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

A very good afternoon, ladies and gentlemen, and welcome to 360 One Wam's Q4 and 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 last fiscal in aggregate witnessed meaningful volatility in the global markets as concerns related to high inflation rates and interest rate hikes continued to persist. The last quarter Q4 FY '23 more specifically saw some turmoil in the global banking front on account of which the global market sentiments as well that in India remained negative. However, Indian markets continued to be resilient to the best extent relative to other global indices. Having said that, we bridge our base case on a conservative note as the sentiment continues to remain cautious on the back of these headwinds. Despite all market driven challenges, our business portrayed not just resilience, but growth with robust improvement in ARR assets backed by strong net flows thereby improving our profitability with steady retentions. Before we deep dive into the financials, we would like to highlight that we have proposed an interim dividend of INR 4 per share. This is our first interim dividend for FY '24. Now coming to the financials, some specific financial numbers. Starting with AUM. In line with our focus on ARR assets, our total ARR AUM is now more than INR 167,000 crore, up 15.7% Y-o-Y for full year FY '23. With this, the share of assets in total AUM now stands at 61% and we continue our relentless focus on high quality recurring revenue. Happy to share that despite market volatility, our ARR net flows have been robust for the year at INR 28,059 crores. Our loan book also for the year stood at INR 5,367 crores, which was up 24% year-on-year. Moving on to revenues and retentions. Our recurring revenues have increased 15.1% Y-o-Y for the year at INR 1,050 crores. As a percentage of operating revenue, recurring revenues now comprise 67%. Going forward from Q1 FY '24 onwards, we will move to an accrual method of accounting for carry and as such, the carried interest accrual will be clubbed with recurring revenues. The approach will be very conservative recognition on funds which are close to maturity and this will add to the steadiness and predictability of carry estimations. Just to reiterate, this will be accounted in recurring revenues. Our total revenues for the year were up 2.2% at INR 1,569 crores. It was mainly impacted on account of lower other income. Our retentions on ARR assets have remained strong at 69 basis points with Wealth ARR retentions at 70 basis points and Asset Management at 69 basis points. Moving on to expenses. For the year our cost to income ratio stood at 45.8% versus 51.1% for FY '22 demonstrating very strong cost discipline. Our increased technology and digital spends continue to drive better efficiencies, enhance productivity resulting in improved cost to income ratios. Total costs are down 8.4% Y-o-Y at INR 718 crores for FY '23 mainly due to lower variable employee costs, which are now fully aligned with the firm's recurring revenue model. Coming to profitability, our operating profit before tax stood at INR 847 crores, up 38% Y-o-Y whereas PAT for the year stood at INR 668 crores, an increase of 14.7% Y-o-Y. Importantly our tangible ROE, which is ROE excluding goodwill and intangibles, continues to remain strong at 26.7% for the year. This is result of prudent capital management and regular dividend payouts. With that, we come to the end of financial highlights. I'll now hand it over to Anshuman to cover the key business and strategic highlights.

Thanks, Sanjay. Good afternoon, everyone. Before getting into the strategic highlights, I do want to call out that we have completed 15 years in April 2023. It's a great marker to reinstate the tremendous success we've had and I'll also reiterate our youth as reflected in the highly entrepreneurial DNA and vibrant client-centric culture. Specifically if I look at the last 3 to 4 years since we started our transition to the recurring revenue business model in FY '20, our business has delivered successfully on all critical metrics laying a very strong foundation for the period ahead. As you would recall, our 3 key focus areas were: first, lead the industry in the transition to recurring revenues. On this, our ARR AUM has grown 2.5x in the last 3 years while keeping retentions at a healthy 75 bps plus. Our ARR revenues has correspondingly grown at a CAGR of 30% and we are by far the industry leaders with an ARR AUM at 61% of total AUM and ARR revenues at 67% of total revenues. This has been enabled through our very sharp proposition and platform built on the advisory business and the gradual establishment of the most comprehensive alternates platform in the country. Our relentless focus on high quality ARR AUMs will continue and we are guiding for robust ARR net flows of INR 40,000 crores with ARR revenue share of total revenues trending towards 80% in FY '24. Second, focus on cost with the realignment, on the overall structure to get it in line with the recurring revenue business model. On this, our cost to income has been brought down to 45%-odd from a very high 66% as we started the transition and we are near the targeted steady state of 43% to 44% with both employee costs and administrative costs in line with guidance. This also factors for our increasing investments on the technology side. Correspondingly, our operating profits have grown at 34% CAGR and PAT has grown at an aggressive 48% CAGR over the same 3 to 4 year period. We are confident on our overall cost structure and continued cost efficiency measures translating to a 44% cost to income guidance for FY '24. Accordingly, our operating PBT is expected to increase to INR 1,000 crores and PAT is expected to see a near 20% growth to INR 800 crores. Thirdly, disciplined and sustaining capital management, which has translated to our tangible ROE improving by 19 percentage points to 27% for FY '23 while we continue to pay out 70% to 80% of our profits as dividends. We expect this to again continue going into FY '24 as well. Our key strategy tenets, which we have discussed in the past as well, remain; growth, resiliency and agility. We remain on course to execute against these successfully and see the translation into metrics shared by Sanjay in the quarters ahead. On growth, we reiterate our bullish outlook on India. We believe there are several natural tailwinds for the managed investment industry in the foreseeable future. With current leadership in Wealth and in alternate Asset Management, we see ourselves in pole position to benefit from these macro factors. With that said, our next phase of growth strategy is based on several factors. First, our continued focus on deepening existing relationships. On an ongoing basis we maintain a relentless focus on sharpening our proposition, expanding our platform offering and bringing a richer understanding of our clients to serve their needs through sharper business intelligence. Secondly, expanding our geographical footprint both domestically and in selective offshore locations. It is evident and public that UHNI and HNI Wealth continues to grow at an unprecedented pace and the market size therefore continues to grow exponentially for us. Further, a large part of this new wealth creation is happening in Tier 2 and Tier 3 cities where access to high quality advice is usually not available. Our focus would be to place ourselves in these domestic locations as well as selective offshore locations where we believe we have a strong right to win. Thirdly, to build out the next segment of clients through our mid-market business build. This will allow us to cater to clients in the INR 5 crore plus segment in a profitable manner. We have made significant strides on the proposition, technology, delivery model and all the other elements that are required and expect this to be live in the second half of the financial year. On the Asset Management side with the completion of the TrueScale transaction and Sameer Nath coming onboard, we believe our 5 strategies have the right leadership and teams to drive the next phase of growth. In addition, we are gaining traction on the global institutional mandates and look to further deepen our footing in the India bound investments. Having said that, the alternates penetration and revenue share in India still remains small compared to developed economies, but is steadily growing thus providing a huge potential for players like us who are leading in maintaining and innovating India's most comprehensive alternates platform offering. Our next core tenet is resiliency, I've already discussed this earlier as I spoke about the transition to a sustainable recurring revenue business model. We continue to strengthen our advisory to discretionary and fund management propositions to remain clear leaders in our business areas. The underlying metrics on client and senior relationship manager retention continue to be strong, highlighting our leadership position as the wealth manager of choice for our clients and the employer of choice for the best talent in the industry. Our last and very important tenet is agility. As mentioned in our previous calls, we've been accelerating our digital transformation and technology investment journey. This is mainly to provide seamless experience to our clients on one side and ease of operations for advisors and sales team and our internal folks on the other. To sum up, I just want to thank all of our investors for supporting us through the last 15-year journey and we look forward to a tremendous next phase of growth and performance creating sustainable value for all our clients and stakeholders. With that, I would like to hand over to Karan and open the session for question and answers.

