihir take us through the financial performance. I'll share other key business highlights and then request Karan to give us thoughts on key market and business-related trends and strategic priorities. We will then open it up for Q&A. So over to Mihir.

Thank you, Anshuman. I will now proceed to provide an overview of the financial performance of the company for the quarter ended December 31, 2019. The quarter has been stable with -- and with growth in key metrics. First, AUM. Our overall AUM has grown 5% Q-on-Q and 16% Y-o-Y to INR 1,50,762 crores. We have witnessed strong growth in ARR assets, 10% increase Q-o-Q to INR 70,434 crores, including 42% Q-on-Q in our IIFL-ONE AUM offering. Our loan book on 31st December 2019 stood at INR 4,027 crores, up 5% compared to 30th September 2019, which was at INR 3,851 crores. On to revenues. For the quarter, the revenues have grown 15.1% Q-on-Q to INR 244 crores, up by 15. 1%, again. Recurring revenues have grown 11.2% Q-on-Q and 20% Y-o-Y to INR 139 crores. Transactional and brokerage revenues stood at INR 82 crores for the quarter, down 22.6% on a Q-on-Q basis. Other income, which primarily reflects our treasury income, stood at INR 23 crores. Our consolidated revenue for 9 months ended December 31, 2019, stands at INR 674 crores, down 17.9% Y-o-Y. Expenses. Our employee and other expenses in Q4 (sic) [ Q3 ] were at INR 144 crores, up from INR 130 crores in Q3 (sic) [ Q2 ]. This is mainly attributable to variable employee expenses, including the cost of ESOPs started during the period. Administration and other expenses at INR 46 crores were lower than INR 48 crores in Q2, in line with -- and in line with Q3 of FY '18. Our overall cost-to-income ratio was at 59% as against 61% in Q2 and in line with Q3 of FY '18. Our consolidated profit before tax is at INR 272 crores for 9 months of the year, and profit after tax for the same period is [ INR 204 crores ]. Our profit before tax for the quarter stood at INR 100 crores, up 22% Q-o-Q. Our PAT for the quarter stood at INR 76 crores, up 8.6% Q-on-Q. We have declared interim dividend -- a further interim dividend of INR 10 per share, taking our overall dividend to INR 20 per share declared during the year. I will now hand over to Anshuman to take us through other key business highlights of the last quarter.

Thanks, Mihir. Over the last few months, we've seen an improvement in the overall client sentiment. However, domestic and international macroeconomic factors continue to be an overhang to the emerging positive sentiment. As a company, we've made steady progress on our strategic priorities. And I wanted to cover some of the specific business highlights over the next few minutes. Three specific points to highlight on our wealth management business performance. Firstly, we are continuing to see strong client traction with 100-plus relevant families added in the last quarter. Net new money has also picked up, with net flows from clients at almost INR 9,000 crores year-to-date. Of this, HNIs are approximately INR 10,500 crores, while treasuries have seen a net outflow during the year. HNI net new flows for the quarter has also been steady and was approximately INR 2,500 crores. Secondly, IIFL-ONE, our flagship proposition, continues to be the core focus area. And AUMs have grown by nearly INR 5,000 crores to over INR 16,000 crores at the end of quarter 3. We are on track to end the financial year at around INR 20,000 crore AUM under IIFL-ONE. Most importantly, our average AUM per family under IIFL-ONE has increased at about 25% to INR 43.4 crores, and retentions have held steady at 42 bps. Please note that this retention is after excluding corporate treasury and nonfee earning assets where existing clients have transferred their investments, but the fee generation will only kick in on maturity of those investments. With growth in our managed pool solutions, we expect the retentions to steadily increase from the 42 bps towards the targeted 50 bps mark. Lastly, we continue to expand geographically with 3 new offices opened last quarter, taking our office count to 29. The new offices are in Amritsar, Varanasi and Surat. And we plan to continue the geographic expansion further to strengthen our presence in the nonmetro cities as well. Moving on to our asset management business. The focus has been on scaling up AUM across our existing products, AIFs, mutual funds and specifically -- especially in the PMS category. The stellar performance across all listed equity schemes have supported the strong AUM growth trajectory. Overall AMC assets have increased 15% Q-on-Q to nearly INR 27,000 crores, with AUM in our listed equity strategies increasing over 50% year-to-date to INR 9,215 crores. Improving retention has also been a priority, and this quarter has seen an uptick in the same. Three specific focus areas for us in AMC: Firstly, the platform. Regular additions to the product platform have helped maintain market leadership in the alternative segment. Aim is to build a unique and comprehensive platform with capability across our 4 strategies: listed equity, private equity, real estate and structured credit. Secondly, it's the distribution coverage. Enhanced distribution coverage has been a big push area for us in this year. And 63 distributors, partners/channel partners have been added over the last year itself. The third focus area is processes and people. We continue to focus on institutionalizing processes and increasing the use of technology across all the activities and functions and also in ensuring an ongoing focus on talent acquisition and retention. Two other quick points before I hand over to Karan: First, multiple initiatives focused on improving our productivity and driving cost efficiencies are underway. And we should see visible impact over the next 6 to 12 months. Our target remains to get towards a 50% cost-to-income ratio towards the end of next year. Also, we have maintained a strong focus on technology, with select strategic programs both for client servicing as well as for automating internal workflows and driving increased analytics. Secondly, acquisition of the wealth management business of L&T Finance is awaiting statutory approval. We expect it to come through over the next 2 to 3 weeks. Now over to Karan to share his views on the market, business and our strategic priorities.

