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

A very good afternoon, ladies and gentlemen, and welcome to 360 One WAM'S Q3 FY '23 Earnings Call. [Operator Instructions] Please note this conference is being recorded. On the call today, we have with us Mr. Karan Bhagat, Managing Director and CEO; Mr. Anshuman Maheshwary, Chief Operating Officer; and Mr. Sanjay Wadhwa, Chief Financial Officer. I now hand it over to Sanjay to take this conference ahead.

Thank you, Anil, and a very good afternoon to everyone on the call today. The year 2022 and the quarter gone by have been busy periods for the market as high inflation and interest rate hikes continued to persist. More recently, resurgence of COVID-19 fears in different parts of the world added to the uncertainty. Despite the volatility and fear, Indian markets remained relatively resilient and broadly outperformed the global indices. The latest IMF estimates suggest that the Indian economy will grow at 6.1% in real terms, beating some of the other larger economies. Having said that, we bridge (sic) [ base ] our best case on a conservative note as the sentiments continue to remain cautious on the back of these headwinds. Amidst all the challenging opportunities, we report yet another exciting quarter with robust improvements in ARR assets backed by strong net flows, thereby improving our profitability with steady retentions. Before we deep dive into financials, we would like to highlight that we have proposed a share split and bonus issue, both in the ratio of 1:1, which is subject to shareholders' approval, and have also declared fourth interim dividend of INR 17 per share. Now coming to the financials, some specific financial numbers. Assets under management. Our total AUM is now more than INR 344,000 crores, up 4.8% Y-o-Y and 3.4% quarter-on-quarter. Excluding custody, our overall AUM increased 5% Y-o-Y and 3% quarter-on-quarter to INR 275,000 crores, with wealth AUM at INR 216,000 crores and asset management AUM at INR 59,000 crores. Importantly, our ARR assets increased 7% quarter-on-quarter and 20% year-on-year to INR 166,000 crores. With this, the share of ARR assets to total AUM now stands at 61% as we continue our journey towards steadily increasing the pie of ARR assets. Happy to share that despite the market volatility, our ARR net flows have been very robust for the quarter at INR 10,386 crores. Our loan book also grew during the quarter and now stands at INR 4,474 crores, which is up 4% sequentially. Now coming to the revenues and retentions. Our total revenues were marginally up quarter-on-quarter at INR 410 crores. As compared to Q3 FY '22, our revenue from operations was up 10% Y-o-Y and 9% quarter-on-quarter at INR 415 crores. Importantly, our recurring revenues have increased 6% quarter-on-quarter and 12% Y-o-Y at INR 276 crores. As a percentage of operating revenue, recurring revenue will now comprise 66%. This quarter has also seen some good transaction revenues at INR 139 crores. Our retention of ARR assets have remained very strong at 70 basis points for wealth ARR assets and 83 basis points for asset management. At an aggregate level, our overall ARR retention stand at 70 basis points. The other income this quarter includes a foreign exchange conversion loss of INR 5 crores, which is arising on account of depreciation in USD as against the Singapore dollar. This is towards dollar-denominated assets which are held in our Singapore entity in the form of investments in our long, short managed funds. This is getting offset by an FCTR gain, reflecting in the other comprehensive income on account of the same assets getting restated in INR for consolidation purposes. Now coming to expenses. For the quarter, our cost-to-income ratio stood at 45.5%. Our total expenses for the quarter were up 4% quarter-on-quarter at INR 186 crores. Administrative and other expenses were up 13% quarter-on-quarter at INR 54 crores, which is mainly on account of rebranding costs that got incurred during the quarter and some higher technology-related expenses. Coming to profitability, our PAT stood at INR 180 crores, an increase of 16% Y-o-Y and 4% quarter-on-quarter. Importantly, our tangible return on equity, which is ROE excluding goodwill and intangibles, continues to remain strong at 28.6% for the quarter. With that, we come to the end of the financial highlights. I'll now hand it over to Anshuman to cover the key business and strategic highlights.