We'll now open the session for Q&A with Mr. Karan Bhagat joining in. [Operator Instructions] First in line we have Mohit Mangal.

Congratulations on completing 15 years. My first question, I mean I do understand that our quarter 4 was hit by lower other income and AUM losses. But even if I look at the guidance for financial year '24, I think it's little conservative at INR 800 crores given that around 4 to 5 quarters back, we were expecting around INR 840 crores profitably for financial year '24. So would you further throw light on that?

So from a guidance perspective, I think the INR 840 crores coming down to INR 800 crores is broadly a little bit of reflection of the TBR going down. I think there is a potential obviously depending on the way the markets are for that 4%, 5% TBR to go up. But if you see in our guidance, we've taken a fairly conservative TBR of INR 300 odd crores and I think the ability to do another INR 50 crores depending on the function of the market will be there. But on a very steady state basis, there are 2 adjustments we've made. We've been much more conservative in our guidance on the other income, which we had assumed to be a larger number in our last guidance. And second, I think we made our TBR slightly more conservative. So this is really what's led to the INR 840 crores to INR 800 crores. I think we realize both of these factors are little bit -- especially the other income is out of our control so want to be slightly more conservative on it. And TBR by itself, I think the INR 40 crore, INR 50 crore number will be a bit of a function of markets. But I guess we've done the guidance slightly on the conservative side, we may end up somewhere between the INR 800 crores to INR 840 crores depending on how the markets are.

Perfect. The second is basically you're expecting around INR 40,000 crore of net flows. So what would be the key focus areas for those to achieve?

So of the net flows of INR 40,000 crores, I think there are really 2 or 3 parts in some senses. I think 1 part is obviously the older AUM kind of coming out that gradually year-on-year is kind of reducing. I think from next year that number would be closer to the INR 7,500 crore to INR 8,000 crore number. I think of the INR 8,000 crore, INR 8,500 crore thereabouts number, we'll surely be able to retain back 65%, 70% 75%; which will be a INR 5,500 crore, INR 6,000 crore number. So that'll be round about 10% to 15% of the entire INR 40,000 crore pool. I think the conversion really from transactional assets to the RI assets is really accelerating in a very large way especially in the second half of March and especially from the first week of April because from this year, we've changed the balance scorecard for the relationship managers for the first time to be reflecting on the ARR AUM. So I think we believe the acceleration of the change of TBR to ARR will happen in a much more accelerated manner and that I personally feel will add round about INR 10,000 crores to INR 15,000 crores. And another INR 20,000 crores to INR 25,000 crores will really be net flows, which we'll have to go out and get from either increase in wallet share from existing clients or the new to the firm clients both on the Asset Management side as well as on the Wealth Management side. So I think absolutely new to the firm would be INR 20,000 crores, INR 25,000 crores and you need to gross that up for round about INR 6,500 crores, INR 7,000 crores of outflows which will happen automatically given the redemption in some of our schemes. So overall INR 30,000 crores, INR 35,000 crores would need to come through net flows from existing clients, increase in wallet share, new strategies on the Asset Management side and new clients on the Wealth Management side. The remaining INR 10,000 crores to INR 15,000 crores will be a function of the existing AUM converting into ARR.

Perfect. Sir, last con call you said that know we are present in around 24, 25 cities and you intend to expand it to 40. So just wanted to know how are we progressing and how is that shaping up?

So that's a great question, I think, see, out of the 24, 25 cities, I think our plan is to move to round about 40 cities and potentially have another office in Dubai also and a smaller office in Singapore. So effectively 42 odd cities. But effectively in the expansion from 25 to 40 cities, our onboarding process and our entire order execution process is intended to be substantially much lighter than what we've curated for our business traditionally. And we've kind of built a much lighter onboarding mechanism as well as trade execution platform, which I think should be up and operational over the next 30 days to 60 days and simultaneously we're recruiting people in these 15 locations. So I think both are equally important because having heavy infrastructure either in terms of people or in terms of trade execution, some of these cities may not necessarily work. So I think from a recruitment perspective, we've seen a large number of new team join us over the last 3 to 6 months. So that's gone really, really well and especially across the board from competition and also in different regions. So from a resources perspective, we're very confident with the number of people joining us -- who have joined us over the last 3 months plus the number of people joining us in the next 3 months. From a resources perspective, we'll be well set to cover these locations. From a technology and infrastructure perspective over the next 45 days, we should be in good shape. So I think by the end of the year, we should be closer to adding another 10-odd cities plus Singapore and Dubai, maybe the remaining 5 cities will come through in the first half of the next financial year.