Thank you, Anshuman. I think the last quarter have been an interesting quarter for us, at least post the IL&FS crisis from last September. For the last 3 months, for the first time, we saw clients having an active interest to invest. The focus towards investing in high-quality fixed income and equity instrument continues, but the inertia of not wanting to do anything with money seems to have gone away. Over the last 3 months, we've been able to launch very interesting products, be able to take our IIFL-ONE solutions to clients and successfully revitalize the system in many ways. Over the last quarter, we've also seen 2 interesting regulatory changes from SEBI, one in the form of a consultative paper, which talks about the new advisory guidelines, and the notification of the new portfolio management services guidelines. The PMS guidelines itself does not have any material impact on our business as it increases the minimum amount from INR 25 lakhs to INR 50 lakhs as well as takes away the ability of a manufacturer to pay or charge an entry load to the client. In our client segment, both of those are really not an issue. Most of our portfolio management clients would typically tend to be far higher than INR 50 lakhs. And given the fact that we are on a trail model, in no situation even before the regulation, where we're really charging a big setup fee to the client. On the advisory regulation, SEBI has taken out a draft consultative paper. It's the fourth paper over the last 4.5, 5 years. We'll have to wait and see how the clarity finally emerges. But broadly, they are talking about each client being distinctly captured in the group as either an advisory client or a broker-dealer client. From our perspective, this is a regulation we've spoken about many times over the last 2 to 3 quarters. And we believe as time goes by, over the next 9 to 15 months, at some point or the other, every client would have to get uniquely captured. As a firm, we are extremely well prepared. We've anticipated these changes in regulations. And IIFL-ONE, housed under the portfolio management business, is extremely well equipped to handle this. As we go forward, we believe such regulatory changes may actually consolidate the market and enable us to be able to guide the client towards entering into relationships like IIFL-ONE much better and lead to certain maturity in the industry, which we are already moving towards. From a business model change perspective, we've seen a very, very good trend emerging both from the client side as well as, most importantly, from our relationship managers. Clients have started understanding the IIFL-ONE proposition extremely well. Our retentions and their ability, our ability to convince them on the need to pay fees as opposed to us earning retrocession from manufacturers has been much better established as we go along. Most of our new clients, nearly 3/4 of our new clients, continue to come on to the IIFL-ONE platform. For our old clients also, the ability to migrate them has moved forward steadfastly. With every quarter -- passing quarter, I think the momentum will only increase. Last quarter, we saw a good shift happening. And as we've seen and as we've discussed earlier, I think on the portfolio management nondiscretionary side, we should be able to end up with the 40, 45 basis points retention, and discretionary should be slightly higher. On a blended basis, I think, as we make this transition to IIFL-ONE, our ability to convince clients of roundabout the 50 basis point fee remains extremely, extremely strong. On the relationship manager side is where I think we made the maximum amount of improvement over the last 3-odd months. We've had intense amounts of training from experts globally who have helped private banks make the shift from a distribution business model to an IIFL-ONE kind of model. And we worked very hard with the relationship managers to reconstruct the balanced scorecard as well as reimagine their own profit and loss accounts over the next 2.5, 3 years. And that has yielded good results. I think today, there is a large amount of conviction within the firm and within each relationship manager as to the benefits he gets by migrating clients to the IIFL-ONE platform. Their ability to scale up their business and have many more clients and therefore widen the span of control rather than being focused on daily transactions is something which is of immense value to them. We've also made a small change in terms of their compensation. We've kind of introduced a small variable which enables them to have a much softer lending as compared to the firm during this migration process. And over the next 18 months, it will help them build their balanced scorecard in a much more realistic manner. On the strategic initiative side, we continue to build and expand our platform. For us to be successfully -- in paneling and staying ahead of competition on the IIFL-ONE platform, we need to continuously invest on products, on our brokerage team, on our technology, on our advisory, investment counselors team as well as on our ability to provide ancillary services to clients, including trust services, funding, tax advisers, so on and so forth. On these ancillary services, we continue to invest and build a very strong architecture so that we can serve as a one-stop shop for our clients for everything regarding their net worth management. As we go forward, one interesting trend we continue to see is the expansion of the wealth management market in India for our segment moving away from 8 to 10 cities to becoming 25 to 30 cities. And that's a change which is extremely interesting for us. We've invested a lot of our time over the last 12 to 18 months in building the 10th to the 30th cities, if we can call it that way. And very interestingly, I think each city gives us the opportunity of having 40, 50, 60 new relationships. That is something which we've been extremely successful with over the last 12 to 18 months. On the asset management side, post Anup coming in over the last 12 to 18 months, all our funds continue to be practically on the top-performing pole position for the last year, 1.5 years and practically -- and are in the top quartile for the last 1, 2, 3 and 5 years. On the back of that, we continue to see a strong growth on our asset management business as well as continue to build a large platform to be able to house more and more innovative ideas on the alternate asset management platform. And all of this, we hope to achieve with a razor-sharp focus on productivity as well as cost. So I think over the last 12 months, I think we've seen some green shoots emerging over the last quarter. And both from a market share perspective as well as from a relationship manager perspective, most importantly, we've seen the traction improve substantially. One of the interesting trends we've seen as far as relationship managers go is our ability to attract senior relationship managers from the industry post the introduction of our IIFL-ONE platform has been extremely, extremely good. And as we build our business over the next 12 to 18 months, I think we'll find a lot more like-minded senior relationship managers from platforms outside of ours come together with us to be able to help build our business better. Thank you.