Thanks, Sanjay. Good afternoon, everyone. As covered by Sanjay, it has been once again an exciting quarter for us amidst all the uncertainty and volatile environment, which we expect to stay around for a while in the near term. Moving on from the specific financials that Sanjay has spoken about, I want to speak through on our broad aggregate view on FY '23 before sharing a few key highlights across our businesses. Overall, as you've seen through the last 3 quarters, growth remains strong and well-rounded across business segments and asset classes. Also our relentless focus on specific metrics of recurring revenue assets, cost-to-income and return on capital is driving sustained performance. Most importantly, ARR net flows continues to see strong traction across both wealth and asset management and at over INR 22,000 crores for 9 months remains broadly in line with our guidance. Delving a bit deeper into this, wealth has seen about INR 18,500 crores ARR net flows in the first 9 months, nearly at our full year FY '22 level, with 45% -- over 45% of this coming into IIFL-ONE. Asset management at INR 3,500 crores of net flows remains healthy, specifically given the external environment and planned distribution of over INR 4,000 crores year-to-date from our earlier AIFs. I want to highlight that the flows in AMC has specifically been strong in credit and real assets, ably supported by listed PE and multi-asset LVFs, showcasing the strength of our well-diversified multi-strategy platform. This allows us to go through these external cycles with a significantly higher resilience. Overall, ARR, AUM is tracking at about 21% year-on-year growth, has seen a 4% to 5% impact due to low or negative MTM across the different asset classes. Our operating revenues has remained very strong through the 9 months, sustained retentions of 70-plus bps on ARR assets and continued strong transactional income. The total revenue is tracking at about 3% lower than guidance, but primarily due to the impact of market volatility and the foreign exchange that Sanjay highlighted on other income. However, even with this, our focus on cost and operating leverage is keeping expenses under control and therefore, the bottom line coming in at a high level. The cost across both employee and other costs have remained in line and total to about 44% to 45% from a cost-to-income standpoint. Our operating PBT is tracking very strongly at about 50% year-on-year growth given the robust core business performance and is well above guidance, with overall PAT growing marginally below the guidance due to the lower other income. Tangible ROE is also tracking at guidance of 28% and prudent capital management and dividend payouts have been sustained through the year. Some other business updates. Rebranding is something that we did in this quarter. As we built our business over the last 14 years and spoke to several of our stakeholders and employees on how they perceive us, we felt it's an opportune time to reinforce our approach to advice and service. This is exactly what our new brand 360 One symbolizes. 360 One is an embodiment of 2 words that are extremely important to us. 360 represents the holistic view we take of the one person whose interests are always first, our client. The alignment of interest with our clients, our employees and all our stakeholders has resulted in our company emerging as a leader in the industry. Our brand purpose that has remained constant since 2008 is articulated as Performance Plus. Performance is objectively measured by numbers. It is the long-term performance that we provide to our clients. The manifestation of Plus is different for every stakeholders. For clients, it is the extraordinary personalized care we take off each one of them. For employees, it is their career growth and the entrepreneurial culture, which is core to our firm. And for shareholders, it is our ethos of value creation with stability. The second highlight for the quarter has been on Mumbai Angels. We are excited to announce that our acquisition of Mumbai Angel was completed in this quarter. Mumbai Angels, as you all know, is a private investment platform for early stage ventures and has a CAT 1 AIF license. 360 One WAM Limited now holds 91% of the equity share capital of Mumbai Angels. Mumbai Angels is one of the largest players in the early investment -- early-stage investment stage, and will now be looking at a greater funnel of deals with a deeper penetration in the early stage start-up pool. We have just launched 2 new funds under its domain. The first one is an angel fund with a target of INR 1,000 crores and the second one is a VC fund of INR 300 crores. In the Angel Fund, each investment is treated as a separate scheme and offers unique flexibility to both investors as well as start-ups. The Category 1 VC Fund operates as a blind pool and will enable investors to participate in every deal on the platform. We are very excited with this addition as this further expands our platform offering on the asset management side and increases the comprehensiveness of our proposition to our wealth clients. The third thing on the quarter is on the TrueScale partnership. During the quarter, we announced a transaction with TrueScale Capital, which is an emerging leader in the series B and C venture growth segment. Under this arrangement, TrueScale will transfer the funds it manages along with sponsorships to IIFL AMC. Important to note that there's no financial transaction here and is only a change in the investment manager and sponsor. The TrueScale Fund complements our own private equity track record, and the integrated offering is well positioned to lead this important market segment. With this, we are also glad to welcome Mr. Sameer Nath, Founder of TrueScale, as the CIO and Head for our private equity strategy. The proposed transaction is subject to the applicable regulatory approvals, and Sameer will be joining us after all approvals are received. Work continues on our mid-market segment. Our work on developing a strong digital-led proposition for the next segment of wealth client continues. We are on track to showcase further by the end of this financial year and beginning of next quarter. On the technology side, our significant investment, again, continues, specifically on building a comprehensive data platform for both the wealth and asset businesses, reimagining our banker journeys and further increasing the robustness of infosec within the organization. Lastly, the Bain Capital transaction was completed in this quarter. They now hold 24.98% of 360 One WAM Limited. And with the transaction completion, Mr. Pavninder Singh and Rishi Mandawat are now part of our Board as Nominee Directors of Bain Capital. With that, I would like to hand over to Karan and open the session for Q&A.

[Operator Instructions] First on line we have Mohit.

This is Mohit Mangal from Bank of Baroda Capital. So I've got 2, 3 questions. First is on the flows. So if I look at the flows on the AMC side, I think we have seen the highest since Q1 '22, and I think growth excluding private equity has been actually very fantastic. So going forward, do we see muted private equity, whereas credit and real estate will grow further? Is that a safe assumption?

No. So Mohit, I think while that's factually correct, the only small caveat to that is we had collected a lot of private equity money in 2017, '18, especially in the form of special opportunities funds. So we've got a lot of those redemptions or rather payouts which are coming through over the last 9 to 12 months. So I think we had collected nearly INR 7,000 crore, INR 7,500 crores, and the current value would be close to INR 11,500 crores, INR 12,000 crores, of which nearly 35%, 40% we've already paid out to investors over the last 9 months. So while we've collected a lot of new money in private equity also, it's just getting set off with the earlier redemptions, whereas on the credit and the real asset side, they are relatively new funds over the last 2, 3 years. So therefore, all the flows are kind of in some senses being -- are coming through as net flows. So I think private equity will also continue to be an interesting asset class for us. But in terms of flows itself, I think for the next 6 to 9 months, it will be offset with the -- with some of the older funds maturing. And therefore, in some senses, it will show a slightly muted net flow number. Real assets and credit, I think, will continue to be exciting. We've got lots of new products coming through in both the categories. So I think along with private equity, we should be seeing a strong net flow across all categories.

All right. One of the drag in our flows was even the brokerage we saw, 38 billion outflow. So just wanted to know what was that exactly?

So part of it -- to a small extent -- approximately, nearly 60% to it -- 55% to 60% of it is really moving to the ARR. So in some senses, there is -- the incremental flow in the ARR to that extent can be moderated a little bit because it's a shift from the TBR to ARR. So if you remember, we've always had a line item on the TBR where we've got nearly close to $2 billion, $2.5 billion, which is not earning us any income and broadly matures through the current calendar year and the next calendar year, most of it. So part of it has kind of moved from TBR to ARR and part of it is just the normal outflow. But nearly 60% of it is largely movement to the ARR bucket.