Perfect. My last question is in terms -- I mean our attrition is low. But in terms of client addition, I mean could you tell how much clients we added in financial year '23? Any sense of that?

So I think what's happening really, Mohit, is with our RM profile changing, our client profile is also changing a little bit. I think what's really going through from a firm perspective is I think there are 2 real distinct parts of the business, which are kind of coming out. One's the advisory consult and discretionary part, which we kind of conventionally called IIFL One and now 360 ONE Plus. That's becoming more and more tuned towards the INR 50 crores plus if not the INR 100 crores plus over a period of time. But definitely going towards the INR 50 crores plus because with average retentions in the region of 40 basis points, 45 basis points, 50 basis points over the longer term, really sustaining and servicing clients below INR 50 crores will be a bit of a challenge. On the flip side, the INR 5 crore to INR 50 crore, the INR 10 crore to INR 50 crore client is effectively where you would see slightly higher retentions; but you'll need a slightly better platform and technology to go out and get those clients. I think where we've really done well is the INR 50 crore plus clients. I think where we could do better potentially is the INR 10 crore to INR 50 crore clients and that's really something which we worked very hard over the last 9, 10 months to get our systems equipped for it. And we've kind of done a small internal 10, 15 employee launch already over the last week and we are hopeful by August-September, we should be able to kind of at least test it out for our first 300, 400 clients. So that will accelerate the onboarding of clients between INR 10 crores to INR 50 crores.

Next in line we have Prayesh Jain.

So firstly on this guidance when you mention that your retentions on the ARR are likely to be flattish, I think there is a component of carry income out there. So ex of carry, do you think that the retentions will be flattish because if I look at your ARR model whatever components we have so we've seen pressure on IIFL One or 360 ONE Plus retentions, the AMCPs might undergo some pressure because of the mutual fund business possibly and even the AIFs the regulations are changing possibly they put some pressure out there. So how do we think about the ARR regulations ex of carry income?

So I think the carry income really doesn't cause a big impact on the retentions honestly. I think in the previous year also it's kind of an amount approximately totaling to round about INR 100 crores to INR 110 crores. In some years it will go down to INR 75 crores, INR 80 crores; some years INR 120 crores, INR 130 crores. We don't see too much of an aberration beyond that. So to just kind of put the carry question aside, I think on an average AUM if I just look at AMC AUM of INR 70,000 crores, INR 75,000 crores, INR 80,000 crores; I think on the broad steady state basis, it is going to be in the region of 9 basis points to 12 basis points or 8 basis points to 12 basis points of the AUM. On the overall AUM if I look at the INR 1,60,000 crores, INR 1,70,000 crores of ARR AUM; it's going to broadly have an impact of give or take 6 basis points, 7 basis points from a carry retention perspective. So I don't see that really changing dramatically for last year as well as next year. Coming to the collections on the retention on both the IIFL One advisory/360 ONE advisory piece as well as the asset management piece. I think on the asset management piece, I think the listed equities portion I think can see some bit of pressure. Historically on the PMS side, I think we've seen PMS and AIF retentions remain between the 75 basis points, 80 basis points to 90 basis points. As of now, the industry structure has not changed. I think most of the better portfolio managers continue to have the 80 basis points to 90 basis points kind of retention. On the segregated managed accounts, I think 45 basis points to 60 basis points is the right benchmark, which is where we are. On the mutual fund side, which is relatively a smaller business for us, I think 40 basis points to 50 basis points is the retention. So on the listed equity side honestly unless we grow more on the mutual fund side as opposed to growing on the PMS/SMA side, I think our retention will broadly be in line. On the alternate side, I think the big joker in the pack in some senses in terms of retentions will really be the growth of the private equity assets relative to the credit and the infra assets. So I think the credit and the infra assets are slightly more conservative in retentions in the form of being round about 75 basis points, 80 basis points. It's a very decent number, but more conservative than private equity. Private equity typically tends to be in the 90 basis points to 100 basis points range and obviously I think we've collected a large amount of money in private equity over the last 2, 3 years. And we've got our first large fund of [ 2,000 ] which we have collected INR 7,000 crores, INR 8,000 crores in 2017-'18 getting redeemed over the last 2 years, 1/3 of the redemption which is left will happen in this year. So how that gets replaced may potentially have a bit of impact on the retention. If that obviously gets replaced with equal private equity assets, I think the retention will be the same. If it gets replaced with credit assets or listed assets, then it can have an impact of 3 basis points to 5 basis points on the retention for the unlisted piece, which is round about 1/3 of the AUM. So I think depending on the mix while I don't see a change in the top line, but the mix may cause an impact of 1 basis points to 2 basis points depending on what the mix looks like. If the mix looks similar to what it is today; which is 1/3 private equity, 1/3 listed inventory and 1/3 credit and infra; it will be looking the same. If unlisted equity become slightly lower in proportion, then the retention might go down by 2 basis points, 3 basis points. On the IIFL One and the advisory piece, I honestly think retentions will settle down. I know the numbers currently are kind of showing a little bit of a dip in quarter 4. But I think it's largely to do with 2 or 3 specific things in quarter 4 rather than me believing it's still a trend. I think discretionary, nondiscretionary as well as advisory; I think there will be substantially -- in some senses there will be a rediscovery of the yield. I think most of our larger clients we're now seeing on the advisory side come down 30 basis points, 35 basis points, 40 basis points. I mean I'm saying advisory, I'm just using it as a fungible term with nondiscretionary PMS. It's broadly going to be in the 30 basis points, 35 basis points, 40 basis points zone. I think discretionary, last quarter we ended up having a couple of very large mandates shift from equity to debt predominantly for the taxation. So we had a couple of really large mandates move from equity to debt because they wanted to invest the money before 31st March when the taxation was getting changed, which has impacted the retentions a bit. But overall I think maybe discretionary we were expecting 5 basis points to 7 basis points higher. Hopefully, they'll normalize with more flows coming in through the year. On the advisory side and ND PMS side, I think the entire discussion around the 35 basis points will hold barring corporate treasuries. Corporate treasuries will obviously be substantially lower, but that's not really a big focus area for us. So I think as time goes by, I'm fairly sure we'll still be at that 40 basis point to 45 basis points with advisory and nondiscretionary being in the region of 30 basis points, 35-ish basis points and discretionary being in the region of 45 basis points, 50 basis points. So 5 basis points lower than what we would have liked, but it's along that zone.