Thanks. With that, we'll open it up for Q&A.

[Operator Instructions] The first question is from the line of Saptarshee Chatterjee from Centrum PMS.

Congratulations on a good set of numbers, sir. My first question is in the net new money that you have received in this quarter, around INR 1,800 crores. If I compare that with the earlier quarters of maybe quarter 1 and last FY '19, this number seems meaningfully lower. Are you seeing a higher kind of redemptions? And when can you see this number to be similar to earlier quarter numbers?

So I think from a net new money perspective, I think quarter 1 saw a good inflow of roundabout INR 6,000, INR 6,500 crores. Quarter 2 was a little subdued. In quarter 3, actually, our private wealth net new money is fairly decent. It's back to the INR 2,500 to INR 2,700 crores number. There's INR 1,000 crores treasury redemption, which kind of keeps moving up and down on a quarterly basis. But I think very quickly, we should be back to the INR 3,500 crores, INR 4,000 crores quarterly number, which we intend to be targeting at. This quarter would be closer to INR 2,600 crores, INR 2,700-odd crores.

Understood. And the L&T Finance wealth management, that AUM will come mostly in next year Q1 or Q4 only?

Most probably in Q1 of next year. So it needs the approval from DEA. So I think we'll have to wait and see, but I think it should come through over the next 20 -- 15 to 20 days. And post that, we can take a decision on that. But I think it's unlikely to happen before the first quarter of next year.

Okay. And sir, lastly, I want to understand that in recent times, we have seen Axis Bank to be very aggressive in their Burgundy platform. So are we seeing any kind of a competitive pressure in incremental client acquisition in any of these spaces because of this higher focus of such banks?

So actually, typically speaking, more often than not, the immediate target segment of most of the banks typically tends to be slightly different from our target segment. But given the new initiatives some of the banks are taking to be able to migrate to the higher segment, we'll have to wait and see how it kind of -- whether we see them as competition, the new clients we are acquiring. I think it's fair to say, as we speak right now, the answer is not really.

The next question is from the line of Parag Jariwala from White Oak Capital.