All right. My next question is on M-to-M. So I mean, I remember you saying that, say, if the market goes up by 20%, the AUM is positively impacted by 8% to 12%. If I look at, say, Nifty, going from 17,000 to 18,000 during the quarter, which is about 6%, but M-to-M is actually not reflecting into that. So anything changed?

No. So I think the MTM, I'll just break it up to 3 parts in some senses. So you got the wealth management ARR bucket, you've got the wealth management TBR bucket and you've got the AMC bucket. So wealth management ARR bucket is broadly -- most active managers outside the Nifty for the last quarter have been in the region of broadly, give or take, minus 1%, minus 2% to plus 2%, 3% -- or plus 3.5%, 4%. It's kind of slightly underperformed the -- not slightly. For the last quarter, most active managers kind of significantly underperformed the index. Second, obviously, there's a little bit of mark-to-market in the last quarter on the long-term bond funds. And thirdly, there is a little bit of flows on the wealth ARR side, which has come towards the second half of the quarter. So on the wealth ARR side, these 3 are effectively contributing a little bit towards the slight lower revenues. On the TBR side, where there's a large variation in the MTM, it's really one financial investment of a client which was valued at INR 3,500 crores, INR 4,000 crores. He just wants us to report it at book value. So that's really -- that's the only change. So it's not really -- the number which is showing should be ideally adjusted for INR 3,500 crores, INR 4,000 crores. So it was an unlisted investment. He just wants us to record it at face value. So the TBR mark-to-market effectively will go up by around about [ 2.5 ]. And the AMC one is slightly impacted by private equity, where we follow a fairly conservative policy in valuing our unlisted investments. So the little bit of MTM which has happened is largely on account of us using a market multiple method to kind of arrive at our unlisted investments. But on a broader basis to answer your question, I think the wealth ARR piece will kind of reflect broadly over the longest term, it will reflect the index plus the movement on the bond side. AMC, obviously, will be a little bit of a function of the composition between listed and so on and so forth. And TBR is an exceptional item this quarter, where the INR 4,000 crores has got marked down to effectively, I think, INR 10 crores or INR 20 crores, which is the value of the investment of the client. So all put together, I think that's really the logic. And broadly speaking, if the Nifty does do 10%, we will be at a 6% to 8% ARR more often than not in terms of mark-to-market.

All right. Perfect. I've got the answer. Now if I look at IIFL-ONE, we saw very -- I mean, brilliant growth in nondiscretionary. But in discretionary, we struggle, even the yields also fell. So going into '24, what are your expectations?

So I think discretionary was actually a fairly good quarter for us. We got INR 1,500 crores, INR 1,800 crores of good flows. The only 2 caveats to that was there's a large client of ours on discretionary who was around about INR 1,300 crores, INR 1,400 crores with us. He had some temporary liquidity needs, which has gone out, and now is going to come back next quarter. That's impacted the flows a bit. And for the new mandate, we got -- basically, the fee starts from 1st of January, and we've basically given a 30-day kind of free period till the investment happens for the money to come in. So the retention is impacted a little bit. But overall, I think -- directionally, I think, quite positive on the discretionary side. In fact, from a client behavior perspective, I think it's becoming more and more acceptable. So I think I wouldn't change any of my thought processes around it. And even the retention should go back towards the 44, 45 basis points mark.

Perfect. My last question is towards the non-ARR revenues, which was very strong at INR 139 crores. So safe to assume that the deal pipeline would be strong going forward in '24 and we would earn a significant amount of chunk in that as well.

So Mohit, that's always going to be a bit of a challenge and it's not going to be as predictable as the rest of the business. But obviously, we have the ability and the benefit of dealing across asset classes. So personally, if you ask me, I think '23, '24 and '20 -- definitely the next 12 months, the mix of that income coming from TBR will change a bit. I think for the last 12 to 18 months, it's largely been around more equity denominated. I think last 3 months has been more debt denominated. So I think over the next 12 to 18 months, the nature will change a bit. It will become more fixed income denominated. And if the markets do kind of end up seeing fairly slowed activity, I think that bucket of income can potentially see around about a 10%, 15%, 20% kind of variation. So the INR 130 crores, INR 139 crores per quarter might be closer to INR 100 crores, INR 125 crores per quarter kind of number.

Next in line we have Aejas Lakhani.

So...

Sorry, Aejas. I can't hear you.

Are you able to hear me?

I wasn't able to hear you. Now I can hear you back.

Yes. I said congratulations on a very good set of numbers. So I wanted to just get a couple of finer points. One is that the NIMs have seen a continuous expansion. So could you throw some comments around that?

So I think -- honestly, our broad brand franchise with our clients continues to remain fairly strong. And honestly, if you ask me, we are still able to do our debentures and MLDs and so on and so forth at extremely competitive rates, maybe 5, 10 basis points higher than all the AAA rated NBFCs. So I think from a borrowing cost perspective, we've continued to be very, very competitive. I think through the quarter there are instances where we've been able to raise money at 7.75, 8, 8.05, 8.10, which is pretty much comparable to some of the -- potentially the best in the -- in terms of borrowing. Second, on the lending side, obviously, we've been able to, at the same point of time, kind of translate the 50 to 75 basis points increase selectively. And that's really helped us kind of increase the NIMs a bit here.