Okay. Another question was on the mix of the ARR assets. So in the past you've mentioned that 360 ONE Plus will kind of see faster growth than the overall ARR AUM. Do you still stick to that? And if that is the case, then the retentions would definitely kind of come off, right, because the 360 ONE yields are much lower than the overall ARR basket yield.

So I think first is true for sure. As time goes by, I think the advisory assets will definitely outpace the growth in distribution assets for the INR 100 crore plus/the INR 50 crore plus client. I think that's a given. I don't see any reason over the next 2, 3, 5, 7 years why a INR 50 crore client or a INR 100 crore client won't deal on an advisory basis. And like it's happened in the rest of the world if for a INR 100 crore plus client, you don't offer them advisory, it pretty much becomes a bad word in the sense that if you go and tell them you're only a distributor and you're not an advisor, it becomes really, really challenging for you to be able to do business with them. Ideally speaking it should be an offset by incremental increase in volume and your ability to be able to charge in advisory fee on ETFs and bonds and so on and so forth, which on the distribution side is anyway falling. And today on the distribution side, you can pretty much come on to a brokerage platform and execute on direct without paying a single fee or extremely nominal brokerage. So I think time will tell whether finally the distribution trail or the advisory fee, which one is going to be larger. I still feel is for the INR 100 crore plus client, definitely the advisory fee will be larger because of 3 reasons. One, the client won't want to deal with you. Second, your wallet share with the client will be larger. And third, the mix of the assets will also move a little bit from active to passive, which will anyway force your distribution commission down. So with these 3 broad tenets, I think the INR 100 crore or the INR 50 crore plus client for a minute I think has to be on the advisory side. The INR 5 crore to INR 50 core client I think will continue on the distribution side. And I think that's the mix we have to achieve carefully between the INR 10 crore to INR 50 crore or the INR 5 crore to INR 50 crore as well as the INR 50 crore plus so that our retentions can remain in the broad range. I think if you go absolutely only on the INR 50 crore plus, then I think you're right, the retentions might come off a bit. But if you have the right balance between the INR 10 crore to INR 50 crore and INR 50 crore plus, we'll be okay.

Okay. And my last question is on the INR 5 crore to INR 25 crore offering that you guys have kind of just mentioned that you've done a soft launch with a few employees and a full-fledged launch is expected by September. Could you give some more details now that what is the kind of business model there and what are the things that can be created out there?

Whether it's going to INR 5 crore to INR 25 crore or INR 10 crore to INR 15 crore; I said before also in a few calls this is something which time will tell. But I honestly as it's developing feel it's more towards the INR 5 crore to INR 50 crore or INR 10 crore to INR 50 crore rather than the INR 5 crore to INR 25 crore. Obviously from a platform perspective, it has 2 or 3 very distinctive features. I think the first distinctive feature is it's not really going to be a platform. So we're not really looking at building out another tech platform or a marketplace for people to come out and buy products. What we're really looking from it is 3 things honestly. The first thing is the fact that what we're really known for and what we really stand for is our ability to get the right set of differentiated curated as well as approved products on the platform. And we want to ensure that the platform we get to these set of clients has the distinction of those specific products being there. Second and which is a very, very, very critical is to increase the span of control of relationship managers. Today, most of our relationship managers in spite of putting in their best would really struggle to handle more than 15, 20, 25 clients with more than INR 50 crores. In this kind of mechanism by kind of lightening up everything right from portfolio analytics to the ability to onboard and execute, we think we should be able to expand the span of control of relationship managers with clients to definitely 50, 75 and eventually maybe even 100 clients; but start out with 50 clients. And thirdly, I think it will give us the ability to access a larger pool of clients. So I think in some senses in that sense, it will be a 3 pronged strategy. I don't think so it's going to be a pure marketplace strategy. It's going to be about something which we stand for. Second, it has to be phygital model to allow the audience to have a larger access and a greater span of control. And thirdly, I think allows us to kind of with a greater amount of focus and diligence focus on clients between the INR 5 crore to INR 50 crore or the INR 10 crore to INR 50 crore category.

I was looking for more granularity, if you can talk about some kind of retentions or scale that you want to achieve say like 3 years down the line, cost elements, all those elements. If you could just throw some light.

Honestly I think it's a little early for it, but I think I'll just give the top line numbers in some senses. I think retentions should be typically 10 basis points to 20 basis points higher than the advisory piece. So you should ideally see 50 basis points to 75 basis points kind of retention on the distribution side. But it will need some bit of product innovation, which we've done over the last N number of years to kind of follow through. In terms of costs, obviously there are 2 elements. I think still over a period of 3 to 5 years, the largest element of cost eventually will still be people. Now the initial 2 or 3 years obviously is going to be around technology. From our perspective, I think we believe the spend will be somewhere between the INR 40 crore to INR 100 crore, INR 125 crore number over a period of 3 years. And a large part of -- a third part of it is something which we kind of already incurred. And the remaining 60% 70% will be kind of followed through over the next 2-odd years. From a unit economics perspective, don't see it phenomenally different from the existing business except for the fact that thanks to the span of control, I think the operating leverage might be slightly better. So what we're seeing today is 45% cost to income can typically move down to the 35%, 36%, 37% once we've reached some bit of optimization in terms of the number of clients we are servicing.