So my question is to Karan. If you look at the transactional and brokerage revenue, there is very high amount of syndication-related revenue. Can you just, I mean, highlight what extent it is? Is it like INR 155-odd CR versus INR 40-odd CR in FY '19? Yes, if you can just clarify what exactly is this?

As I discussed in the previous quarter, syndication and brokerage revenue broadly includes all transactional revenues. So it will include transaction revenue. For example, in this current quarter, we could -- let's say, if we are doing a block of NSE shares being sold to our clients, that will get qualified as syndication brokerage revenue. If you could be placing, let's say, the typical transactions we've done in the last quarter would include we placed a block of IndiGrid debentures, which are CRISIL AAA debentures, or we could have placed a block of AAA Embassy REIT debentures. So all of those essentially get classified under syndication and transaction. More often than not, they would -- 60% to 70% represent fixed income -- high-quality fixed income brokerage ideas.

Okay. But see in -- so let's say IndiGrid or any debentures which are like AAA, you basically buy it at a yield of -- so is this pure brokerage or basically in sell-down? Also, there are some commissions like you probably buy it 8% and sell it 9%, so you can book 1% extra.

I wish it was that easy. But typically, it's around about 30 to 40 basis points a year, yes. So effectively, it would range between 1.25% to 1.5% if it's a debenture of 3 years or 4 years. And if it's a debenture of 5 years, it could be potentially 1.5% to 1.75%, approximately 30 to 35 basis points a year is effectively the transaction and brokerage revenue we can make from these kind of transactions.

But then these are like onetime -- so you are probably booking entire 5-year revenue at one go, right?

So this is one time. As we've kind of explained in our financials, there are 2 kinds of revenue. One is the annual recurring revenue, which is essentially something where a client is willing to pay me a fee year-on-year, okay? These are essentially trades with clients where they're not willing to pay me a fee year-on-year. So effectively, they're buying the bond. They don't want to pay me 0.5% on the bond every year. So for example, the same bonds sold to our IIFL-ONE client will not have the brokerage of 30 basis points. It will have the full yield, and the client will be paying me a fee year-on-year, okay? So part of it could be sold to a client who is dealing with me on a transaction basis. Part of it could be sold to a client who is dealing with being on a fee basis. So that comes in the ARR side. Transaction is giving me a onetime revenue. It's coming on the transactions from brokerage side.

Okay. And Karan, with respect to your guidance, which you have mentioned earlier, that the fourth quarter exit F '20 into 4 will be F '19, do you still maintain it or...

Yes. Approximately similar, yes, plus/minus 2% to 5%.

Okay. Okay. And just one last thing. So as a percentage of opening AUM, if I look at a broader period of, let's say, 5, 7 years, what proportion of net new money you are comfortable, which is a percentage of sales, by and large, which you can do?

So 5, 7 years only percentage may not be easy to model in that sense. But on an absolute number, I think INR 15,000 crores to INR 20,000 crores over the next 2.5, 3 years for sure, which effectively means in the region of around about close to, give or take, 10% to 15% of our opening AUM. Going forward, obviously, year 4, year 5, year 6, depending on how the industry is at that point of time, in percentage terms, it might come off a bit. But if you were to model for 6, 7 years, I would put it closer to 8% to 12%. If it's a shorter term of 3 years, I would definitely push it towards the 15-ish number.

The next question is from the line of [ Chirag Patel ] from [ Adinath Shares ].

My question is to Mr. Karan. Going forward, which product we want to highlight more in front of clients. So basically [indiscernible].

Sorry to interrupt but, Chirag, we're not able to hear you clearly. Hello?

Hello.

Sir, your voice is breaking up.

Am I audible?

Yes, sir. Please go ahead.

My question is for Mr. Karan. Going forward, which product we want to highlight more to our customers, specifically to the new 3 cities which you mentioned, like Surat, Varanasi and 1 more in the initial talk, whether it's PMS or AIF.

