5paisa Capital Limited (5PAISA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Felicia, moderator for the conference call. Welcome to 5paisa Capital Q2 FY '23 Earnings Conference Call. We have with us today the management on the call. [Operator Instructions] Please note this conference is recorded. I would now like to hand over the floor to management. Thank you, and over to you.

Thank you. Very good afternoon, everyone. Myself Prakarsh Gagdani. I'm the CEO and Whole Time Director of 5paisa Capital. I welcome you all for the Q2 FY '23 investor call, along with my colleague, our CFO, Mr. Gourav Munjal. This Q2 FY '23 has been a milestone quarter for our industry. This quarter, we have hit 100 million demat accounts as a country. I feel this is a very important and a solid start, and it is a matter of time that investment in capital markets will be a preferred investment destination for every household in the country. For 5paisa also, it has been a milestone quarter, as we have not just crossed 3 million customer mark, but also achieved our highest quarterly profit. Speaking of business, one of our focus was always to improve the quality of our customer acquisition, along with reduction of customer acquisition cost, which is CAC. We are happy to say that we have succeeded in this and our CAC, which was around INR 895 for last quarter, has now come down to INR 574, which is a 36% improvement as compared to the previous quarter. Our efforts in identifying the right source mix, improving entire onboarding journey, improving the do-it-yourself customer journey, and also the straight-through processing cases has helped us reduce all these costs which are associated with account opening. We continue our effort on the same, but we now feel that our cost of acquisition will stabilize and be in the range of around INR 500 to INR 600 in the coming quarters. Further, in Q2 FY '23, our broking income improved by 3%. However, our total income was down by around 4.5%. The drop was majorly due to the reduction in our margin funding book, which was directly associated with the overall market sentiment in the first half of the quarter. Our overall turnover has also gone up to INR 1.69 trillion, our ADTO, which is 25% growth quarter-on-quarter. We've not just seen improvement in our ADTO, but also in market share of derivatives segment. Along with our broking business, our cross-sell business has also seen improvement. We have seen our subscription product, the user base has grown by 6%. Our mutual fund AUM improved by around 14%. Our mutual fund SIP improved by almost 71%. With all our efforts in focusing on revenue, improving cost efficiency, and also product development, we have succeeded in achieving our highest quarterly profit in this quarter of [ INR 10.75 ] crores, which is 45% growth quarter-on-quarter, and almost 672% growth year-on-year. Talking about our product, we focus a lot on enhancing features in our mobile app and our web platform, which will benefit traders. I'm delighted to share that we have launched a dedicated trading terminal for our derivative traders. We call it as FnO 360. This platform is built with the philosophy of providing the data and tools which shall help the derivative traders with better decision-making for their day-to-day trading. Investors will also be able to trade and view their order positions on the same platform. There are various features in this platform that we've launched, which will benefit derivative traders. In addition to that, many new features like Margin Plus is a product, one-tap rollover, quick results, all these features were launched in this quarter. This has helped to improve our mobile app rating from 4.2 to 4.3. Lastly, we will be [Audio Gap] improve our journey on improving our products, our efforts on reduction in cost at the end to improve the entire trading experience for our customers. I'm confident that this all will help us to accelerate our revenue and profitability in coming quarters. I open the call for questions, and I'll be more than happy to address them. Moderator, can you open the forum for Q&A?

[Operator Instructions] Ladies and gentlemen, first question comes from Deepak from Haitong Securities.

Sir, my question is regarding the impact of the recent regulation on funds paying back to the customers on first Friday of every month or quarter. So what has been the impact of this on your -- I mean, is there an impact on your margin book? And second, on your allied income?

See, quarterly payout was always there because we were anyways doing it on a rolling basis for customers. So that has not changed. What has changed this time is that on one particular day, the funds are paid out. Now typically, if you see the funds which have gone out on 7th of October, it's probably by people who are actively trading. So [Audio Gap] Amount of said funds are already back where customers are trading and I don't see a very material impact of that on our revenues. As far as the margin funding book is concerned, obviously that is not impacted because those are the customers who already are into debit and are using our funding facility. So there was no impact on that side of the business. So overall, on the business front, I don't see there's an impact. Operationally, the process was absolutely smooth and we could complete the entire excise in the given time by the regulators.

Okay. Sir, just a follow-up on this. So post 7th October, let's say, how much percent of your money, I mean, that has been paid out to the customer, has been recovered until date, or in the next 4 or 5 days? Any percentage you can give?

I'm sorry, but it would be difficult for me to share that information. But I can say that the amount of -- that money has come back.