Next in line we have Aejas Lakhani.

Congratulations on 15 years. Karan, couple of questions, I wanted to understand the mark-to-market impact so here's my question. So you have about INR 3,600 crores of your own capital, part of that is for your loan book as your FD capital; I'm guessing the number is closer to INR 1,000 crores and the balance INR 4,000 crores is borrowed. So of the INR 2,500 crores, that's your capital that you've invested in your products like AIF plus it's your treasury money and the movements on this is basically the difference in other income. Is that correct?

No, I'll just maybe correct the numbers a little bit. So I think total net worth is round about INR 3,000 crores, INR 3,100 crores; of which, goodwill and intangibles broadly work out to round about INR 550 crores, INR 600 crores so which is INR 2,500 crores or INR 2,600 crores give or take. Of the INR 2,600 crores, INR 1,400 crores to INR 1,500 crores is the capital deployed in the lending business. So we broadly got a cash balance of round about INR 1,100 odd crores. Of the INR 1,100 crores at peak, we've had round about INR 1,100 crores invested into our own AIFs and the remaining INR 700 crores, INR 800 crores is broadly in transit bond investments which are facilitating bond trades for clients. So effectively the larger portion of the mark-to-market which you're seeing is the INR 1,100 crores on the AIFs effectively, which is causing the big aberrations in the other income. Of the INR 1,100 crores, obviously there is a INR 350 crore, INR 400 crore requirement for working capital, which is really presented by INR 100 odd crores for the broking business and INR 300 odd crores is the broad fees and interest we collect at the end of 3 months. So if you just see the working capital in the business is round about INR 350 odd crores. The remaining INR 750 crores, INR 800 crores is the treasury. And the remaining INR 1,450 crores, INR 1,500 crores in the NBFC. Now like I had said in my previous call, our AIF investments is more than what we would like so currently it's close to the region of INR 1,100 odd crores. We would ideally want it to come down to round about INR 400 crores, INR 450 crores, INR 500 crores. In the initial years of our investment especially in the first 3 years from when we started the business, our clients expected us to put in large amounts of capital. That expectation has gone away. Over the last 6 to 8 months, I think we've put in only INR 5 crore, INR 5 crores in most of the new funds we've launched. For example our credit fund, which we closed at round about INR 2,000 crores, we've just put in INR 5 crores or INR 10 crores. So effectively in some sense is over the last 6, 8 months, our ability to bag these AIFs with a small amount is disproportionately high. So over the period of this year Itself, over the next 12 to 15 months, we'll see this INR 1,100 crores come down to the region of INR 500 crores, INR 600 crores and then maybe 6 months from there come down to the INR 450 crores, INR 500 crores. So I think our first step to kind of just improve that other income predictability is to get our AIF book down from INR 1,050 crores, INR 1,100 crores to round about INR 500 crores. And I think once that is done, more or less the current volatility in the other income will reduce substantially. Obviously this comes off 2 years where the other income was phenomenally high because in both the years we had other income well in excess of INR 100 odd crores. So last year in some sense has balanced it out and though the operating PBT obviously shows a big pickup because of the same reason, but last year the other income's become softer relative to the 2 years before that.

That's quite helpful. The second one is on distribution assets on your trail fees and mutual funds in particular. So here the yields have come off and if you typically look at the quarters prior to these 2, this one and the one prior, you used to do more 48 bps, 50 bps which has come down to 41 and 39 bps. So could you please comment?

Sorry, on the mutual fund side is just...

Sorry. You're in the 40 bps range, it's come down to 37 bps. My apologies.

Don't worry, I was correcting that. So 40 bps has come down to 36 bps, 37 bps. So broadly I think there are 2 changes there. I think both of these things have caused 1 basis points to 2 basis points impact. I think the mutual fund itself has seen a lot of movement from or rather it's become slightly heavier on the debt portion in the last 3 odd months as compared to equity, but that for the last quarter would be only 0,5 basis points or 0.7 basis points kind of or maybe a 1 basis points impact. The larger impact of 2 basis points, 2.5 basis points is largely on account of our distribution assets of private equity moving away. We've got a large redemption which has happened in quarter 3 and quarter 4 of round about INR 3,000 crores, INR 3,500 crores of our special opportunities funds going out, While we brought a large part of that money back in, but it's not necessarily come back into the private equity assets and that's caused a bit of dip in the distribution assets. So those are the 2 reasons why it's come off. I think as the fund comes to a close and we raise another fund, I think we should see that 2 basis points, 3 basis points in the private equity piece pick up again. So both of these changes are really in terms of a little bit of asset class changes as opposed to anything else.

Got it. And Karan, on your loan book, right, so interest rates have been up so, but your NIMs on the book are lower. So is it that you have not passed on all the rate increases to clients?

We passed on maybe 40%, 50% of it and the rest of it we passed it on towards the end of March. I think we just didn't want to burden clients with too much because they already had the larger issues around the bonds tax and MLDs and so on and so forth to deal with. So I think we pushed out 50%, 60% of the NIM increase towards the end of March rather than in the middle of the quarter.

Perfect. And just lastly on IIFL One again the discretionary mandates. You commented earlier that this was one-off because of what's happened in the last 2 quarters the shift from equity to debt. That's the only reason why you are seeing the yields sort of slightly compressed in that subsegment of discretionary. That's it, right? There is no other reason there.

So there is broadly discretionary works on 3 models, right? So one is the all-in fee; second is the 0.6%, 0.5% kind of just pure discretionary portfolio management fee; and third in some few cases, which is where the aberration is come, we work on an asset class way where we are charging differently for equity and debt. But if you see today round about 30% of our mandates are on the all-in inside, 30% to 35% are asset class agnostic and 35% to 40% are a function of the kind of asset you invest in. So where you've really seen some bit of compression is because of 3 reasons. One is because the last portion, which is the 35% 40% has seen a sharp movement from equity or debt specifically in the last quarter. Second, we've kind of got a largeish flow round down about 5% to 6% of AUM, which becomes fee chargeable only from June as opposed to from February from where it came because clients kind of were putting in some money into advance tax, purchasing a house. So eventually it becomes chargeable post that. So those are the 2 reasons, but I don't see a structural shift there. Maybe 1 basis point here or there, but I don't see it's going to be dramatically different from what we've looked at.