Got it. That's very clear. And could you speak about the ramp-up in IIFL-One that you expect and how that piece is really shaping up? And give us some more granular color on how the team is building out? Like Anshuman in his opening comment mentioned that 25% of the incremental assets this year -- that wealth sort of came through -- went to IIFL-One. So could you give some granular piece of how you're building this important piece of the business?

So I think IIFL-One in some senses will kind of be the most important vertical for new flows over the next 12 to 18 months, right? Because all the new deals, all the new stake sales, all the new clients who really come in, more often than not they don't want to come on the distribution side. It's safe to say 6 to 7 out of 10 clients above $10 million want us to work with them either as advisers or as portfolio managers, effectively, either on the nondiscretionary side or on the discretionary side. And 3, 4 of them are still saying, "I've got all that worked out. Why don't you show me some good ideas and let's build it out from there." So I think 60% to 70% of all net new acquisitions, okay, and therefore, 40% to 50% of the net new flows will come through the umbrella of IIFL-One in that sense. For the remaining 30% to 50%, obviously, and maybe that's 20% to 30% acquisitions, those clients will continue to come on the ARR side, but on the non-IIFL-One revenue earning trail side. From our perspective, I think that percentage is going to keep evolving. Maybe 3 to 4 years back, it was 10 and 19; now it's maybe 60 and 40 in favor of IIFL-One. I think progressively as you go forward over the next 5 years, it may stabilize somewhere between the 80% to 20% range, right? So there's still -- that 20% trail-bearing distribution assets will survive. But 75%, 80% of the new acquisitions will end up coming on the IIFL-One side. So it's extremely, extremely key part of the business. Now coming to the second half of your question as to what are the levers to make that business successful. I think that's really the tough part and that's really where we spend most of our time, right? So I think for us to be having the ability to get the client on the non-discretionary side to pay 30, 35 basis points or 25, 30, 35 basis points on the discretionary side, pay 40, 45, 50, 60, depending on the size of the client, you really need all the operating levers to fire, right? It needs the entire trust team, the tax team, the entire advisory piece, the entire technology architecture, portfolio analytics, the constant review, the investment portfolio statement, our deep expertise on every products, plus a little bit for the satellite investments, innovation on products. All of that needs to come together. And then the ability to help in through the ODI, OPI regulations. So it's a consolidated platform and it has to be practically -- I'm not trying to kind of -- but it needs a 360 view, right? So it's kind of -- in some senses, it needs a full-fledged platform. And we are among the few ones who invested in the platform early. And in that sense, once you have the complete platform, we'll have the ability to get the fee. So I think we need to constantly keep investing in that platform, which we are doing, both in terms of people and technology and research. But it has to be a simultaneous process. But you'll have to have the full offering with the client to be able to get to the IIFL-One kind of a fee structure there.

Got it. And what was the reason for the slight softness in the discretionary piece this quarter with -- the reported number was 0.41 versus 0.48, which is what...

Yes. So as I said, one of the flows came in on -- one of the large flows came on 10, 15 December, and we've given a fee break to the client for our -- till the time his money gets invested, which is broadly for a month. So we're not charging him the fee on his pure liquid funds. So it will get adjusted in the next quarter.

Perfect. Got it. And the other piece is, is there any synergies between the AMC and IIFL-One? Or are they complete Chinese walls and...

Complete Chinese walls. But it's a great question because IIFL-One discretionary needs to be built -- the portfolio management team needs to be built with the same kind of depth and same kind of research and same kind of analytical ability, the same kind of risk processes and controls pretty much as the AMC. So in some senses, the portfolio management team could pretty much be sitting in any other asset management -- or our asset management firm, but the depth and ability to understand client requirements and portfolio risk metrics is similar to pretty much any other asset management business.

Got it. And...

Especially on the discretionary side.

Got it. Okay. So currently -- what I understand from your answer is that synergies could exist, but they're being built out very separately. So there's no cross-subsidization or...

No. No, it's being built out separately. Yes.

Got it. Okay. And you mentioned that carrying...

Slightly -- sorry. Slightly different skill -- I won't call them skill sets, but slightly different objectives. On the discretionary side, we are focused more on asset allocation levers. Our largest products eventually will end up being ETFs, index funds, direct bonds. So on the asset management side, we are a little bit more instrument specific in the sense we'll be looking at more direct stocks, bonds opportunities. On the wealth IIFL-One discretionary side, we'll be looking at more pooled vehicles. So slightly -- the universe we are studying is slightly different, but the skill sets around doing diligence and finding the right vehicle is pretty much the same.

Got it. Got it. I mean, again, it's quite exciting that you've built such a large platform and you are so deep in that platform. I'd probably love to get deeper in -- if you could somehow showcase to investors the depth of IIFL-One sometime just as a...

It's a good idea. We can maybe look at potentially putting out a separate presentation on that. We'll -- Anshuman and Sanjay will work on it. And it's actually come out really well and we're quite proud of it. So happy to kind of share with others.

And lastly, you had mentioned, I think, a couple of quarters back that carry incomes of close to INR 75 crores for the year. I think it's trending around ballpark that same number. So should we expect carry income for the coming year as well, FY '24? Or...

Yes. So actually, it's kind of more or less included in our TBR income. So I think the number would be somewhere between the INR 70 crores, INR 75 crores to the INR 110 crores kind of number. I think there's a fair degree of predictability to it. It's across lots of funds and also across asset classes. So I don't see too much of variation to those numbers at least for the next 12 to 18 months. Obviously, after that, it may increase or decrease a bit in the later stage funds depending on the markets. And as I discussed a couple of quarters back, I think if I just look at the -- today's carry income purely on a mark-to-market basis across all our funds, it would be -- the residual carry would be in the region of INR 350 odd crores, of which I think most of it will get accounted, of INR 350 crores, INR 400 crores, in fourth year, pretty much in the next 3 to 4 years. But obviously, all the funds we've raised in the last 2 years have similar structures. So they will start kind of kicking in after the fourth year.