Okay. Okay. And Sir, my second question is regarding your cost of acquisition. We have reported a very excellent -- I mean, sharp degrowth in cost of acquisition. It is mainly because of the cut in marketing and business promotion. So in terms of sourcing, sir, have we changed any sourcing? I mean can you give us a kind of sourcing mix, I mean, in a ballpark figure between referrals, your performance marketing and organic search. That will be really for us, sir.

So what we've done is, as we rightly said, we have been working on improving our quality of acquisition and the mix of the acquisition. It will be difficult to actually give you a percentage for each of the source. But I can say the large part of our acquisition today, almost 65% to 70% of our acquisition is organic and also through reference. And now that percentage was -- our objective was that it would improve going ahead, and most of our acquisitions should come from organic or through the word of mouth. So we are right now in the process of that. But broadly, 65%, 70% of our acquisition today is either organic or through word-of-mouth referral from our existing customers.

Okay. And sir, squeezing a last question from my side. So in terms of the accounting of subscription fee, how do we account it? I mean do we defer it over the year and account it on a monthly or quarterly basis, or else on an upfront basis?

So we do follow our, I mean, [indiscernible] in this regard, which is revenue recognition. So if the plan is monthly based, then we account in the same month. But if the plan is for 1 year, then we defer that revenue for further 11 months, and it is based on the [indiscernible] as prescribed by ICI.

But on the marketing side, I mean, marketing and business promotion expense, we account it as and when the client is getting acquired in the same month, right?

Yes, yes. There is no deferment in this. When the client has been acquired, the same has been booked in the same month.

The next question comes from Deepak Poddar from Sapphire Capital.

Sir, I just wanted to understand one thing first. I mean, what would be our figure for active clients? I mean gross client figure I got in the presentation of 3.19 million, right? What would be the number for active clients?

Active clients, if you are talking about the customers that have traded in last 1 year, which is typically the one that industry says, is somewhere in the range of, I think, 1.5 million to 1.6 million.

1.5 million to 1.6 million?

Yes.

Okay. So that has been declining, right? I mean, towards FY '22 end, I think, I remember that, that number was around 1.8 million.

Yes. So typically, what happens is that if you look at the acquisition that we have done in the last 2 years, and the acquisition that we have been doing in last 2 to 3 [Audio Gap], there is a difference in terms of number. So typically, what happens is that when your acquisition run rate changes, that has an impact on the active customer over a period of time, and that is what you see as a decline.

Okay, okay. So somewhere down the line, is that the reason basically because of which, I mean, our customer growth on the gross front is not translating into your revenue growth on a quarter-on-quarter basis, right? Last 2 quarters, our revenue has been declining 5% a quarter, I mean.

I don't think so because if you look at -- the revenues are largely to do with the overall market sentiment and the way market is doing. So May, June, July, some part of August was anyways bad for the industry. Even if you look at the retail turnover at an exchange level in cash [Audio Gap]. So that also fell down to almost like INR 18,000 crore to INR 20,000 crore from INR 30,000 crore to INR 35,000 crore that we were doing some time back. So overall, it was more of market sentiment. Now when again market started going up, we are seeing volume coming back. So more than acquisition, it was more of a market sentiment. If you look at our revenues, even despite all this, the revenues, in terms of brokerage revenue, has improved in this quarter. It was only because of the market, our average funding book reduced. And that is the reason there was an impact on the revenues, and the 4.5% drop in the revenues is because of that. But I don't see that reduction in the active clients has an impact on our overall revenue.

Fair enough. Understood. And then how do we see that going forward? I mean, going forward, how do we see the growth on a quarter-on-quarter basis?

See, it won't be right for me to give a forward-looking statement in terms of revenue. But obviously, looking at maybe active customers that you see may not be a right barometer for performance because what is important is how many of those customers are actually giving revenue. And that is where I'm pretty optimistic that the kind of quality of customers that we are acquiring, we should be in a position to improve our revenues as well as profitability. But of course, we all understand that stock market is a cyclical business. And a large part of our revenues come from brokerage and brokerage is dependent on how the overall market functions. So if the market or the NIFTY goes down by 10%, 15%, retail activity tends to slow down, and that has an impact on revenues. So in a cyclical kind of a business, it is difficult to predict that how the quarters are going to be. But the kind of effort that we are taking, I am confident that it will be in the right direction and will help us improve our revenues and profitability.

The next question comes from Sumit Jankar from Motilal Oswal.

Sir, the ADTO has increased quarter-on-quarter for the brokers. Can you provide me the numbers for cash from derivative market share and brokerage split between cash and derivatives and the ratio of cash versus derivatives in brokerage.

The derivative market share has improved and now it is around 3.14%. Cash market has more or less been stable around 2.8%. So that's a share part. Obviously, on the revenue side, derivatives contribute a large number. I don't have the exact number right now, but maybe later I can share with you. But broadly, I know that derivative contribution in this quarter as a percentage of our total brokerage has gone up, but I can share that number later with you.