Got it. That's very helpful. And just lastly, Anshuman in his opening comments mentioned about the institutional mandates. Could you speak a little bit more on how you're thinking about that piece? What kind -- how should we look?

So I think institutional mandates in some senses are extremely interesting from a perspective of the fact that they have a little bit of a tail effect that once you get 1, you can get the second and third and fourth. And on the other side paradoxically, you got a bit of a capacity you can take in every year, right. So in some senses I think we are blessed in a way where we've kind of post Anup coming in, in a fairly short period of time managed to get 4 fairly large mandates aggregating to $1.5 billion, $1.6 billion on the listed side. But at the same point of time, we've not really been able to necessarily emulate the same on the private equity and the credit side yet. And I think going forward It would be fair to say that on the listed equity side, we are already in advanced stages of discussion with at least a couple of people more where at least we feel we can add 2 or 3 more [indiscernible] through the whole of next year. On the private equity and credit side, especially on the credit side, we've had a fairly stable over the last 18 to 24 months and a track record of lots of transactions because we ended up raising close to INR 5,500 crores, INR 6,000 crores on credit. So I think credit seems very interesting again from an institutional mandates perspective. So I think between credit, private equity as well as listed equities, we would hope to get 3 to 4 mandates over the next 18 to 24 months.

Next in line we have Vivek Ramakrishnan.

Karan, congratulations on excellent performance over 15 years. My questions are conversely on the loan book in terms of you said about how you like to decrease the investment in AIFs. So what is the kind of debt equity would you like to have on your loan book? What causes the growth of the loan book? It's about INR 5,000 odd crores right now, at market volatility will it come down? And the last question is you were talking about NIMs also and ability to pass on cost. Are the clients sensitive to interest rates because of the risk of the portfolio? And with MLDs going off on the liability side on the other hand, will the spreads decrease?

So I'll try and kind of answer the question in the order of my thoughts coming in. So I think MLDs would have been a bit of an issue and the cost would have gone up if the taxation for all other instruments would have not changed. So I think then really a choice between an MLD and a debt mutual fund for 3 years would have been substantially more difficult to choose. So honestly if you would have asked me this on 26th of March, the answer would have been yes. But on 27th March obviously tax for everything has kind of changed and everything is equal. So I think in that sense, there might be a 15 basis points, 20 basis points, 25 basis points impact; but honestly the kind of impact we were imagining prior to 27th March, we've not seen and all the new MLDs also which we raised in the month of April and post the announcement 27th March is pretty much at par with the current prevailing interest rates. On the proportionate increase or decrease of the loan book itself, I think it's fairly -- most of our loans are 4 to 6 months in maturity so they are fairly transient loan -- it's a fairly transient loan book and it's largely a function of different set of clients having different liquidity needs who end up borrowing against their portfolios rather than necessarily liquidating their investments. My typical kind of experience over many years is it tends to be around about 1.5% to 2% of our AUM and I think that's where we are broadly at INR 4,500 crores, INR 5,000 crores. I think that's really where we would end up being. In a very, very active market now obviously IQs are not there. But in a very, very active market, this might move up to 2.5% of AUM. But otherwise more often than not, it would be somewhere in the region of 1.5% to 2.1%, 2.2%. What we've not done and we don't intend to do is really change the risk profile of our book to accelerate growth. For us it's really in some senses Lombard lending where we are lending largely against the portfolio. So we intend to keep that and therefore, we don't intend to -- we don't see the loan book kind of growing disproportionately. In terms of your last question in terms of debt to equity, I think we end up adding close to round about 50% of the profits of the NBFC back to capital every year and that's the portion which doesn't get paid out as dividend. So I think that's automatically adding to the capital of the NBFC. And I think from a leverage perspective, I think a debt to equity ratio of roundabout 2.5:1 is really where I see it kind of settling down.

Next in line we have Abhijeet Sakhare.

Sir, couple of questions on flows to start with. So for F '23, is it possible to kind of break it up the entire flow in terms of, let's say, new customers versus Increased wallet share on existing set of customers?

Haven't done it, Abhijeet. But it's possible to do it for sure. I can give you some numbers intuitively, but maybe we can come back to you with the exact numbers. My guess is it will be 60/40 in favor of new customers there. But it will be plus-minus 5%. We'll come back to you with the exact numbers.

Got it. And then on the INR 40,000 crores flow guidance for next year, again any thoughts on where does it come from? Is it the IIFL One piece versus distribution versus Asset Management because we are seeing very different flow trends across different lines of businesses in the last few quarters?

So I can take a good estimate. There's no way for me to know for sure. But I think if I was take an educated guess not a guess, I think it would be in the region of I would say INR 14,000 crores to INR 16,000 crores on the 360 ONE Plus, which is the erstwhile IIFL One; INR 14,000 crores to INR 16,000 crores on the Asset Management side; and round about INR 8,000 crores to INR 10,000 crores on the distribution side. This is a complex question to answer because you have to net it off from the redemptions also. So it's a tough question to answer, but it should be broadly in that range.

Just wondering because when we look at the flow numbers on the discretionary portfolio side so there's little bit of softening on the IIFL One piece, but interestingly the distribution part of the discretionary portfolio still seems to be delivering flows.

I think you will see it change a bit because for 2 reasons. One, I think the general attractiveness of AIFs generally speaking will be slightly lower. Second, I think our own incentive structure has changed our line more towards the advisory side from April. And thirdly speaking, I think if capital markets remain a little flattish, generally speaking appetite of clients to do alternate stuff is slightly lower than what it was a couple of years back. So all put together, I think in the last couple of years you've seen distribution asset stores do slightly more. But I think going forward, I think will be more a balanced approach.