Perfect. And any thoughts or guidance on how you expect net flows to shape up for '24? I think you called out INR 30,000 crores, including custody assets for '23, right?

So I think we want to look at net flows slightly differently just in the sense that -- looking at net flows on the TBR side is not really very objective in a sense because it doesn't really have a direct correlation to the TBR income. So in terms of calling out the net flows, we want to be much more sharper in calling out the net flows on the ARR side as opposed to the TBR side. So honestly, if you ask me for next year, I would -- we would like to move towards that INR 30,000 crores to INR 40,000 crores of net flows, but on the ARR side. So rather than just getting on to the net flows purely on ARR plus TBR, we would like that number to be closer to INR 35,000 crores, INR 40,000 crores only on the ARR side.

Got it. And the equivalent ARR number for this year for 9 months for -- what is that?

It's INR 22,000 crores, if I'm not wrong.

Okay. Got it. Okay. And lastly, just on capital allocation, any thoughts of buyback versus dividending for FY -- the year ahead?

So honestly, I think there are lots of benefits of dividends. Obviously, the taxes is slightly different. Buyback tax is, obviously -- maybe potentially 9% to 11% lower than what it's for dividend on an average. I mean, if I include everybody in -- different levels of marginal rate of tax, including foreign institutions, maybe dividend tax is lower, purely because people are paying anywhere between 10% to 35%. Obviously, for only residents, including all of us promoters, the tax rate is 9% to 11% higher. But on balance, I think dividend gives us a little bit more predictability in our ability to do it versus kind of carrying out medium-term buyback programs. So I just find it easier and cleaner. So I think all things being equal, we would prefer the dividend route. If we ever get a special opportunity to do a larger kind of payout, then we can potentially look at a buyback as an episodic activity. But on a going concern basis every quarter, I think dividends is really where it is.

Next in line we have Prayesh Jain.

So this is the first time we are meeting after the name change. So yes, I would love to hear your thoughts as to what really drove this name change? And what really you aim to accomplish with this brand change? What you couldn't do with the IIFL Wealth brand? So I would love to hear your thoughts there before like I ask my questions on the business front.

So a quick answer in 3 parts. First, we are obviously still awaiting a few regulatory approvals for our overall brand change. I think for the mutual fund, it's still awaited. The rest of it, I think, is more or less implemented, including for the NBFC and all -- most of the brokerage -- most of the businesses. I think for the brokerage business also some small approval from NSE is pending. But those are all procedural in nature. I'm hoping we'll get here over the next 30 to 45 days. I think from an exchange perspective, we've got approval for the ticker to change from 23rd of January. So I think the name will change on the exchange from IIFL WAM to 360 One WAM on 23rd of Jan. Now coming for the -- and I don't think the name change was so much of a binary event where we needed it to do anything we were not able to do in our earlier name. I don't think it was that binary in nature. But the motivations around the name change really was threefold in some senses. The first reason really was to ensure that there is a little bit of -- there typically tends to be a little bit of overlap in the business activities of the 3 demerged entities, which is IIFL, Finance Securities and Finance. And therefore, to make -- to give the name a little bit more clarity in terms of the business activities we are involved in. And similarly, the client -- the kind of client segments we are dealing in. So I think that was the first motivation really in terms of the name change. The second motivation really was, in some senses, we were kind of a little -- also passionate and driven by what the name represents as a whole. I think that's really in some senses for us come out extremely well. And thirdly, for us, in some senses, it marks the third chapter of growth in the company in some senses over the next 5 to 7 years. In terms of business activities and what we could do and what we can't do, I don't think that there's anything like that. I think we had the ability to do anything we -- or everything we wanted within the earlier brand of IIFL Wealth and Asset Management. And I think the same continues here. So I wouldn't put it as a binary event. But at the same point of time, it allows us to build our identity in a more clear and distinct manner in the market.

Great, great. Just extending the previous participant's question on the flow front. So is there a more challenge to get flows now given the market situation where we are in, people talking about slowing down of GDP growth, slowing down of incomes, interest rates on the higher side, which would possibly put pressure on liquidity for quite a few of entrepreneurs. And also, on the other hand, we have a competitive intensity in the entire industry and increasing with a lot of more participants in this HNI segment. So do you see that incremental flows are coming at a more -- in a more challenging manner and at a much lesser pricing? Or is there -- I'm reading it wrong?