No, I don't think so. We typically approach new clients with only new products, which will be driven more around asset allocation and therefore post that product selection. The way we typically would approach it is, how much in fixed income, how much in equity? Within fixed income, how much in AAA, AA-plus and alternates? And similarly, in equity, how much in large cap, mid-cap and alternates? What ends up being through our IPS, which is our investment portfolio statement, what typically clients end up doing is broadly 50% fixed income, 50% equity. Within the overall portfolio, typically 10% to 15% tends to be alternates, which is your alternate investment funds. PMS would have a similar weightage of 10% to 15%. Remaining 65%, 70% ends up being mutual funds and high-quality bonds. That will be the typical mix. And then there will be certain set of clients who might say that, "I don't want to start with the advisory proposition or with the portfolio management service. I want to start with more of a product-based approach." So there, he might end up choosing one of these products. But our idea would be to, sooner than later, moving to a portfolio approach as opposed to stay in a product approach. So ideally speaking, to answer your question, we would want a mix of debt and equity and not more than 15% to 20% in alternates and potentially 10% to 15% in PMS.

So we are catering more in your financial planning kind of typical wealth management firm?

I think a typical wealth management firm should end up with a lot of financial planning. But yes, I think our focus is to first set up the IPS, which is the investment portfolio statement, and basis of guidelines construct the portfolio.

Okay. And what average ticket size per client are we expecting to receive for this kind of service? Average -- any internal target, we said?

So I think currently, our average client size across the firm is in the region of INR 23 crores to INR 25 crores. In our IIFL-ONE proposition, it's currently around about INR 43 crores. I think that will come down towards the average size of the firm's client, which is in the region of INR 25-odd crores.

[Operator Instructions] The next question is from the line of Nischint Chawathe from Kotak Securities.

Sure. Just on syndication, if you could give some color in terms of what pipeline you're looking at over the next couple of months? Because that tends to be a slightly volatile one. And the second one was, you did make a mention about changing or tweaking the employee incentive program. Maybe just if you can explain that a little bit more in detail?

Thank you, Nischint. I think both questions are important. On the syndication transaction brokerage revenue, on the very long-term basis, I think it should end up at around about not more than 15 basis points to 20 basis points of the assets. And the way that's kind of computed is the ARR income on the assets should centralize it in the region of 50, 55, 60 basis points. And 30% to 35% of that is essentially what will come through as transaction and brokerage income. Currently, it has been slightly higher. It will be in the region of 45-ish to 50%. But that's also a function of the fact that only around about 15% to 18% of our assets have actually moved into the ARR bucket as we speak. So I think as we go along, I think the numbers will kind of, in percentage terms, start coming off. I think over the next year or so, it will see some bit of quarterly ups and downs, the transaction brokerage revenue. But I think -- over the next year, I think it will more or less stabilize in that region of around about 35% to 40% of the overall fee revenue. And 60% to 65% of the fee revenue should come through the ARR bucket. So for example, if you end up with INR 100 fees and commissions, adding INR 35 to INR 40 maximum will be from the transaction breakage revenue, INR 60-odd will be from the recurring revenue. On the...

Near-term pipe -- sorry. Just some color on the near-term pipeline?

Near-term pipeline will end up being closer to more the 45% to 50% range as opposed to the 30%, 35% range.

Sure. Okay. So on the second one, sir? Yes.

On the bonus -- the variable portions, we've kind of had 2 changes in the current quarter. So we had an option plan of around about 22 lakh, 2.2 million options granted to employees at a price, if I'm not wrong, of around about close to INR 900 a share. That essentially is vesting over 4 years. And effectively, a large part of the cost essentially hits in year 1. So effectively, we've got a cost of around about INR 7.8 crores to INR 7.9 crores of ESOP cost included in the current quarter's bonus provision. And effectively, from next quarter, the INR 7.8 crores would move to around about INR 14.5 crores to INR 15 crores for the next 3 quarters and then consequently would keep coming down as a large part of the 3.5-year ESOP -- 4-year ESOP cost is being upfronted in the year -- first year. We've also started out a small retention bonus program for some of our relationship managers, which essentially is a kind of a reassurance that as we go through the change in the business model, some part of their bonuses, which would naturally come through over the course of a normal year, remains protected. That represents nearly around about 60% of the bonus provision in the current quarter. Around about 30% to 35% is on account of the ESOP cost. And around about 10% would really be joining bonuses and so on and so forth. So that's the split of the bonus. So we expect, overall, from a guidance perspective, for the full year, we would not -- we would model around about a 35-odd percent number to variable cost of the total employee cost. So effectively, salaries into roundabout 30% to 35% would be the broad variable cost, including ESOPs.