Got it. And just 1 follow-up on the IIFL One piece. What's the current penetration level on that one?

In penetration level terms will be lower than 1/3 I think. It'll be round about the 25% levels. Just to clarify, 25% in number of client terms, maybe 33%, 34% in value terms.

Next in line we have Nidhesh Jain.

Karan, the first question is on IIFL One. So first of all, we have seen some moderation in yields. So once the retention is down, how can we increase the retention going forward given that customer is already being used to paying a lower retention? So how can we convince customer to pay higher retention from next year onwards?

So I think it's a function of all the 4 things which I already spoke about; a little bit of the asset class mix, a little bit of the size of the customer between the INR 10 crore to INR 50 crore and INR 50 crore plus. Thirdly, a set of customers who've kind of maybe come in towards the end where the fee charging only starts from May or June. And fourth as the mix between the discretionary, nondiscretionary and advisory piece. I think it's going to be a combination. It's not really what we want existing clients starting with a higher fees.

And incremental clients will also be coming at the same fees, right? It's just because of the mix change that we expect to get better retentions.

That's exactly right. So when you say incremental, they come in at the same fee structure. This is more a 1 quarter phenomenon. If you actually see the retention for the broader year, it's broadly in line. I don't see it changing dramatically for next year also.

Okay. Secondly, in terms of RM count, I don't think we have shared the data what is the count of RM we have as of March '23. But if you look at data in last 2 to 3 years, we have not been adding much of RMs. So doesn't it -- that we are not expanding the capacity of the organization to take care of future growth and that may have repercussion going forward not probably next year; but 3 years, 5 years down the line that may have repercussion given that the RMs that we will hire today will start to become productive over next 3 years. So isn't it lead to lower growth outcomes in future versus the pressure on cost to income today?

No, you're right, but you need to pick it up as said earlier between the client segment and servicing. I think our focus has largely been on the INR 25 crore plus clients till now and I think there we are fairly well serviced. I think what we've really seen between our number of 200, 230 for the last 3 years is the change in the kind of RM in this 200, 230 right? So we ended up with substantially more senior RMs with 6 to 7, 8 years' experience with the ability to go and sell advice to clients as opposed to doing distribution. So the last 3, 4 years has really been about, I won't call it quality, but the mix of the kind of RM which is there within these 230. And that was really our first focus given the INR 25 crore, INR 50 crore plus segment we are servicing,. As we go down a little bit, there obviously it's going to be slightly also number driven. So as you build the INR 10 crore to INR 25 crore; INR 10 crore to INR 50 crore segment; you will see the number of RMs increase. But where we are today on the INR 25 crores and INR 50 crore plus, I think it's more about the mix of the RMs and the kind of RMs rather than just increasing the RM count.

Sure sir. And lastly the count of relevant families also has also been quite stable in last 2 to 3 years. So how should we look at that number?

I think more or same thought process to be honest. I think we've gone through a little bit more quality than quantity, very similar to the RMs thing. But you will see that change once we go down the ladder a bit. On the higher side obviously we have not got the data here. But if you kind of just break up the data and INR 1 crore, INR 10 crore, INR 25 crore and INR 50 crore; maybe next time you can do it along with the other question; you will see the improvement a bit in the wallet share above the INR 10 crore, INR 25 crore, INR 50 crore. So while we've not kind of maybe that many strides in the INR 1 crore to INR 10 crore or INR 1 crore to INR 25 crore segment, there's significant improvement in the [indiscernible] segments.

And what is your estimate of the total Wealth Management AUM of the existing clients that you are having with the industry? Is it 3x of that, 10x of that, that you're currently managing?

I have a good estimate I can give it you. Obviously I'm giving you now a top-down estimate not a bottom-up estimate so you have to kind of look at it with a pinch of salt, right? So I think broadly you can take the mutual fund industry at round about INR 40 lakh crores. You've got INR 20 lakh crores on the equity side, of which I think 80%, 85% will be broadly retail money, which will be INR 16 lakh crores to INR 17 lakh crores. Of the remaining, there'll be another INR 4 lakh crores, INR 5 lakh crores, INR 6 lakh crores in a combination of long-term debt, short-term debt as well G-Secs and balanced funds. So that INR 5 lakh crores, INR 6 lakh crores also you can multiply it broadly by 80%. The rest of the INR 13 lakh crore, INR 14 lakh crore would be corporates, institutions and so on and so forth. So broadly around the INR 24 lakh crore, INR 25 lakh crore industry I would guess would be around about your take 25%, 30% would be the segment or maybe 20% would be the segment which we are kind of getting to; 65%, 70% or 80% would be the mass affluent or the retail segment. So I think on the mutual fund side, I think maybe it's a INR 7.5 lakh crore, INR 8 lakh crore kind of serviceable market or slightly broadly in that range; of which we are servicing whatever the INR 30,000 crores, INR 40,000 crores on the distribution side; another INR 30,000 crores on the advisory and the INZ platform. So I think the mutual fund side broadly a market share of maybe somewhere in the region of 5% to 8% on the mutual fund side. On the ARR said. I think the full industry is broadly give or take around about INR 4.5 lakh crores, INR 4 lakh crores of broad commitment; INR 5.5 lakhs crores, INR 6 lakh crores of total commitment. So undrawn commitment would be round about INR 2 lakh crores. Of the INR 4 lakh crores for us, we represent round about INR 35,000 crores, INR 40,000 crores. So more pressure on the AIF fees would be round about 9% to 10%. PMS again including again we would be closer to the INR 15,000 crore, INR 20,000 crore kind of number. I think the overall AUM after excluding the PF and the institutional mandates, I think the size of the industry will be closer to the INR 2.5 lakh crores to INR 3.5 lakh crores, a large part of which would be high net worth. So I think again on the PMS side, we should have a 7% to 8% market share. So I would broadly put 6% top-down and 4% to 6% on mutual funds, 6% to 8% on the PMS and 8% to 10% on the AIF side, I think that's a quick estimate for me on the ultra-high net worth side in terms of the products.