So 3 things, I think, to answer your question very quickly. I think -- see, the macroeconomic indicators and slowness of business activity typically come into flows with a lag. So as of now, we are not seeing it. I think the quantum of business activity in terms of mergers and acquisitions, strategic sales, especially on the unlisted side, continue to be very, very active. And whether -- there are 2 or 3, 4 transactions [indiscernible] across the country are fairly active yet, okay? I think, obviously, if things were to dramatically slow down, we would see some bit of impact come through over the next 6, 9 months because a lot of these transactions take a fair degree of time to close. Would I expect flows to be slightly more muted coming out of new stake sales over the next 12 months? I think just looking at the global macros, potentially slightly lower, which obviously means that we slightly need to work harder in terms of getting market share and increasing the scale of wallet share from our existing -- getting market share from our competitors and also increasing the market share and wallet share with our existing clients. Secondly, I think -- purely from a competitive intensity perspective, I think you're right, there are different levels of competitive intensity between different markets. But overall, we find ourselves in a fairly good place. I think outside -- baring a couple of cities where we think we can definitely increase our presence, I think we find ourselves fairly well positioned pretty much in most markets to get access to 60%, 70%, 80% of the deals. Obviously, I think pricing sometimes can be a little competitive at the point of start, but we've seen it stabilize very well over 6, 9, 12 months because our clients really appreciate the work you're doing. And they soon realized 30, 35, 40 basis points versus the impact on returns is not going to be really -- a never ending discussion to continue having. Third, I think -- on the pure activity level within net flows, I think we'll also have to kind of -- it is going to be a function of how we approach it. So we will have to have different multi-asset classes well in store and a little bit of innovation on the product side to ensure that if markets do become flattish to negative, other asset classes kind of come into being. So I think that's a very big advantage we have. And as wealth managers in the industry for the last 20, 22 years, I think we've seen at least 3 or 4 cycles. And the good news is clients really don't shut out. They start looking at other opportunities. And more often than not, debt becomes super attractive, yield-bearing assets become super attractive. And that's really when we need to kind of be there with the client and ensure that the mix is well managed. So I think on the balance of all of these 3, I think I feel confident about getting to that number between INR 30,000 crores, INR 35,000 crores, INR 40,000 crores. Obviously, the numbers may trend towards the INR 30,000 crores or may move towards -- ahead of the INR 40,000 crores depending on the pace and the excitement in the markets. But I think at a baseline, roundabout INR 30,000 crores. At the -- a more optimistic case, around the 45-ish number we are fairly confident we'll be able to get that.

And the last question from my side will be on the, again, IIFL-One yields tensions. So I remember a year back, you had mentioned that around 3 -- within 3 years you might -- you were aiming to reach the retentions at around 40 bps. We today are at -- even adjusted for one of the client's flows, you will possibly somewhere be around 30 bps for the overall entity, right -- overall IIFL-One. Would you still say that in the next couple of years, we can reach the 40 bps number?

No. So I would just -- we had discussed this in the last earnings call. I think the corporate treasury piece has to be looked upon slightly separately. But outside of that, the 40 to 50 basis points number will definitely come through.

Next in line we have Kunal Shah.

Congratulations for a good set of numbers. So firstly, with respect to managed assets -- distribution of managed assets, retention rates, that's been on a downward trajectory. And I think that piece has almost doubled, say, compared to that of March. So is it more to do with maybe the distributor and the manufacturer relationship at, say, wealth and the asset management level and some change in dynamics out there? Because in wealth also we saw almost INR 2,000 crores alternate funds flow, and there would have been some distribution of that as well. So is it more to do with that? Or some mix change within the managed assets is what is actually leading to this kind of...

Yes, a fair question. I think of the 3 reasons you put out, all 3 can be reasons. I think it's not really a big change in the distributor-manufacturer relationship. I think that's pretty much the way it used to be. We are -- we never will -- we never were and we won't be also I think one of the biggest -- we don't -- we end up sharing -- on the wealth management side, we end up sharing fees with the manufacturers quite liberally in that sense. So I don't think so that equation is changing in a hurry. The reason for the change is really, I think, 2 things. I think the older assets which get -- which move into trail are at slightly lower rates than the newer assets because they have a slightly -- the older upfronts which were paid were already there. So the newer -- older AUM which is moving from distribution to ARR is moving at a slightly lower retention compared to the older ones. And second, I think -- specifically, in the last 3 to 6 months, I think the collection on fixed income has been quite high, especially on the credit infra as well as on the fixed income side. So there the asset class mix is causing a bit of impact. So compared to equity and -- private equity and alternates, where the gross management fee will be typically in the region of 150 to 175 basis points, of which we would typically get 55% to 60%, the gross fees on the other asset classes are in the region of 90 to 125 basis points. So effectively, we're getting 60% of that or 55% of that. So effectively, that's kind of causing the change. So I think the second and third point are really where it is. On the first point, we've been fairly manufacture friendly for a long period of time. So we effectively end up sharing anywhere between 50% to 60% of the management fee. I don't think so that's really changed in the industry in a big way.

Sure. And secondly, in terms of what you guided with respect to, say, INR 30,000 crores, INR 40,000 crores of net inflows on ARR, and you said that we can ignore, say, on the transactional side. But there is some maybe transition which is also happening, and that's been the part of our focus area. So out of this INR 30,000 crores, INR 40,000 crores, how much would be coming from the existing transactional assets, TBR? And how much would be like the real, in your additions, which would...

Yes. So I think that's a good -- so I think -- see, broadly out of the TBR assets which are not earning us anything, our assumption -- going assumption is anywhere -- a number between 50% to 60% will move into ARR. So now the pending number there would be nearly been INR 10,000 crores to INR 12,000 crores. So I think INR 4,000 crores to INR 5,000 crores, INR 6,000 crores will come from that TBR into ARR. Otherwise, in some senses, maybe another INR 4,000 crores, INR 5,000 crores from the normal TBR, Otherwise, I think INR 25,000 crores to INR 30,000 crores will be really coming from the -- in some sense, is a new engagement altogether. To answer your question, 25%, 30% from the existing TBR, yes.

Got it. Yes. And lastly, in terms of this entire rebranding, so where do we see the maximum impact in terms of the quantitative numbers? Would it be with respect to growth, with respect to retention? How should one look at it? You said maybe it's -- you highlighted in terms of the 3 key rationales for doing this. But on a quantitative impact, and do we see in terms of increasing the guidance or something coming through because of this entire exercise?