So just to understand this now, in the retention program, what you're essentially saying is that when you get new business, you are going to make some provisions for bonus that could be paid in the later periods, which could be pertaining to the revenue that you'll be earning in the later period. So is it kind of sort of saying that you're making provisions for the revenue that you will be earning in later periods?

Yes...

Is it like upfronting of expenses? I mean that's the way to put it, which is the way you used to do earlier, where you used to kind of upfront income. And obviously, the bonuses are also sort of upfronted.

Retention bonuses are paid over 12 months. So it's not really upfronted in that way.

No, no. But you're making a provision right away, right? So...

We are paying it quarterly. So what is provided for is what is paid for this quarter. It's subject to the employee being there, meeting a certain set of small minimum numbers. It's more like a reassurance that if you're around and the numbers are done, a minimum amount of bonus is there. And honestly, the provision, more or less, captures a number which would definitely come through in normal state of business. So it's not any advanced provisioning as such. It's essentially more of a retention bonus very similar to what would normally get provided over the next 12 months. So I think it's safe to say that in either case, with 70% of the mean is already provided for, it could be minus 10% or plus 25%, depending on how the business works out over the next 12 months.

So there is, per se, no lead lag effect between bonus and revenue on this, right, which is what I...

No, no. No lead lag effect at all.

Sure. Got it. So typically, what you used to do is that you used to make a provision and pay it at the end of the year. What you're saying is that you're kind of now kind of paying it in the quarter. Is that -- is my understanding right?

Yes. That's fair.

Sure. Those were my questions. Sorry, just one final one. On the mutual fund side, the recurring AUMs, I think we have seen this number sort of remaining flattish or maybe going down a little bit this quarter. Anything to read in that?

No. So I think 2 things have happened there. One, part of the AUM has obviously moved into IIFL-ONE. And second, the mix has improved. Therefore, the brokerage has gone up a bit. So for example, we've seen a lot of liquid funds move to arbitrage, a little bit of fixed income move to equity. And therefore, the brokerage has moved up. And part of the AUM redemption is largely driven from the movement to IIFL-ONE.

The next question is from the line of Kunal Pawaskar from Indgrowth Capital.

My query is to the IIFL Wealth team. I'm on Slide 7 of the deck shared for this quarter and in the finance cost line, in fund-based income under that heading. For the interest income that has probably grown by around 25% year-on-year, the finance cost increase is much higher. Can I understand what's happening there behind this?

Yes. If I get the question right, I think you're referring to the reclassified results table, right? Slide 7?

Correct. Correct. That is Slide 7, reclassified result table. I'm on finance cost line. And when we see that on a Y-o-Y basis, 160 going up to 200, almost 25%, whereas finance cost goes up much more. And on another slide, it also said that the borrowing costs were essentially stable. So I was not able to understand why the disproportionate increase here in finance cost. If you can explain that, please?

So if you look at the next slide, if you just go to Slide 8 for a minute, what we have done is we've taken the whole fund-based income, which is that full heading, including the finance cost, and broken up the income and the expense into 3 heads. One is what we earn as NIM on the loans we gave. One is the hedged instrument we hold on our balance sheet. And the third is the other income. Now unfortunately, the way that result table is made, it doesn't really explain this well, which is why we've added the slide. So if you look at the hedged investment and you look at the jump between the income and the expense on hedged investment, it's from 66 to 106, right? So that essentially has no impact on our financials or on our P&L. But the mark-to-market changes on the instruments which are hedged, yes, will drive these absolute numbers up and down. So basically, the -- yes, the obligation of the hedged instrument is being passed through net changes in fair value and cost of interest, but the nullifying impact is 0.

Okay. Okay. So one should rather see Slide 8 and just focus on the first line only, on the NIM on loans, to get a fair picture?

That's the reason we added this slide, yes.

Understood. Okay. And on IIFL-ONE platform, the second question was that it should probably touch around INR 20,000 crores is what you indicated in this call at the start. Would you be able to provide any guidance about how much that figure might be at end of FY '21, March '21 quarter, indicatively?

No. We would be disappointed if it's below INR 40,000 crores.

The next question is from the line of Priyankar Sarkar from HSBC.

Sir, my question is a bit long-term oriented. And I'd be happy if Karan can answer this for me. Sir, for the last 10, 12 years, we have seen SEBI make a lot of regulatory changes such as entry load, exit loads and upfronting of fees. So all these changes have taken place obviously as the industry is getting scale. So what kind of more changes we think can SEBI come up with over the next 3 to 4 years, which will impact our long-term earnings potential?