Sure sir. And lastly, any comments on competition. We keep on hearing that a lot of new players are entering into the sector. They are trying to hire from the existing wealth managers. So how do we prepare ourselves for intense competitive intensity in the segment?

I think competition is a given to be honest. I think it's just that the business as it becomes more and more complex, it's not easy for competition to deliver. So especially on the advisory side, it's a team approach, it's no longer an individual approach. So you need the entire team, you need a set of relationship managers, you need product experts, you need investment counselors, you need the tax team, you need the investment research team, you need the entire tech team, you need the family office platform. So it's a very, very comprehensive platform to be able to charge that 40 basis points, 50 basis points and effectively it needs to be done at scale otherwise it really doesn't work. So I think just given the way we started in 2008 where initially it was a lot of distribution and it gave you cash flow and the ability to build out the business strongly in the first 7, 8, 10 years and then adapt. I think that luxury is not there today. So I think anybody who starts off afresh today would need to kind of put in that 2, 3 years, 4 years of incremental capital before you really can see the advisory piece kind of play out. On the distribution side, I think there will be new players who will come especially on the back of technology attacking different sets of markets. So that would be an interesting thing to see. But as of now, obviously I think it's been a bit of a model where you've really not seen people kind of trying to monetize it so it's not really worked out that well. But overall I think competition can be broken up into 3 big parts. I think first is really the domestic focus bespoke wealth management players who are obviously going to invest the maximum in building out teams and resources. Second, obviously you'll have the large MNC private banks who are trying to set up in India. Of them, obviously only ones kind of looking at India seriously right now as we speak. Third, you'll have the domestic banks, which are currently maybe slightly more focused on the INR 5 crore to INR 25 crore kind of segment. And lastly, you will have independent financial advisors and external asset managers who will essentially be ex wealth managers who want to go out and set up family offices of their own with 3 or 4 clients. So I think to me having the first and the fourth will be competition in the medium term and there will be some select players in the second and third basket who kind of eventually get there in terms of their own understanding of the wealth management and the capital markets business.

We move to the next question, [ Dipanjan ].

So Karan, congratulations on completing 15 years. 2, 3 questions from my side. Again going back to the flows. On this INR 400 billion of ARR flows that you forecast for next year, how much of it in your mind do you kind of build in from the corporate treasury and from the institutional mandates that you mentioned? To my understanding this will come in at relatively lower retention. So because this year if we see like for IIFL One in the overall flows if I split between corporate treasury versus PMS, it seems corporate treasury was relatively on the higher side at least in the second half.

At least in our thought process less than 10%.

Got it. Second on IIFL One, you mentioned that over the last few years you have been focusing more on the quality customers. So in terms of your broad ticket size mix of IIFL One and if you can give some color between the initial clientele that you may be acquired in 2020-2021 and maybe incrementally how that is changing?

So I think the kind of client we attacked in 2021 was all kinds of clients to be honest above INR 10 crores. Where I think we figured out that eventually the right way to play it is more on the INR 25 crore plus and the INR 50 crore plus and that's really where we've got the right amount of success and an ability to also map our resources to the expectation of the client is really there. So I think where we've kind of triggered a change today and we're fairly clear, it's only going to be towards the INR 50 crore plus kind of segment as opposed to going down below that. Obviously there may be scenarios and profiles of clients for whom we start with a slightly lower amount. But I think we are fairly clear that any advisory mandate below that number may not really make sense. And I think at the same point of time we spend a lot of time, energy and effort hopefully productively on building a platform for the next set of clients where effectively we are able to offer the right distribution platform to clients.

Just 2 small questions. One on the product pipeline in the AMC business, how does it stack up?

The product pipeline looks good. Across the board I think both on the alternate side as well as on the listed side, I think we've got a good platform going. Even in the last 3 to 4 months we did really 3 large really interesting innovative products. We had a very interesting credit fund, which has ended up raising INR 2,000 crores. We did a real assets funds where we invested in infra asset along with CDPQ, that's ended up again raising close to INR 1,600 crores, INR 1,700 crores. We did a Global Development Fund, which is now in nearly a INR 750 crore, INR 800 crore fund. So I think from an asset management piece, we have the ability to do a lot of innovative things. We've got at least 6, 7 ideas for the year. So I think we will end up doing a lot of things. I think the only place where we need to ensure that we are able to kind of recycle a part of the residual monies on the crossover funds. I think we did collect nearly the entire money of crossover funds 14, 16 months back. But as you get the last portion of redemptions, we have to ensure that, that kind of comes through because otherwise that has a bit of an impact of 30 basis points, 40 basis points of debt portion, which effectively has an impact of 1 basis points, 2 basis points on retention otherwise. So outside of that, I think the strategy is quite clear. We have to just kind of ensure that the mix is maintained at 1/3, 1/3, 1/3.

And Karan, just lastly going back to the similar question on the cost side. Now while you mentioned you'll be venturing into 10 more geographies where it will be low cost, low infra, asset-light sort of a model; maybe the RMs will also look different in quality or maybe different in vintage or something. Just wanted to get little in terms of near-term cost and you've given some guidance, but how comfortable will you be on the cost amidst rolling out of this new strategies?

I think I'm quite comfortable with the cost. I think won't see too much of an issue there. Honestly I think from a cost perspective, I think maybe INR 5 crore, INR 10 crore plus/minus; don't see massively beyond that. But having said that, I think from a productivity perspective it's important that as you build out the new team or rather not the new team, the extended team; we are able to give them the right tools and arms and ammunition to be successful on the Street because if they're not, then the productivity can kind of start showing up and reflecting the cost to income basis. So I think from a pure absolute cost basis; very, very comfortable. From a cost to income basis, obviously the productivity on the revenue side also needs to come through.

Thank you. I think that's all we have time for. Karan, in case you have anything else to add.

No. Thank you. Thank you, everybody. Thank you, Anil.

Thank you. On behalf of 360 One Wam, thank you for joining us and look forward to your participation next quarter.