Okay. I have one more question. The customer acquisition cost has reduced in the quarter. Do you think that the payback period will also reduce moving forward.

Yes, absolutely. The whole objective of reducing the cost is to improve the payback deal. So we've been always in the range of around 8 or 10 months kind of a payback period. We're definitely looking at an improvement by 2 to 3 months from where we were earlier.

Thank you. [Operator Instructions] We have a question from Karthikeyan VK from Suyash Advisors.

I'm sorry, I missed your opening comment, so if this was discussed previously. So just one thing, last quarter when we spoke, you talked about acquiring higher quality customers and that led to an increase in cost. This quarter, there's been an impressive reduction in the acquisition cost. Should we assume that these numbers will sustain? Or has there been a change in the way you acquire your customers? How should one think about that on a sequential basis?

So see, last quarter, when -- so basically, we were always in the range of around INR 760, INR 770 of acquisition cost. Last quarter was the only -- and I said that because of certain changes that we were doing, that quarter was an increase, but we will reduce it, which we have done. And I think now we are fairly -- as I also said in my opening remarks, that it will fairly be in this range. Now from here on, we don't see much reduction in the cost, but we will be in the range of around INR 500, INR 600 an acquisition cost. So the objective of reducing the cost more or less is now achieved.

Okay. And the run rate that you have in terms of new customer addition, should that be maintained? Or do you believe that this approach will give you a higher number? Some thoughts on that as well.

So obviously, it is difficult to comment on the exact acquisition number. But our plan is to spend on improving our brand and also organic and word of mouth, which are typically the sources of acquisition where you can get a higher number, at the same time also get the quality. So our objective would always be to improve our acquisition quarter-on-quarter, but not at the cost of sacrificing on quality. So until the time we are able to -- the CAC that I mentioned, the payback that we're looking forward, we will definitely be interested in acquiring more customers. And I see that it may happen, and it will happen where the acquisition also improves, at the same time quality of [indiscernible].

Interesting. One last thing. You talked about some tech investments that was expensed. And therefore, from this quarter onwards, this Q2, there was to be a reduction in that. And therefore, that will also lead to an improvement in profitability. How much of that is in numbers, sir?

So I had said last time that all the tech investment that we were doing in Q3 and Q4 is now almost done. So now it is more of a steady state. So whatever that improvement was, had come in last quarter. Now our tech cost is more or less stable. So you won't see much of an increase in that cost. That was the point. But this quarter, it is the same as...

So in terms of your OpEx, what we see now is a reasonable reflection of the run rate? Plus inflation, of course.

Yes.

And the next question is from Murli Khandelwal, an individual investor.

Thank you. All my queries have been already answered.

Thank you. [Operator Instructions] We have a follow-up question from Deepak from Haitong Securities.

So my question is regarding subscription plan. What is the contribution of the subscription fee that we generated in Q2 to total operating revenue?

Subscription income is approximately INR 4.8 crores, which covers [Audio Gap] the cross sell.

And for H1?

So it is approximately -- it is more in the same range, and approximately INR 15 lakh growth is there. But otherwise, it is in the same range. So for the H1, you can say that it's INR 9.5 crores.

And out of our total client base, what is the percentage of clients who are under subscription plan?

See subscription plans typically are taken by traders, because that's where they get real benefit out of this plan. So broadly, around the range of around 30,000 to 40,000 customers take our subscription plans.

Okay. Okay. And last question on this. So of the total operating revenue for, let's say, for H1, what would be the contribution of these subscription customers? Any ballpark figure if you have?

Sorry, can you repeat the question?

So if you take an operating revenue for H1, what would be the contribution by these subscription customers.

Contribution to what, in brokerage, or in the subscription?

No, no. Total operating revenue.

So, as Gourav mentioned, we are in the range of around INR 9.5 crores, INR 10 crores kind of revenue for H1. And the total revenue is around INR 164 crores. So that's broadly 7%, that's the contribution.

So that was the subscription fee. I mean, what I mean to ask is, these 40,000 customers, how much contribution from these customers is towards your broking revenue?

I don't have that information right now.

Thank you. [Operator Instructions] That will be the last question for the day. Now I hand over the floor to the management for closing comments.

Thank you very much, everyone, for joining the call. I hope we were able to answer your questions. If there is any question that you have, you can write it to us at [email protected] and we would be more than happy to answer your questions. Thank you very much, and wishing you and your family a very happy Diwali and a prosperous New Year in advance. Hope you all have a great Diwali and a great [Audio Gap]. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes your conference for today. Thank you for your participation and for using Door Sabha's conference call service. You may disconnect your lines now. Thank you, and have a pleasant evening.