So I think, honestly, a large measure of the changes on the asset management side, I think, are more or less inching towards -- I think it's very well regulated on the asset management side. The only thing which is not there is essentially on portfolio management and alternative investment funds. There is still flexibility for the manufacturer and distributor to decide upfront and trail commissions. And if you look at the history of mutual funds for the last 20-odd years, I think, if you remember, till 2007, if I'm not -- for every transaction, you essentially got [indiscernible] load and you got trader commission. In 2009, that got eradicated. 2015, SEBI reduced the upfront commissions to 1% and finally, last year, made it 0. And they removed the entry load in 2007. So I think even in the PMS regulation, SEBI has actually taken the first step by removing entry loads now. So you can't charge an entry load now. So we are back to -- effectively, in a sense, if you can call it PMS, we are in Phase 2 of mutual fund regulations. So I think as time goes by, over the next 3 to 4 years, Stage 3 and 4 essentially will imply that the distributor even for PMS can only be paid from the scheme and only retail and only trail commission, not upfront. So that can have a bit of impact on the behavior of the distributor, where essentially for him, whether he sells a portfolio management scheme or he sells an AIF or he sells a mutual fund, for him, the retention across all 3 will become more or less the same. So that's as far as asset management goes. As far as wealth management goes, I think, eventually, as a wealth manager, you'll have to have a clear mandate with the client, whether you're dealing with him as a portfolio manager or an adviser or a broker-dealer. And I think this definition will need to be extremely clear as a relationship between you and the client. And therefore, your fiduciary responsibilities across all these 3 will need to be defined. Your ability to maintain records of transactions across these 3 will be different. Your in-house technology, compliance, bookkeeping across these 3 will be different. And I think as time goes by, I think SEBI will also require you to make a tighter log and control. As the business becomes larger and larger, you may find it difficult to continue as an individual. You may need to corporatize that business. I think from our perspective, I think 2 changes on the asset management side. I think upfront commissions will slowly go away over the next 3 to 4 years, even on PMS and AIF. And on the wealth management side, I think as we go forward over the next [ 3 to 4 years ], there has to be a clear relationship defined between the client and the firm. I think these are the 2 big things we'll see over the next 3 to 4 years.

Fair enough. Can I add one more question, please? Is there any kind of global wealth management company that we aspire to become?

So I think there are many firms. There's no single firm we aspire to become like. But I think to be honest, I think Credit Suisse, UBS, much more recently in Asia, Bank of Singapore, we have all 3 done. And in the U.S., we obviously got Bank of America Merrill Lynch. Over the last decade or so, all of them have made a beautiful transition from becoming a more fund distribution outfits to becoming more advisory portfolio management-focused solution provider. And I think that's really where we would like to move our business towards.

[Operator Instructions] The next question is from the line of Alpesh Mehta from Motilal Oswal.

Congrats for the good set of numbers. First question is on IIFL-ONE. You mentioned around 42 bps is the net retention. So if I just back calculate the numbers, so the average AUM for the first 9 months is around INR 77 billion. Is that right?

So the way to -- that's right, but there are many small nuances to that, so I'll just explain. Our IIFL-ONE assets are effectively kind of broken into 3 portions, okay? One essentially is discretionary PMS, the second is nondiscretionary PMS and third is advisory. Advisory, we offer only to corporate treasuries. So there, the retention is slightly lower. But a large part of our assets, which you see there, are basically in the first 2 categories, which is discretionary PMS as well as nondiscretionary PMS. There, the only nuances there are certain instruments, what we call our effectively fee-bearing and certain assets which are currently not fee-bearing. The client has already contracted to it, but it's becoming fee-bearing as soon as the maturity of the instrument which we invested in, which was a close-ended instrument earlier, comes up for maturity. So effectively, blending those 2, the current retention is ending up being closer to roundabout 36 basis points, which automatically, as instruments move up for maturity, will move up to 42 basis points. And currently, if you do the weighted average, you are right, it will be INR 7,754 crores. But the right quantum of assets is INR 12,216 crores. Over the next 2 to 3 quarters, the retention on these assets will automatically move up from the current number to 42 basis points.

Okay. So if I were to -- I don't know whether you would be answering this question. But if I were to break up this INR 16,000 crores between the treasury discretionary and the amount that has been shifted from the earlier upfront fees, would you be able to give a rough breakup about that AUM?