Not really, not really. And I don't think so. I think there's more qualitative changes, which leads to quantitative changes eventually. So I think the biggest qualitative changes would be a distinct brand, a clear identity in the client's mind, a clear identity in the employees' mind, our ability to kind of build a brand ethos of our own. When we follow our Product Approval Committee -- just ensuring a certain process and discipline to what we do and what we stand for. And therefore, eventually kind of building out the brand clearly with all stakeholders, most importantly with the client and the employee, is really I see as the big benefit. That obviously translates into softer factors like retention of employees and clients in the medium term. And eventually, it kind of leads to better quantitative numbers.

Sure. And getting into the guidance for FY '24, any revision which we see in any of the line items? Or we continue what we articulated at the end of FY '22 earnings, yes?

I think broadly in line. But obviously, I think the way we wanted to do our guidance for the next 2 years is maybe do it at the end of this quarter, kind of get it Board approved also and then kind of release it with our next cycle. But if you ask me today, it's broadly in line. I don't see too many changes there.

[Operator Instructions] Next in line we have Abhijeet Sakhare.

So how do you see the next year pan out? Like the ask rate on flows and returns is likely to be higher now that cost savings will sit in the base and then probably some expected expenses towards the mid-market rollout.

So I think most of these 3, 4 things are factored in our assumptions right now. I don't see them as an absolute new thing. Obviously, I think from an expense perspective, we're fairly confident of our own assumptions on the employee expense side, which is really, honestly, representing 80% to -- 75% to 80% or 85% of our expenses. I think that's a well chartered course. I would say we are 100% efficient and productive there, but we've improved a lot. I think we still have the potential to maybe improve the productivity by 4% to 5%. But a lot of those 4%, 5% productivity gains effectively kind of get lost in some senses in terms of growth because you hire new teams, you hire -- build new strategies on the asset management side and you build new geographies on the wealth management side. So I would say there is 4% to 5% to 6% productivity on the employee side, which will kind of get a little bit offset with the -- with our new initiatives. On the other expenses, I think the biggest variable, honestly, is technology. Outside of that, the expenses are not really a lever of the quantum of business we do, whether we look at rent, whether we look at all our corporate expenses. Obviously, small things like travel and all will be linear. But outside of that, the operating leverage on the expense side will be fairly high. The only things which honestly can become a little bit more sequential to growth and the response to the environment will be a little bit on technology. So we're quite confident we will be able to squeeze our expenses to be in the right framework and the right number to maintain the same percentages. But honestly, the only thing which I sometimes kind of think about ensuring and kind of optimizing is tech spend. Everything else, I think, is something which is, in a sense, quite predictable and nonlinear to growth now.

Got that. And secondly, on the IIFL-One, now given that clients are increasingly preferring the advisory fee model and you seem to have a good head start here. So like when you look at the numbers over the last, let's say, 12-odd months, are you seeing that visible in terms of better market share gains on incremental flows?

I would say 8 out of 10 cities -- the answer is yes if I just look at the 10 big cities. 2 cities may be no because we don't have the full firepower there yet in terms of delivery. But broadly speaking, the answer is absolutely yes. But again, wherever we -- where I'm saying a resounding yes, we need all 3 things to happen. We need our entire platform in action, we need the entire team in action, plus we need all of us to be able to support the team. So wherever you get all 3 things together, I think it's a resounding yes.

Got that. And on the IIFL-One, like how does the fee curve look like across ticket size, let's say, 10 million, 25 million, 50 million. What's the sort of difference that you have across different sizes?

So I think the challenge is really coming in the north of 40 million, 50 million where they want to cap the fees, right? So that's really the challenge. I think the percentages are not dramatically changing. It's between the 35 to 50 basis points. But where the challenge comes is the capping on the fees. Wherever the fees is exceeding, let's say, 10 lakhs a month broadly, okay, that's really where the clients are saying, "Is it a linear function on the fee side?" We don't face the same challenge on the discretionary side. On the discretionary side, the client is looking at us as an adviser and as a portfolio manager. So there he is willing to -- really, the capping of the fees is not really coming into play in such a significant way. But on the nondiscretionary side, I think mentally clients are not kind of too happy about exceeding that INR 1.2 crore number a year. So I think where it will become a play is if we have only clients above 30, 40 [indiscernible], I think the percentages in terms of bps can look slightly awry.

Got that. And lastly, like whatever redemptions have been happening on the existing set of clients, especially on the private equity side, have you been able to, let's say, redirect them onto the platform or onto the other strategies...

I think broadly speaking, wherever, let's say, IIFL Wealth has been a distributor, I think the ratio is roundabout 65-ish, 60%, 65%. Where other -- we have got third-party distributors, it's broadly around about 35% to 40%.

Got that. And last one. Given the focus on passive strategies, any -- let's say, any initiatives there? Or you will broadly rely on the external product providers?

So honestly, we have lots of IPS checks now on the wealth management side, where not more than 5%, 10%, 15%, 20% of our portfolios can go into our own products. So typically speaking, that 5%, 10% typically finds its way into more innovative ideas from our side. The more ETFs and the simpler long-only products and so on and so forth more often than not would end up with third-party managers there.

Next in line we have [ Dipanjan ]. [ Dipanjan ] I think he's moved out of the queue. We have Sanjay Kumar. Sanjay, kindly unmute and ask your question.

First question on the Tier 2 and Tier 3 piece. What would be our current footprint? How many cities are we present currently? Because in the last 6 months, I have been seeing commentary from, say, be it Bank of Baroda's Wealth Management, Motilal. They're all talking about the Tier 2, 3 piece growing faster, say, Coimbatore, Vizag, Mysore, Ludhiana. Even someone like Uniqlo is going to Chandigarh instead of Mumbai. So where are we on that? What is our current footprint?