No. We can give the full breakup in the sense we can send across the table also. But the discretionary PMS is around about INR 4,000 crores right now on a closing basis. The nondiscretionary is roundabout INR 7,800 crores. And the corporate advisory is roundabout INR 3,800-odd crores, which is the breakup of the INR 16,000 crores.

Okay. And when you say around INR 40,000 crores of -- or maybe you're guiding for around INR 40,000 crores of IIFL-ONE by FY '21. What is the rough mix that you have in mind? Why I'm asking this question is...

It was -- yes. Corporate advisory should not typically be more than 20%. We would want 80% in discretionary and nondiscretionary.

Okay. So by -- again, by FY '21, while you have a targeted number of around 50 basis points, but because of these nuances, would the weighted average number be lower than the 50 basis points that you are guiding right now? Because like for the first 9 months, when you have a reported number, weighted average number looks like around 28, 29 basis points [indiscernible].

So if you look at it for -- so there are 2 ways to look at all these numbers. That is obviously on a run rate basis and managed for the period gone by. I think for the period gone by in March next year for the previous 12 months, I think it will be closer to 35 basis points. On the forward run rate basis, it will be closer to 45, 50 basis points.

Okay. Got it. I got it. Second question is on the loan book of -- in this quarter, it's flattish on a quarter-on-quarter basis. But since we are sitting on excess capital, what's your guidance on this book? I understand it's a bit opportunistic, but again, any rough idea would you have about this particular...

No, no. I think loan book, while it's opportunistic, I think we -- our ability to find even good quality assets today is not really an issue. And good quality assets, what I'm referring to, I'm not referring to only promoter funding or stuff like that. Even across our client base today, good quality assets is not really a problem. But we have to be extremely sensitive about the liability side. So I think while we are looking to grow our loan book constructively, I think we'll continue to be very, very cautious and 110% sure that all our liabilities should be towards the longer end. And I think we are constructively going there. Today, our entire liability is north of 9 to 12 months at the minimum. So I think as long as we can maintain that, we would hope to grow our loan book constructively by at least 15% to 20% over the next 6 to 9 months.

Okay. And related -- one more question related to this business. Has there been any change into the capital allocation towards this business versus the previous quarter because I see, on a calculated basis, at least the margins are higher.

Yes. So we had reduced a little bit of capital because the dividend we have declared, we've upstreamed it from the NBFC to the wealth business and then finally to the shareholders. But it's got more than compensated. It's got more than -- it's got compensated by the profitability over the last 2 quarters.

Perfect. And just a last question on the other income side. Last quarter, you had an impact -- negative impact of around INR 19 crores or so, which was a mark-to-market. And this was -- so on a net -- on a gross basis, the number was 0. In this quarter, mark-to-market gains of around INR 23 crores. So any explanation on that one, please?

So the other income is, more or less -- we have around about INR 740 crores invested as sponsor/nonsponsor in our own alternative investment funds. Plus, we would have another INR 100 crores, INR 150 crores at all points of time being in liquid schemes. I think the best way to look at that INR 800-odd crores is a broad return of 9% to 10% on a yearly basis. The only challenge with this 9%, 10% is not going to be symmetrical on a Q-on-Q basis. So I think the other income will not go typically below INR 60 crores for the year and will typically not exceed beyond INR 80 crores because we are not really doing anything else with the money. We are just investing back into our own alternative investment funds. So I think the number for the year would be in the region of INR 60 crores to, maximum, INR 90 crores. And it will essentially kind of end up being slightly asymmetrical on a quarterly basis because, broadly, the movement is the -- NAV movement on a quarter-on-quarter basis is not necessarily reflecting a realized position.

And is this the gross number? Or there are mark-to-market loss -- or the provisioning also taken into this number...

No, there's no provisioning. The provisioning was there only for the last quarter, which is on that...

Agree. Last quarter, there is no provisioning, right, related to the...

No, I don't see any provisioning actually at all. Now we have no bond, nothing. So we've disclosed our balance sheet in a great amount of detail. So really, there is nothing really there.

Perfect. This is a gross number. Okay. Correct.

Thanks.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Karan Bhagat for his closing comments.

Thank you. We look forward to the next quarter to speak to all of you again. Thank you.

Thank you. Ladies and gentlemen, on behalf of IIFL Wealth Management Limited, that concludes this conference. Thank you for joining us.