We should have been faster, to be honest. I think we fully agree with the thesis. I think there's a lot of growth happening. We've kind of moved from 14, 15 to 23, 24 cities very effectively. And we got disproportionate gains in the next 7, 8 cities. But ideally speaking, if I just look at our own leadership map, thought process, I think we had around about 38, 40 cities in mind. I'm hoping to ensure that we get across to the next 40, 50 cities over the next 3 to 6 months. But to answer your question, there are clear 40 cities today where people like us with, let's say, a require -- not a requirement or a need, but an aspiration to handle clients above INR 15 crores, INR 20 crores, 35 to 40 markets can be fairly tangible markets. For us today, that number is closer to 21 to 23.

What would be the size of this potty?

In the sense -- sorry, I don't...

The size of the AUMs of these.

No. So that -- size of the AUM broadly, it's available on the AMFI data. But our typical experience is -- if you look at the AMFI AUM and strip out the treasury AUM, that into approximately 3 to 4x would be the size of the market.

We'll take one last question from [ Dipanjan ]. [ Dipanjan ] in case you're back, kindly unmute yourself and ask your question.

Am I audible now?

Yes [ Dipanjan ], you're audible.

Just one question from my side on the mid-market strategy, and Anshuman highlighted that you will come out with more disclosures maybe sometime during the next calendar year. But just from a theoretical perspective, what are the key competencies that you really require to dominate in this market? My understanding is that there are already some players who have been operating in this market for some time, and you are probably trying to enter a new segment per se in that way. Second, from a long-term perspective -- medium-to long-term perspective in terms of profitability, be it your cost ratios or yields or the way you deliver the product to the customer, how does the entire unit economics really shape up from the mid-market versus, let's say, where you're operating now? And how do you think of it more from a medium- to long-term perspective? And last one question. Any other inorganic opportunities that you are evaluating or maybe are in the final stages that you think can materialize going ahead?

Got it. So I'll answer the third question first. Honestly, right now, nothing. Really, we're not evaluating any large inorganic opportunities. I think we are fairly focused on our 2 core activities and the 2 core engines. I think both have enough opportunities for us. And from a product and people platform perspective, I think we're fairly well built on both the businesses. Therefore, it's really going to be about us being able to -- on the asset management side, build deeper within the strategies, and on the wealth management side, potentially expand a little bit more in terms of teams, in terms of geographies. Those 2 would be our key focus areas. In terms of your first couple of questions -- I forgot, Anshu, what was...

On the mid-market side.

On the mid -- yes, yes. So on the mid-market side, as Anshuman pointed out, I think, obviously, from a -- our closed user group had a little bit of disclosure on strategies and stuff like that around April, May. I think he said next -- beginning of next financial year, not calendar year. So effectively April, May is when we'll be kind of more ready with most of our strategies. But maybe I think philosophically in terms of strategy, I'll address the question a little bit. I think the industry is going -- and when we call it mid-market, I think it has to be looked upon slightly differently. For us, the mid-market would be more or less the upper end of the high net worth segment in India. So we're not really looking at INR 25 lakhs, INR 50 lakhs in that sense. We're really trying to attack the client who has a financial asset portfolio of anywhere between INR 5 crores to INR 25 crores, and potentially 3 to 5 years from today, INR 10 crores to INR 50 crores. See, what's happening on our wealth management business as it's becoming more and more advisory, it's swinging a little bit more directionally towards the north of INR 25 crores, north of INR 50 crores client base with us. So what we expect over the next 3 to 5 years is our core wealth management business will head more and more towards the INR 25 crores, INR 50 crores client base and the mid-market business will move more towards the INR 5 crores to INR 20 crores to the INR 10 crores to INR 25 crores base. So in some sense, it's not really the conventional mid-market definition which is really there. We also expect the mid-market business and the INR 5 crores to INR 20 crores, INR 10 crores to INR 50 crores business to be slightly more product-driven, okay? So it has to be a little bit more built around innovation and value-added services as opposed to being built around pure advice. And the high net worth individuals, which is the INR 50 crores plus client will more and more -- or the INR 25 crores plus client today, will more and more demand a full platform and advice; whereas, the client just below, will divide -- will demand more agility of execution, innovation on the product side and more value-added services. So I think that's the going in thesis. Obviously, having said that, the INR 5 crores to INR 20 crores population of the client is massively wooed by all wealth management firms within banks. So we will have to have a differentiated proposition to ensure that he looks at his bank as the enabler for his banking needs and he looks at us for his wealth management requirements. So that's really the mystery we have to work on, on the mid-market side. And we feel we have a fairly powerful proposition, which will come through there. But not really for the INR 25 lakhs, INR 50 lakhs client. We will become more a means of servicing today, let's say, the INR 5 crores to INR 20 crores client.

Sure. Just one small follow-up. If I understand correctly, this mid-segment, the INR 5 crores to INR 25 crores, INR 30 crores, over a period of time, let's say, next 5 to 10 years, it will be less people intensive and may derive more leverage benefits, whereas the cost will be more front loaded. Whereas compared to your, let's say, legacy business, which is, on a going concern basis, quite people intensive in a way.

Fully right. I think from a -- but at the same point of time, I think it will be platform intensive. It won't be people intensive. So it will require constant investment on the platform. Value-added services will be very, very important. So I think you're absolutely right. I think the INR 50 crores plus business will be slightly more people managed and people intensive. The first part of the business will become a little bit more platform intensive.

Thank you. And I think that's all we have time for this afternoon, Karan. So on behalf of 360 One WAM, thank you for joining us and look forward to your participation next quarter.

Thank you. Thank you, everybody.